AIG 2011 Annual Report Download - page 107

Environmental
Environmental Background and Discussion and Analysis
Chartis maintains an active environmental insurance business written through its Chartis Environmental business
unit. The reserves associated with this unit’s business are evaluated and reported separately from the asbestos and
environmental reserves associated with standard General Liability and Umbrella policies discussed in ‘‘Asbestos
and Environmental Reserves’’. The following discussion relates solely to the Chartis Environmental reserves.
The estimation of loss reserves relating to environmental claims is subject to a high degree of uncertainty due to
inconsistent court decisions as well as judicial interpretations and legislative actions that in some cases have
tended to broaden coverage beyond the original intent of such policies and in others have expanded theories of
liability. Reinsurance balances can also be subject to a higher level of disputes and legal collection activity, given
the complex nature of coverage issues.
Historically, Chartis actuaries have used traditional actuarial methods, such as loss development, Bornhuetter-
Ferguson, and indexing methods to assess the reserves for the Chartis Environmental products. However, recent
emerging claims activity has led Chartis to conclude that these traditional actuarial methods do not address to its
satisfaction the unique nature of the underlying exposures enough for those environmental policies with large
ultimate loss potential (greater than $5 million per policy) and high policy limits. Chartis Environmental
strengthened its reserves in the first nine months of 2011 by $217 million, partly due to large reserve increases on
individual claims. Consequently, an in depth ground-up review of the existing exposures was conducted by
actuaries and claims analysts. As a result of this claim review as well as other factors, Chartis strengthened the
reserves by an additional $196 million in the fourth quarter of 2011. Approximately 80 percent of the 2011
development was associated with accident years 2003 and prior.
In addition to reserving actions, Chartis has made significant changes to the Chartis Environmental business
with the goal of ensuring that the current policies are being written to earn an appropriate risk adjusted profit.
Underwriting guidelines have been revised to no longer cover known or expected clean up costs, which were a
significant driver of historical claims, and a ‘‘new emerging contaminants’’ team has been formed within the
dedicated environmental engineering staff to track any new cleanup standards that may be set by federal or state
regulators. The percentage of long term policies (ten years or more) has decreased from a historical average of
6 percent to 1.5 percent by policy count. In addition, minimum retentions have been increased, and engineering
reviews are required for specific business segments (such as oil and gas, and landfills) that have traditionally
generated higher losses.
See Chartis Results herein for further discussion of net loss development.
Overview of Loss Reserving Process
Chartis loss reserves can generally be categorized into two distinct groups. One group is short-tail classes of
business consisting principally of property, personal lines and certain casualty classes. The other group is long-tail
casualty classes of business which includes excess and umbrella liability, D&O, professional liability, medical
malpractice, workers’ compensation, general liability, products liability and related classes.
Short-Tail Reserves
For operations writing short-tail coverages, such as property coverages, the process of recording quarterly loss
reserves is generally geared toward maintaining an appropriate reserve for the outstanding exposure, rather than
determining an expected loss ratio for current business. For example, the IBNR reserve required for a class of
property business might be expected to approximate 20 percent of the latest year’s earned premiums, and this
level of reserve would generally be maintained regardless of the loss ratio emerging in the current quarter. The
20 percent factor would be adjusted to reflect changes in rate levels, loss reporting patterns, known exposure to
unreported losses, or other factors affecting the particular class of business.
AIG 2011 Form 10-K 93