AIG 2011 Annual Report Download - page 117

Due to this uncertainty, it is not possible to determine the future development of asbestos and environmental
claims with the same degree of reliability as with other types of claims. Such future development will be affected
by the extent to which courts continue to expand the intent of the policies and the scope of the coverage, as they
have in the past, as well as by the changes in Superfund and waste dump site coverage and liability issues. If the
asbestos and environmental reserves develop deficiently, such deficiency could have an adverse effect on AIG’s
future results of operations for an individual reporting period.
With respect to known environmental claims, AIG established over two decades ago a specialized environmental
claims unit, which investigates and adjusts all such environmental claims. This unit evaluates these environmental
claims utilizing a claim-by-claim approach that involves a detailed review of individual policy terms and exposures.
Because each policyholder presents different liability and coverage issues, AIG generally evaluates exposure on a
policy-by-policy basis, considering a variety of factors such as known facts, current law, jurisdiction, policy language
and other factors that are unique to each policy. Quantitative techniques have to be supplemented by subjective
considerations, including management judgment. Each claim is reviewed at least semi-annually utilizing the
aforementioned approach and adjusted as necessary to reflect the current information.
In the environmental claims unit, AIG actively manages and pursues early resolution with respect to these
claims in an attempt to mitigate its exposure to the unpredictable development of these claims. AIG attempts to
mitigate its known long-tail environmental exposures by utilizing a combination of proactive claim-resolution
techniques, including policy buybacks, complete environmental releases, compromise settlements, and, when
appropriate, litigation.
Similarly, with respect to known asbestos claims, AIG established over two decades ago a specialized toxic tort
claims unit, which historically investigated and adjusted all such asbestos claims. As part of the above mentioned
NICO transaction, effective January 1, 2011, NICO assumed responsibility for claims handling related to the
majority of AIG’s domestic asbestos liabilities.
In the fourth quarter of 2010, management conducted its more in-depth comprehensive loss-reserve review with
the assistance of its third-party actuary. The more in-depth study to determine the appropriate loss reserve
estimate for its asbestos exposures includes a series of top-down and ground-up reserve analyses. To ensure it has
the most comprehensive analysis possible, AIG engages an independent third-party actuarial firm to assist in
assessing these exposures. The third-party actuarial firm’s ground-up study uses a proprietary model to calculate
the loss exposure on an insured-by-insured basis. Management believes that the accuracy of the reserve estimate is
greatly enhanced through the combination of the third-party actuarial firm’s industry modeling techniques and
industry knowledge and management’s specific account-level experience.
Key observations in 2010 from AIG’s third-party actuary that were factors in informing the base-case reserve
strengthening included:
• An analysis was performed on policy-specific information including, for instance, policy limits, layers of
coverage, ground-up attachment points, and self-insured retentions/deductibles. This policyholder-specific
data provided the third-party actuary with an ability to refine its models to produce more account-specific
reserves and reduce the amount of standard-model assumptions (i.e., industry assumptions). This new
information allowed the third-party actuary to consider certain policies for which assumed losses would not
be allocated evenly across years (i.e., pro rata) as assumed under the standard model.
• Through the third-party actuary’s review of the policy data as provided by AIG, the third-party actuary
identified specific additional policies with no claim activity to date and included them in its modeling for
certain accounts. These additional policies provided the actuary with the ability to replace its standard
assumptions used in the pure IBNR calculation, with actual identified policies.
• During the fourth quarter of 2010, AIG and the third-party actuary increased the estimate of reserves in
recognition of general industry litigation trends attempting to expand asbestos coverage theories.
• With the assistance of the third-party actuary, AIG periodically reviews its assumptions and modeling
parameters used in its reserving estimates to calibrate the model to arrive at the most accurate estimate of
AIG’s experience. This regular calibration is a necessary step in ensuring that AIG’s loss reserve estimate
AIG 2011 Form 10-K 103