AIG 2013 Annual Report Download - page 118

the reserves of that class of business. In some cases, the higher or lower than expected emergence may result in no
clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to
the reserves for the class of business for prior accident years. In other cases, the higher or lower than expected
emergence may result in a larger change, either favorable or unfavorable. As appropriate, we make adjustments for
the difference between the actual and expected loss emergence for each accident year. As part of our reserving
process, we also consider notices of claims received with respect to emerging and/or evolving issues.
The following is a discussion of the primary reasons for the development in 2013, 2012 and 2011 of those classes of
business that experienced significant prior accident year development during the three-year period. See Critical
Accounting Estimates for a description of our loss reserving process.
The excess casualty segment presents unique challenges for estimating the unpaid claims. Insureds are generally
required to provide notice of claims that exceed a threshold, either expressed as a proportion of the attachment
(e.g., 50 percent of the attachment) or as particular types of claims (e.g., death, quadriplegia). This threshold is
generally established well below our attachment point, to provide us with a precautionary notice of claims that could
potentially pierce our layer of coverage. This means that the majority of claims close without payment because the
claims never pierce our layer, while the claims that close with payment can be large and highly variable. Thus,
estimates of unpaid claims carry significant uncertainty. For reserve reporting purposes, we now combine the
Umbrella Excess casualty business with the high layer Catastrophic Casualty business that attaches when losses
exceed $50 million.
During 2013, Excess Casualty experienced $144 million of favorable emergence due to favorable outcomes on some
large cases from 2010 and lower than expected emergence in high layer Catastrophic Casualty business.
During 2012, the Excess Casualty class of business experienced $157 million of adverse development based on
worse than expected Umbrella Excess emergence, primarily from adverse outcomes relating to certain large claims
from older accident years, from the legacy public entity excess casualty class of business and from a refined analysis
applied to claims in excess of $10 million. This refined analysis considered the impact of changing attachment points
(primarily impacting frequency of excess claims) and limit structures (primarily impacting severity of excess claims)
throughout the loss development period.
During 2011, the Excess Casualty class of business experienced better than expected loss emergence. For Umbrella
Excess, the expected loss emergence was based on the shorter-termed loss development pattern from the year-end
2010 reserve analysis. However, accident year 2010 experienced some large catastrophic losses causing its results
to be worse than expected.
We maintain an active environmental insurance business related to pollution legal liability and general liability for
environmental consultants and engineers, as well as runoff business for certain environmental coverage which
provides cost overrun protection, in some cases over long time periods. We evaluate and report reserves associated
with this business separately from the 1986 and prior asbestos and environmental reserves associated with standard
General Liability and Umbrella policies discussed under ‘‘Asbestos and Environmental Reserves’’.
In 2013, our analysis of pollution products reflected an updated review of individual cases which indicated large
increases in the value of certain previously reported cases due to new developments such as the discovery of
additional contamination in certain sites, legislative changes, court rulings, expansion of plaintiff damages and
increased cost of remediation technologies. Additionally, the number and severity of newly reported claims was
higher than expected. As a result, we increased our estimate of ultimate losses by approximately $269 million with
approximately $201 million of this relating to policies written in 2003 and prior. Significant changes in underwriting
during 2004 changed the terms and conditions materially for policies written after 2003 to reduce our exposure to
these events.
Because of an increase in the frequency and severity of claims observed beginning in 2011, the 2012 loss reserve
review consisted of an intensive review of reported claims by a multi-disciplinary team including external specialists in
environmental law and engineering science, toxicologists and other specialists, our actuaries, claims managers and
underwriters to reassess our indicated loss reserve need. The review improved our understanding of factors that
Excess Casualty
Environmental and Pollution Products
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AIG 2013 Form 10-K100
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
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