AIG 2013 Annual Report Download - page 119

drive claim costs such as policy term, limit, pollution conditions covered, location of incident and applicable laws and
remediation standards. The analysis used these factors to segment and analyze the claim data to determine ultimate
costs, in some cases, on a claim by claim basis. As a result of this analysis, $200 million of prior year adverse
development was recognized during 2012, including $166 million for pollution products reported in the AIG Property
Casualty Other reporting unit related to lines that are now in runoff. The majority (81 percent) of the adverse
development related to accident years 2003 and prior, before significant underwriting changes were adopted.
Historically, we had used traditional actuarial methods to assess the reserves for the pollution products. The
comprehensive claims review provided a more refined approach for the development of actuarial estimates for toxic
tort claims (which were found to have a distinctly lengthier loss development pattern than other general liability claims
in the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving based
estimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with high
policy limits (greater than $5 million per policy). Notwithstanding the refined methodology and approach applied in
2012 and subsequently, considerable uncertainty remains over the ultimate loss cost for this class of business,
especially for business written in accident years 2003 and prior.
We strengthened our Pollution Products reserves in 2011 by $385 million, partly due to large reserve increases on
several individual claims. Of this amount, $382 million was included in the AIG Property Casualty Other reporting
unit. Approximately 80 percent of the 2011 development was associated with accident years 2003 and prior.
In addition to reserving actions, we have made significant changes to the ongoing environmental business included in
Commercial 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.
Further, engineering reviews are required for specific business segments (such as oil and gas, and landfills) that
have traditionally generated higher losses.
Primary Casualty includes Workers’ Compensation and General Liability in Commercial Risk, Specialty Workers’
Compensation, Energy Business units, Worldsource and Non-Admitted business.
The Commercial Risk division writes casualty insurance for businesses with revenues of less than $700 million. The
majority of the business is workers’ compensation. The Energy division writes casualty insurance (including workers’
compensation) in the mining, oil and gas and power generation sectors. The Commercial Specialty Workers’
Compensation division writes small monoline guaranteed cost risks. Our Commercial Specialty Workers’
Compensation business unit grew significantly in the early to mid 2000s but has reduced premium writings by nearly
70 percent since 2007.
During 2013, we continued to refine the segmentation of our analyses of primary workers’ compensation, which
indicated that prior year development was flat after taking into account the initiatives that our claim function has
undertaken to manage high risk claims.
During 2013, for primary general liability, we increased our reserves for prior years by approximately $355 million.
Most of the increase was driven by construction-related primary general liability claims, especially construction defect
claims where we increased our ultimate loss estimates by $219 million to reflect the higher than expected frequency
and severity of these claims especially in states that experienced heavy increases in construction activity after the
2004 and 2005 hurricanes and during the housing boom prior to 2007. Due to the subsequent home price declines
observed in many of these states, the frequency of reported losses has increased as the losses subsequently
represented a larger percentage of the equity values of the affected homes, and homeowners increasingly looked to
insurance recoveries as a way to recoup some of that lost value.
During 2012, we significantly intensified our claims management efforts for those primary workers’ compensation
claims which are managed by AIG. These efforts include consulting with various specialists, including clinical and
public health professionals and other advisors. We also continued to refine our actuarial methodologies for estimating
ultimate loss costs incorporating a more refined segmentation by state (California and New York were analyzed
separately) and a more refined approach for business subject to deductibles as well as business subject to premium
adjustments (loss-sensitive business). Based on these enhanced reviews, we increased reserves by $46 million.
Primary Casualty
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AIG 2013 Form 10-K 101
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
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