AIG 2013 Annual Report Download - page 120

In 2012, we also reviewed the general liability loss experience of the primary casualty classes of business using a
more refined segmentation for business subject to a deductible as well as loss-sensitive business. Our review
focused on applying actuarial loss development analyses to those general liability claims for which these techniques
are appropriate. As a result of this analysis, we determined that prior year reserves needed to be increased by
$235 million for the primary general liability class of business in 2012 to reflect the worse than expected emergence
of paid loss severities for both bodily injury and property damage claims from the more recent accident years (2008
and subsequent).
The Commercial Risk, Commercial Specialty Workers’ Compensation and Energy divisions contributed $265 million,
$145 million and $115 million, respectively, of adverse development in calendar year 2011. The vast majority of this
adverse development emanates from primary workers’ compensation exposure, which was largely from accident year
2010. In 2011, losses for accident year 2010 continued to emerge at higher levels than anticipated at prior year end.
A key driver was the effect of high unemployment on the frequency of higher severity lost time claims. The poor
economic environment precluded some employers from offering ‘‘light duty’’ return-to-work alternatives that might
otherwise have mitigated lost time claims. At the same time, the increased use of pain management strategies has
led to increased medical claims. The increase in lost time frequency and the adverse effects of medical cost trends
resulted in higher loss ratios than anticipated at prior year end. For each of the three classes, our conclusion that the
worsening experience necessitated a strengthening of the reserves was confirmed by an independent third-party
actuarial review during 2011.
During 2013, this class recognized $54 million of favorable prior year development due to lower than expected loss
emergence in many classes such as Excess Hospital Liability.
During 2012, this class recognized $68 million of adverse prior year development due to several large claims that
involved unusual coverage issues for this class. With the exception of these claims, this class experienced claim
activity in line with expectations.
Healthcare business written by AIG Property Casualty’s Americas region produced moderate favorable development
in 2011. Healthcare loss reserves have benefited from favorable market conditions and an improved legal
environment in accident years 2002 and subsequent, following a period of adverse loss trends and market conditions
that began in the mid 1990s.
This class of business has an extremely long tail and is one of the most challenging classes of business to reserve
for, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly
sensitive to small changes in assumptions — in the rate of medical inflation or the longevity of injured workers, for
example — which can have a significant effect on the ultimate reserve estimate.
During 2013, we updated our analysis of Excess Workers’ Compensation reserves and determined that no changes
to our carried reserves were needed. During the 2012 loss reserve review, we augmented traditional reserve
methodologies with an analysis of underlying claims cost drivers to inform our judgment of the ultimate loss costs for
open reported claims from accident years 2003 and prior (representing approximately 95 percent of all open reported
claims) and used the refined analysis to inform our judgment of the ultimate loss cost for claims that have not yet
been reported using a frequency/severity approach for these accident years.
This approach was deemed to be most suitable for injured workers whose medical conditions had largely stabilized
(i.e., at least 9 to 10 years have elapsed since the date of injury). The reserves for accident years 2004 and
subsequent (13 percent of total case and IBNR reserves for this class) were determined using traditional methods.
See Critical Accounting Estimates for additional information.
The refined analysis confirmed that significant uncertainty remains for this class of business, especially from
unreported claims and from the propensity for future medical deterioration. Based on the more refined analysis we
did not recognize any material development for accident years 2011 and prior.
During 2013, we experienced adverse development from Storm Sandy totaling $108 million, or 5.4 percent of the
December 31, 2012 estimate. This development resulted from higher severities on a small number of large and
Healthcare
Excess Workers’ Compensation — U.S.
Natural Catastrophes
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AIG 2013 Form 10-K102
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
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