AIG 2013 Annual Report Download - page 205

We historically have used a combination of loss development Excess workers’ compensation is an extremely long-tail class
methods and expected loss ratio methods for excess workers’ of business, with loss emergence extending for decades. The
compensation. For the year-end 2013 loss reserve review, our class is highly sensitive to small changes in assumptions — in
actuaries supplemented the methods used historically by the rate of medical inflation or the longevity of injured workers,
applying a structural drivers approach to inform their judgment for example — which can have a significant effect on the
of the ultimate loss costs for open reported claims from ultimate reserve estimate. Claims estimates for this line also
accident years 2003 and prior and used the refined analysis are highly sensitive to:
to help inform their judgment of the ultimate loss cost for • the assumed future rate of inflation and other economic
claims that have not yet been reported using a frequency/ conditions in the United States;
severity approach for these accident years.
• changes in the legal, regulatory, judicial and social
environment;
• the expected impact of recently enacted health care reform
on workers’ compensation costs;
• underlying policy pricing, terms and conditions;
• claims settlement trends that can materially alter the mix
and ultimate cost of claims;
• changes in claims reporting and management practices of
insureds and their third-party administrators;
• the cost of new and additional treatment specialties, such
as ‘‘pain management’’;
• the propensity for severely injured workers’ medical
conditions to deteriorate in the future;
• changes in injured worker longevity; and
• territorial experience differences (across states and within
regions in a state).
Expected loss ratio methods are given the greater weight for
the more recent accident years. For the year-end 2013 loss
reserve review, the structural drivers approach which was
applied to open reported claims from accident years 2003 and
prior, was deemed to be most suitable for informing our
judgment of the ultimate loss cost 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 reserve
for accident years 2004 and subsequent was determined
using a Bornhuetter Ferguson expected loss ratio method.
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AIG 2013 Form 10-K 187
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
Excess Workers’ Compensation
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Class of Business or Category and Actuarial Method Application of Actuarial Method