AIG 2014 Annual Report Download - page 145

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES
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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.
Environmental and Pollution Products
We maintain an active environmental insurance business related to pollution legal liability and general liability for
environmental consultants and engineers, as well as run-off 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”.
Historically, we had used traditional actuarial methods to assess the reserves for pollution products. The comprehensive claims
review process that began in 2012 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 costs for this class of business, especially for business written in
accident years 2003 and prior.
In 2014, our updated analysis of environmental and pollution products resulted in adverse prior year loss reserve development
of $120 million for pollution policies primarily written prior to 2004, which are managed by our run-off unit, and $91 million for
pollution policies written 2004 and subsequent. The prior year loss reserve development on policies written prior to 2004 is
mostly due to projected increases for individual claim estimates as determined by our run-off unit. The prior year loss reserve
development on policies written in 2004 and subsequent is due to an increase in the pure IBNR by reflecting an increase in the
estimated future severity for the pure IBNR claims and an increase in the expected loss ratios for recent years to reflect the
emerging experience and the results of updated claim file reviews completed in 2014. Our updated reviews did not establish
any discernible trends from a policy structure, industry class, or cause of loss standpoint. Rather, there were several large loss
increases associated with a single accident or catastrophe. While the average policy term for new business written is close to
three years, the results for more recent accident years can still be influenced by longer term policies issued in prior years. We
have continued to actively monitor and adjust policy terms offered in the pollution products class of business. Transactions with
policy terms greater than five years have been reduced by more than 75 percent, with policy terms in excess of five years now
accounting for just four percent of the gross written premiums of the book. The new business written continues to meet risk
adjusted profitability targets after the increased estimates of ultimate losses for the more recent accident years.
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, and 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 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 adverse prior year loss reserve development was recognized during 2012, including
$166 million for pollution products reported in the run-off unit. The majority (81 percent) of the adverse development related to
accident years 2003 and prior, before significant underwriting changes were adopted.