AIG 2014 Annual Report Download - page 146

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES
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In addition to reserving actions, we have made significant changes to the ongoing environmental business included in
Commercial Insurance 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 – U.S. and Canada
Primary Casualty includes Workers’ Compensation, General Liability and Auto Liability lines of business. In addition, these
lines of business are categorized into classes of business including National Accounts, Commercial Risk, Specialty Workers’
Compensation, Energy, Multi National, Construction, Transportation and Trucking.
The National Accounts class of business includes casualty insurance for businesses with revenues of $700 million or more.
The Commercial Risk class of business includes casualty insurance for businesses with revenues of less than $700 million.
The majority of the business is workers’ compensation. The Specialty Workers’ Compensation class of business includes
small monoline guaranteed cost risks. Our Specialty Workers’ Compensation class of business grew significantly in the early to
mid 2000s but has reduced premium writings by nearly 70 percent since 2007. The Energy class of business includes
casualty insurance (including workers’ compensation) in the mining, oil and gas and power generation sectors. The
Construction, Transportation and Trucking class of business includes casualty insurance (including workers’ compensation)
within that industry.
During 2014, we continued to refine our segmentation of primary workers’ compensation into guaranteed cost and excess of
large deductible business by deductible size group. The net result of the analysis was adverse development of $137 million for
the primary workers’ compensation class of business. The key drivers of the adverse development in this class of business
were increases for guaranteed cost business in California and New York, and increases for excess of large deductible
business, as well as adverse experience in the Construction class. Each of these segments appears to have been impacted
by specific structural changes in the portfolio. For California business, our tail factor increases were in response to changing
long-term medical development patterns. In New York, there has been a lengthening of the period between the date of
accident and the classification of non-scheduled permanent partial injuries. We completed a review of claim emergence and
payouts for our top six states in workers’ compensation and concluded that California and New York were the main states
where the loss development patterns had materially changed since our last review. For excess of large deductible business
across all states, we updated our analyses to consider the impact of changes in the mix of retentions that has occurred over
time as the data by retention band was becoming more credible. For the Construction class, we note that the construction
sector has experienced a comparatively slow recovery in payroll employment. As a result of the diminished employment
opportunities in this industry sector, injured workers may experience limited return-to-work opportunities, which moderate the
shortening of claim duration that normally accompanies a labor market recovery. For all other states combined excluding
California and New York, we saw favorable emergence in our middle market Specialty Workers’ Compensation segment. The
net effect of these revised selections had the greatest adverse effect on the Construction class of business ($140 million
adverse development) and the National Accounts class of business ($125 million adverse development). The most significant
favorable effect was in the Specialty Workers’ Compensation class of business ($155 million favorable development). Our
analysis considers our best estimate expectations of medical inflation and loss costs trends and also reflects the impacts of
enhancements in our claim management and loss mitigation activities, such as opioid management, fraud investigation and
medical management.
For primary general liability in 2014, we increased our ultimate losses for prior years by $182 million. This was largely driven by
the construction segment as a result of several large construction defect claims and increases in the costs of claims in New
York associated with New York Labor Law. The construction results in California and New York continue to be the main
sources of adverse development in our guaranteed cost primary general liability books although we did experience adverse
development from construction defect claims in other states in 2014. Our large account primary non-construction general
liability business was adversely impacted by claim activity in the layers excess of large insured retentions and we increased
our loss development patterns for these layers to reflect the changes.
For commercial auto in 2014, we reacted to an increase in frequency of large claims in the accident years 2010 to 2013, where
the economic recovery has contributed to increased frequency and severity, especially for those claims in excess of a client