AIG 2014 Annual Report Download - page 151

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES

134
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment
expenses for accident year 2004 and prior by major class of business and driver of development:
Years Ended December 31,
(in millions) 2014 2013 2012
2004 and prior accident year development by major class of business and
driver of development:
Excess Casualty - primarily mass torts(a) $ 301 $-$-
Excess Casualty - all other 53 251 (108)
Primary Casualty - loss sensitive business(b) 37 (24) 83
Primary Casualty - all other(c) 196 102 183
Environmental (post 1986 - ongoing) and Run-off environmental (1987 to 2004)(d) 97 214 250
Asbestos and Environmental (1986 and prior) 124 67 75
Commutations(e) 63 21 78
All Other 30 98 43
Total prior year unfavorable development $ 901 $ 729 $ 604
(a) Updates of mass tort loss development patterns.
(b) Loss sensitive business that is offset by premium adjustments and has no income statement impact. Approximated based on prior accident year development
recognized from policy year premium charges.
(c) Includes loss development on excess of deductible exposures in workers’ compensation, general liability and commercial auto.
(d) Includes results of comprehensive specific large claim file reviews initiated in 2012 and updated in 2013 and 2014.
(e) The effects of commutations are shown separately from the related classes of business, primarily excess workers’ compensation. Commutations are
reflected for the years in which they were contractually binding.
The main sources of unfavorable prior year development for accident years 2004 and prior, representing 95 percent of the total
recorded in 2012 through 2014, are as follows:
• Update of the mass tort loss development patterns used for U.S. Excess Casualty which accounted for $301 million and
other loss emergence including specific large loss development totaling $196 million across the three years;
• Loss sensitive business that is entirely offset by premium adjustments accounted for $96 million;
• Update of the loss development patterns used for U.S. Primary Casualty including loss development patterns used in
guaranteed cost workers’ compensation in CA and NY, the construction class of business and updates to the loss
development patterns for business written on excess of deductible exposures in workers’ compensation, general liability and
the commercial auto classes of business which collectively accounted for approximately $577 million across the three years;
• Update of the Environmental run-off portfolio’s losses following the 2012 comprehensive claims review that 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). These
updates which commenced in 2012 and have been applied in each subsequent year, accounted for approximately $561
million;
• Update of our net retained asbestos and environmental exposure from 1986 and prior which accounted for approximately
$266 million ($196 million environmental and $70 million asbestos) across the three years; and
• Commutations in the three-year period ending December 31, 2014, accounted for approximately $162 million. These
commutations serve to reduce the uncertainty in AIG’s required reserves.
During the period 2012 to 2014, we completed comprehensive refinements of our reserving methodologies for U.S. mass tort,
toxic tort, retained asbestos, environmental and other specific large losses. We also conducted extensive additional studies to
corroborate our judgments for our U.S. primary workers compensation and excess workers’ compensation classes of business.
Further, we refined our loss reserving methodologies for our U.S. Excess Casualty class of business and our U.S. Primary
Casualty class of business written over excess of deductible exposures where loss development patterns may lengthen if
client retentions increase over time. Collectively, the reserves for the aforementioned classes of business or loss exposures
account for the majority of the remaining net loss reserves for accident years 2004 and prior.