AIG 2014 Annual Report Download - page 205

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Class of Business or Category and Actuarial Method Application of Actuarial Method
Excess Workers’ Compensation
We historically have used a combination of loss
development methods and expected loss ratio methods
for excess workers’ compensation. For the year-end
2014 loss reserve review, our actuaries supplemented
the methods used historically by applying a structural
drivers approach to inform their judgment of the ultimate
loss costs for open reported claims from accident years
2006 and prior and used the refined analysis to help
inform their judgment of the ultimate loss cost for claims
that have not yet been reported using a
frequency/severity approach for these accident years.
Excess workers’ compensation is an extremely long-tail
class of business, with loss emergence extending for
decades. 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. Claims estimates for this line also are highly
sensitive to:
 the assumed future rate of inflation and other
economic conditions in the United States;
 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).
Methods based on expected loss ratios are given the
greater weight for the more recent accident years. For
the year-end 2014 loss reserve review, the structural
drivers approach which was applied to open reported
claims from accident years 2006 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 2007 and subsequent was
determined using a Generalized Cape Cod Method,
which is similar to a Bornhuetter Ferguson expected loss
ratio method.