AIG 2015 Annual Report Download - page 137

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES
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For Primary General Liability, we increased our ultimate loss estimates for prior accident years by $146 million largely related
to coverage sold to the Construction sectors as we reacted to noteworthy adverse loss emergence throughout the year, by
changing our assumptions about loss development and expected loss ratios. For construction, the adverse development was
driven by construction defect claims. The construction class is being re-underwritten to reduce New York and U.S. residential
exposures.
For Primary Auto liability, we have observed increases in both the frequency and severity of claims occurring since the
recovery from the recent U.S. economic downturn, which have significantly outpaced the pricing rate increases implemented
during the same period. As a result, we recognized $144 million of adverse development during 2015 as we increased the
expected loss ratios for recent accident years to reflect the deteriorating trends.
We also-reassessed the reasonableness of our liability for future claim handling expenses related to existing loss reserves and
updated our estimates to reflect the costs from recent investments in claims systems, processes and people with the objective
of improving our ability to better manage total loss costs. We increased our reserve estimates by $214 million based on refined
analyses, $100 million of which was attributable to U.S. & Canada primary casualty. The balance was distributed among other
classes.
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 loss estimates 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
deductible of $500,000, which generally take several years to emerge and settle. This led to adverse prior year loss reserve
development of $156 million for the automobile subset of primary casualty.