AIG 2015 Annual Report Download - page 140

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES
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economic environment, and in part by favorable frequency trends and recoveries in second lien claims. Partially offsetting
these improvements were upward trends in severity, particularly for older (pre-2012) accident periods.
During 2013, we recognized $30 million of adverse prior year loss reserve development due to unfavorable emergence of
overturns of prior claim cancellations and increased severity estimates in first liens, partially offset by favorable frequency in
student loans and a reduction in the unallocated loss adjustment expense reserve.
Consumer Personal Insurance
During 2015, 2014 and 2013, we recognized $19 million, $77 million, and $155 million of favorable development, respectively.
During 2015 and 2014, we experienced favorable loss reserve development of $10 million and $16 million, respectively, from
Natural Catastrophes.
The remaining $61 million of favorable development in 2014 was primarily from Homeowners, International Accident & Health
and U.S. Warranty.
Run-Off Insurance Lines
The following is a discussion of the primary reasons for the Run-Off Insurance Lines development in 2015, 2014 and 2013 of
those classes of business that experienced significant prior accident year development during the three-year period.
Asbestos and Environmental (1986 and prior)
Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos reserves are ceded to
National Indemnity Company (NICO) under a retrospective reinsurance arrangement entered into in 2011. However, certain
asbestos-related exposures are not subject to the NICO agreement, including asbestos exposures for which we have
negotiated fixed payment schedules, and third party reinsurance assumed policies. The reported claim activity on the assumed
claims has increased in the last year. As a result, we modified certain of our loss-reserve-related assumptions to better reflect
this AIG-specific experience as well as consideration of recent industry-wide trends regarding expanding coverage theories for
liability. As a result, we increased our 2015 reserves by $164 million and by $117 million for Asbestos and Environmental,
respectively.
Other Run-Off Insurance
During 2015, we transferred approximately $1.2 billion of loss reserves, largely representing coverages we have not written for
at least five years, from Commercial Insurance into Run-off insurance lines. We increased the reserves for these coverages by
$272 million to reflect updated assumptions about future loss development.
Excess Workers’ Compensation – U.S.
This class of business, which is reported in our run-off unit, has an extremely long tail and is one of the most challenging
classes of business from a reserving perspective, particularly when the excess coverage is provided above a self-insured
retention layer. The class is highly sensitive to small changes in assumptions, e.g. — in the rate of medical inflation or the
longevity of injured workers, which can have a significant effect on the ultimate reserve estimate.
During 2015, this class of business did not experience significant development in loss reserves. The proactive management of
settlement negotiations and other claims mitigation strategies minimized the volatility observed during 2015. The nominal
reduction in reserves as a result of commutations and individual claims settlement strategies amounted to $222 million in 2015
compared to $242 million in 2014 and $25 million in 2013.