AIG 2005 Annual Report Download - page 92

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
develop deficiently, such deficiency would have an adverse
Asbestos and Environmental Reserves effect on AIG’s future results of operations. AIG does not
The estimation of loss reserves relating to asbestos and discount asbestos and environmental reserves.
environmental claims on insurance policies written many years With respect to known asbestos and environmental claims,
ago is subject to greater uncertainty than other types of claims AIG established over a decade ago specialized toxic tort and
due to inconsistent court decisions as well as judicial interpre- environmental claims units, which investigate and adjust all
tations and legislative actions that in some cases have tended such asbestos and environmental claims. These units evaluate
to broaden coverage beyond the original intent of such policies these asbestos and environmental claims utilizing a claim-by-
and in others have expanded theories of liability. The claim approach that involves a detailed review of individual
insurance industry as a whole is engaged in extensive litigation policy terms and exposures. Because each policyholder presents
over these coverage and liability issues and is thus confronted different liability and coverage issues, AIG generally evaluates
with a continuing uncertainty in its efforts to quantify these exposure on a policy-by-policy basis, considering a variety of
exposures. factors such as known facts, current law, jurisdiction, policy
AIG continues to receive claims asserting injuries and language and other factors that are unique to each policy.
damages from toxic waste, hazardous substances, and other Quantitative techniques have to be supplemented by subjective
environmental pollutants and alleged claims to cover the considerations including management judgment. Each claim is
cleanup costs of hazardous waste dump sites, referred to reviewed at least semi-annually utilizing the aforementioned
collectively as environmental claims, and indemnity claims approach and adjusted as necessary to reflect the current
asserting injuries from asbestos. information.
The vast majority of these asbestos and environmental In both the specialized and dedicated asbestos and environ-
claims emanate from policies written in 1984 and prior years. mental claims units, AIG actively manages and pursues early
Commencing in 1985, standard policies contained an absolute resolution with respect to these claims in an attempt to
exclusion for pollution related damage and an absolute asbestos mitigate its exposure to the unpredictable development of these
exclusion was also implemented. However, AIG currently claims. AIG attempts to mitigate its known long-tail environ-
underwrites environmental impairment liability insurance on a mental exposures by utilizing a combination of proactive claim-
claims-made basis and has excluded such claims from the resolution techniques including policy buybacks, complete
analysis herein. environmental releases, compromise settlements, and, where
The majority of AIG’s exposures for asbestos and environ- indicated, litigation.
mental claims are excess casualty coverages, not primary With respect to asbestos claims handling, AIG’s specialized
coverages. Thus, the litigation costs are treated in the same claims staff operates to mitigate losses through proactive
manner as indemnity amounts. That is, litigation expenses are handling, supervision and resolution of asbestos cases. Thus,
included within the limits of the liability AIG incurs. while AIG has resolved all claims with respect to miners and
Individual significant claim liabilities, where future litigation major manufacturers (Tier One), its claims staff continues to
costs are reasonably determinable, are established on a case operate under the same proactive philosophy to resolve claims
basis. involving accounts with products containing asbestos
Estimation of asbestos and environmental claims loss (Tier Two), products containing small amounts of asbestos,
reserves is a subjective process and reserves for asbestos and companies in the distribution process, and parties with remote,
environmental claims cannot be estimated using conventional ill defined involvement in asbestos (Tiers Three and Four).
reserving techniques such as those that rely on historical Through its commitment to appropriate staffing, training, and
accident year loss development factors. management oversight of asbestos cases, AIG mitigates to the
Significant factors which affect the trends that influence the extent possible its exposure to these claims.
asbestos and environmental claims estimation process are the To determine the appropriate loss reserve as of Decem-
inconsistent court resolutions and judicial interpretations ber 31, 2005 for its asbestos and environmental exposures, AIG
which broaden the intent of the policies and scope of performed a series of top-down and ground-up reserve analyses.
coverage. The current case law can be characterized as still In order to ensure it had the most comprehensive analysis
evolving, and there is little likelihood that any firm direction possible, AIG engaged Milliman to provide an analysis of these
will develop in the near future. Additionally, the exposures for exposures including ground-up estimates for both asbestos
cleanup costs of hazardous waste dump sites involve issues such reserves and environmental reserves. Prior to 2005, AIG’s
as allocation of responsibility among potentially responsible reserve analyses for asbestos and environmental exposures was
parties and the government’s refusal to release parties. focused around a report year projection of aggregate losses for
Due to this uncertainty, it is not possible to determine the both asbestos and environmental reserves. Additional tests such
future development of asbestos and environmental claims with as market share analyses were also performed. Ground-up
the same degree of reliability as with other types of claims. analyses such as those provided by Milliman take into account
Such future development will be affected by the extent to policyholder-specific and claim-specific information that has
which courts continue to expand the intent of the policies and been gathered over many years from a variety of sources.
the scope of the coverage, as they have in the past, as well as Ground-up studies can thus more accurately assess the exposure
by the changes in Superfund and waste dump site coverage and to AIG’s layers of coverage for each policyholder, and hence
liability issues. If the asbestos and environmental reserves
40 AIG m Form 10-K