AIG 2006 Annual Report Download - page 98

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
deviations is expected to be less material when compared to the Superfund and waste dump site coverage and liability issues. If
the asbestos and environmental reserves develop deficiently,
effect on the classes cited above.
such deficiency would have an adverse effect on AIG’s future
results of operations.
Asbestos and Environmental Reserves
With respect to known asbestos and environmental claims, AIG
The estimation of loss reserves relating to asbestos and established over a decade ago specialized toxic tort and environ-
environmental claims on insurance policies written many years mental claims units, which investigate and adjust all such
ago is subject to greater uncertainty than other types of claims asbestos and environmental claims. These units evaluate these
due to inconsistent court decisions as well as judicial interpreta- asbestos and environmental claims utilizing a claim-by-claim
tions and legislative actions that in some cases have tended to approach that involves a detailed review of individual policy terms
broaden coverage beyond the original intent of such policies and and exposures. Because each policyholder presents different
in others have expanded theories of liability. The insurance liability and coverage issues, AIG generally evaluates exposure on
industry as a whole is engaged in extensive litigation over these a policy-by-policy basis, considering a variety of factors such as
coverage and liability issues and is thus confronted with a known facts, current law, jurisdiction, policy language and other
continuing uncertainty in its efforts to quantify these exposures. factors that are unique to each policy. Quantitative techniques
AIG continues to receive claims asserting injuries and dam- have to be supplemented by subjective considerations, including
ages from toxic waste, hazardous substances, and other environ- management judgment. Each claim is reviewed at least semi-
mental pollutants and alleged claims to cover the cleanup costs annually utilizing the aforementioned approach and adjusted as
of hazardous waste dump sites, referred to collectively as necessary to reflect the current information.
environmental claims, and indemnity claims asserting injuries In both the specialized and dedicated asbestos and environ-
from asbestos. mental claims units, AIG actively manages and pursues early
The vast majority of these asbestos and environmental claims resolution with respect to these claims in an attempt to mitigate
emanate from policies written in 1984 and prior years. Commenc- its exposure to the unpredictable development of these claims.
ing in 1985, standard policies contained an absolute exclusion for AIG attempts to mitigate its known long-tail environmental expo-
pollution-related damage and an absolute asbestos exclusion was sures by utilizing a combination of proactive claim-resolution
also implemented. The current environmental policies that AIG techniques, including policy buybacks, complete environmental
underwrites on a claims-made basis have been excluded from the releases, compromise settlements, and, where indicated,
analysis herein. litigation.
The majority of AIG’s exposures for asbestos and environmen- With respect to asbestos claims handling, AIG’s specialized
tal claims are excess casualty coverages, not primary coverages. claims staff operates to mitigate losses through proactive han-
Thus, the litigation costs are treated in the same manner as dling, supervision and resolution of asbestos cases. Thus, while
indemnity amounts. That is, litigation expenses are included within AIG has resolved all claims with respect to miners and major
the limits of the liability AIG incurs. Individual significant claim manufacturers (Tier One), its claims staff continues to operate
liabilities, where future litigation costs are reasonably determina- under the same proactive philosophy to resolve claims involving
ble, are established on a case-by-case basis. accounts with products containing asbestos (Tier Two), products
Estimation of asbestos and environmental claims loss containing small amounts of asbestos, companies in the distribu-
reserves is a subjective process and reserves for asbestos and tion process, and parties with remote, ill-defined involvement in
environmental claims cannot be estimated using conventional asbestos (Tiers Three and Four). Through its commitment to
reserving techniques such as those that rely on historical accident appropriate staffing, training, and management oversight of asbes-
year loss development factors. The methods used to determine tos cases, AIG mitigates to the extent possible its exposure to
asbestos and environmental loss estimates and to establish the these claims.
resulting reserves are continually reviewed and updated by To determine the appropriate loss reserve as of December 31,
management. 2006 for its asbestos and environmental exposures, AIG per-
Significant factors which affect the trends that influence the formed a series of top-down and ground-up reserve analyses. In
asbestos and environmental claims estimation process are the order to ensure it had the most comprehensive analysis possible,
inconsistent court resolutions and judicial interpretations which AIG engaged a third-party actuary to assist in a review of these
broaden the intent of the policies and scope of coverage. The exposures, including ground-up estimates for both asbestos
current case law can be characterized as still evolving, and there reserves and environmental reserves consistent with the 2005
is little likelihood that any firm direction will develop in the near review. Prior to 2005, AIG’s reserve analyses for asbestos and
future. Additionally, the exposures for cleanup costs of hazardous environmental exposures was focused around a report year
waste dump sites involve issues such as allocation of responsibil- projection of aggregate losses for both asbestos and environmen-
ity among potentially responsible parties and the government’s tal reser ves. Additional tests such as market share analyses were
refusal to release parties. also performed. Ground-up analyses take into account policy-
Due to this uncertainty, it is not possible to determine the holder-specific and claim-specific information that has been gath-
future development of asbestos and environmental claims with ered over many years from a variety of sources. Ground-up studies
the same degree of reliability as with other types of claims. Such can thus more accurately assess the exposure to AIG’s layers of
future development will be affected by the extent to which courts coverage for each policyholder, and hence for all policyholders in
continue to expand the intent of the policies and the scope of the the aggregate, provided a sufficient sample of the policyholders
coverage, as they have in the past, as well as by the changes in can be modeled in this manner.
48 AIG 2006 Form 10-K