AIG 2006 Annual Report Download - page 99

American International Group, Inc. and Subsidiaries
In order to ensure its ground-up analyses were comprehensive, For environmental claims, an analogous series of frequency/
AIG staff produced in the 2006 analyses the information required severity tests are produced. Environmental claims from future
at policy and claim level detail for over 1,000 asbestos defend- report years, (i.e., IBNR) are projected out ten years, i.e., through
ants and nearly 1,000 environmental defendants. This repre- the year 2016.
sented over 95 percent of all accounts for which AIG had received At year-end 2006, AIG considered a number of factors and
any claim notice of any amount pertaining to asbestos or recent experience in addition to the results of the respective top-
environmental exposure. AIG did not set any minimum thresholds, down and ground-up analyses performed for asbestos and
such as amount of case reserve outstanding, or paid losses to environmental reserves. AIG considered the significant uncertainty
date, that would have served to reduce the sample size and that remains as to AIG’s ultimate liability relating to asbestos and
hence the comprehensiveness of the ground-up analysis. The environmental claims. This uncertainty is due to several factors
results of the ground-up analysis for each significant account were including:
examined by AIG’s claims staff for reasonableness, for consis- (The long latency period between asbestos exposure and
tency with policy coverage terms, and any claim settlement terms disease manifestation and the resulting potential for involve-
applicable. Adjustments were incorporated accordingly. The results ment of multiple policy periods for individual claims;
from the universe of modeled accounts, which as noted above (The increase in the volume of claims by currently unimpaired
reflects the vast majority of AIG’s known exposures, were then plaintiffs;
utilized to estimate the ultimate losses from accounts or expo- (Claims filed under the non-aggregate premises or operations
sures that could not be modeled and to determine the appropriate section of general liability policies;
provision for all unreported claims. (The number of insureds seeking bankruptcy protection and the
AIG conducted a comprehensive analysis of reinsurance effect of prepackaged bankruptcies;
recoverability to establish the appropriate asbestos and environ- (Diverging legal interpretations; and
mental reserve net of reinsurance. AIG determined the amount of (With respect to environmental claims, the difficulty in estimat-
reinsurance that would be ceded to insolvent reinsurers or to ing the allocation of remediation cost among various parties.
commuted reinsurance contracts for both reported claims and for After carefully considering the results of the ground-up analy-
IBNR. These amounts were then deducted from the indicated sis, which AIG updates on an annual basis, as well as all of the
amount of reinsurance recoverable. The year-end 2006 analysis above factors, including the recent report year experience, AIG
reflected an update to the comprehensive analysis of reinsurance determined its best estimate was to recognize an increase of
recoverability that was first completed in 2005. All asbestos $256 million in its carried net asbestos reserves, and a decrease
accounts for which there was a significant change in estimated of $58 million in its carried net environmental reser ves at
losses in the 2006 review were analyzed to determine the December 31, 2006. The corresponding changes in gross
appropriate reserve net of reinsurance. reserves were an increase of approximately $570 million for
AIG also completed a top-down report year projection of its asbestos and a decrease of approximately $230 million for
indicated asbestos and environmental loss reserves. These environmental, respectively. A minor amount of additional incurred
projections consist of a series of tests per formed separately for loss emergence pertaining to asbestos was reflected in 2006,
asbestos and for environmental exposures. primarily attributable to the general reinsurance operations of
For asbestos, these tests project the expected losses to be Transatlantic. The majority of the increase in asbestos reserves
reported over the next twenty years, i.e., from 2007 through resulting from the 2006 review is attributable to higher than
2026, based on the actual losses reported through 2006 and the expected emergence of claims pertaining to new asbestos policy
expected future loss emergence for these claims. Three scenarios exposures. A significant portion of this increase pertains to higher
were tested, with a series of assumptions ranging from more layers of excess coverage for certain major asbestos defendants
optimistic to more conservative. In the first scenario, all carried on business written by DBG. Approximately $80 million of the
asbestos case reserves are assumed to be within ten percent of overall $256 million net asbestos reserve increase is attributable
their ultimate settlement value. The second scenario relies on an to business written by Foreign General, approximately $30 million
actuarial projection of report year development for asbestos of which is in turn ceded to DBG. In 2006, Foreign General
claims reported from 1993 to the present to estimate case enhanced its capability to identify asbestos exposures, resulting in
reserve adequacy as of year-end 2006. The third scenario relies the identification of additional asbestos defendants in 2006, as
on an actuarial projection of report year claims for asbestos but well as higher layers of exposure for certain existing defendants.
reflects claims reported from 1989 to the present to estimate As described above, the ground up analysis as of 2006 now
case reserve adequacy as of year-end 2006. Based on the results models over 1,000 asbestos defendants and over 95 percent of
of the prior report years for each of the three scenarios described all known reported asbestos claims.
above, the report year approach then projects forward to the year The decrease in environmental reserves resulting from the
2026 the expected future report year losses, based on AIG’s 2006 review is primarily attributable to favorable loss trends in
estimate of reasonable loss trend assumptions. These calcula- recent report years. These favorable trends resulted in a reduced
tions are performed on losses gross of reinsurance. The IBNR expectation of unreported claims, i.e., IBNR, for future report
(including a provision for development of reported claims) on a years.
net basis is based on applying a factor reflecting the expected
ratio of net losses to gross losses for future loss emergence.
Form 10-K 2006 AIG 49