AIG 2008 Annual Report Download - page 101

Asbestos and Environmental Reserves
The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written
many years ago is subject to greater uncertainty than other types of claims due to inconsistent court decisions as well
as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the
original intent of such policies and in others have expanded theories of liability. The insurance industry as a whole is
engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing
uncertainty in its efforts to quantify these exposures.
AIG continues to receive claims asserting injuries and damages from toxic waste, hazardous substances, and
other environmental pollutants and alleged claims to cover the cleanup costs of hazardous waste dump sites,
referred to collectively as environmental claims, and indemnity claims asserting injuries from asbestos.
The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior
years. Commencing in 1985, standard policies contained an absolute exclusion for pollution-related damage and an
absolute asbestos exclusion was also implemented. The current environmental policies that AIG underwrites on a
claims-made basis have been excluded from the analysis herein.
The majority of AIG’s exposures for asbestos and environmental claims are excess casualty coverages, not
primary coverages. Thus, the litigation costs are treated in the same manner as indemnity amounts. That is, litigation
expenses are included within the limits of the liability AIG incurs. Individual significant claim liabilities, where
future litigation costs are reasonably determinable, are established on a case-by-case basis.
Estimation of asbestos and environmental claims loss reserves is a subjective process and reserves for asbestos
and environmental claims cannot be estimated using conventional reserving techniques such as those that rely on
historical accident year loss development factors. The methods used to determine asbestos and environmental loss
estimates and to establish the resulting reserves are continually reviewed and updated by management.
Significant factors which affect the trends that influence the asbestos and environmental claims estimation
process are the court resolutions and judicial interpretations which broaden the intent of the policies and scope of
coverage. The current case law can be characterized as still evolving, and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposures for cleanup costs of hazardous waste dump
sites involve issues such as allocation of responsibility among potentially responsible parties and the government’s
refusal to release parties from liability.
Due to this uncertainty, it is not possible to determine the future development of asbestos and environmental
claims with the same degree of reliability as with other types of claims. Such future development will be affected by
the extent to which courts continue to expand the intent of the policies and the scope of the coverage, as they have in
the past, as well as by the changes in Superfund and waste dump site coverage and liability issues. If the asbestos and
environmental reserves develop deficiently, such deficiency would have an adverse effect on AIG’s future results of
operations.
With respect to known asbestos and environmental claims, AIG established over two decades ago specialized
toxic tort and environmental claims units, which investigate and adjust all such asbestos and environmental claims.
These units evaluate these asbestos and environmental claims utilizing a claim-by-claim approach that involves a
detailed review of individual policy terms and exposures. Because each policyholder presents different liability and
coverage issues, AIG generally evaluates exposure on a policy-by-policy basis, considering a variety of factors such
as known facts, current law, jurisdiction, policy language and other factors that are unique to each policy.
Quantitative techniques have to be supplemented by subjective considerations, including management judgment.
Each claim is reviewed at least semi-annually utilizing the aforementioned approach and adjusted as necessary to
reflect the current information.
In both the specialized and dedicated asbestos and environmental claims units, AIG actively manages and
pursues early resolution with respect to these claims in an attempt to mitigate its exposure to the unpredictable
development of these claims. AIG attempts to mitigate its known long-tail environmental exposures by utilizing a
combination of proactive claim-resolution techniques, including policy buybacks, complete environmental
releases, compromise settlements, and, where indicated, litigation.
AIG 2008 Form 10-K 95
American International Group, Inc., and Subsidiaries