AIG 2008 Annual Report Download - page 102

With respect to asbestos claims handling, AIG’s specialized claims staff operates to mitigate losses through
proactive handling, supervision and resolution of asbestos cases. Thus, while AIG has resolved all claims with
respect to miners and major manufacturers (Tier One), its claims staff continues to operate under the same proactive
philosophy to resolve claims involving accounts with products containing asbestos (Tier Two), products containing
small amounts of asbestos, companies in the distribution process, and parties with remote, ill-defined involvement
in asbestos (Tiers Three and Four). Through its commitment to appropriate staffing, training, and management
oversight of asbestos cases, AIG seeks to mitigate its exposure to these claims.
To determine the appropriate loss reserve as of December 31, 2008 for its asbestos and environmental
exposures, AIG performed a series of top-down and ground-up reserve analyses. In order to ensure it had the most
comprehensive analysis possible, AIG engaged a third-party actuary to assist in a review of these exposures,
including ground-up estimates for asbestos reserves consistent with the 2005 through 2007 reviews as well as a top-
down report year projection for environmental reserves. Prior to 2005, AIG’s reserve analyses for asbestos and
environmental exposures were focused around a report year projection of aggregate losses for both asbestos and
environmental reserves. Additional tests such as market share analyses were also performed. Ground-up analyses
take into account policyholder-specific and claim-specific information that has been gathered over many years from
a variety of sources. Ground-up studies can thus more accurately assess the exposure to AIG’s layers of coverage for
each policyholder, and hence for all policyholders in the aggregate, provided a sufficient sample of the policy-
holders can be modeled in this manner.
In order to ensure its ground-up analysis was comprehensive, AIG staff produced the information required at
policy and claim level detail for over 800 asbestos defendants. This represented over 95 percent of all accounts for
which AIG had received any claim notice of any amount pertaining to asbestos exposure. AIG did not set any
minimum thresholds, such as amount of case reserve outstanding, or paid losses to date, that would have served to
reduce the sample size and hence the comprehensiveness of the ground-up analysis. The results of the ground-up
analysis for each significant account were examined by AIG’s claims staff for reasonableness, for consistency with
policy coverage terms, and any claim settlement terms applicable. Adjustments were incorporated accordingly. The
results from the universe of modeled accounts, which as noted above reflects the vast majority of AIG’s known
exposures, were then utilized to estimate the ultimate losses from accounts or exposures that could not be modeled
and to determine an appropriate provision for unreported claims.
AIG conducted a comprehensive analysis of reinsurance recoverability to establish the appropriate asbestos
and environmental reserve net of reinsurance. AIG determined the amount of reinsurance that would be ceded to
insolvent reinsurers or to commuted reinsurance contracts for both reported claims and for IBNR. These amounts
were then deducted from the indicated amount of reinsurance recoverable. The year-end 2008 analysis reflected an
update to the comprehensive analysis of reinsurance recoverability that was first completed in 2005 and updated in
2006 and 2007. All asbestos accounts for which there was a significant change in estimated losses in the 2008
review were analyzed to determine the appropriate reserve net of reinsurance.
AIG also completed a top-down report year projection of its indicated asbestos and environmental loss
reserves. These projections consist of a series of tests performed separately for asbestos and for environmental
exposures.
For asbestos, these tests project the losses expected to be reported over the next 18 years, i.e., from 2009
through 2026, based on the actual losses reported through 2008 and the expected future loss emergence for these
claims. Three scenarios were tested, with a series of assumptions ranging from more optimistic to more
conservative.
For environmental claims, an analogous series of frequency/severity tests are produced. Environmental claims
from future report years, (i.e., IBNR) are projected out eight years, i.e., through the year 2016.
At year-end 2008, AIG considered a number of factors and recent experience in addition to the results of the
respective top-down and ground-up analyses performed for asbestos and environmental reserves. AIG considered
the significant uncertainty that remains as to AIG’s ultimate liability relating to asbestos and environmental claims.
This uncertainty is due to several factors including:
• The long latency period between asbestos exposure and disease manifestation and the resulting potential for
involvement of multiple policy periods for individual claims;
96 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries