AIG 2010 Annual Report Download - page 110

American International Group, Inc., and Subsidiaries
loss development assumptions increased the excess casualty reserves by approximately $815 million for accident
years 2006 and prior. Additionally, in conjunction with the selection of higher loss development factors described
above, AIG assigned greater credibility to the emerging loss development factors for product aggregate-related
claims, which are reviewed separately. This resulted in an increase of approximately $195 million in reserves,
primarily for accident years 2000 and prior. In the 2008 review of the product aggregate-related loss development,
only partial credibility had been given to the emerging loss development experience for product aggregate-related
claims. Finally, AIG claims staff updated its review of accounts with significant exposure to construction defect-
related claims. This resulted in an increase of approximately $65 million.
For the year-end 2008 loss reserve review, AIG claims staff updated its review of accounts with significant
exposure to construction defect-related claims. In response to the continued upward developments on these
claims, and based on an updated analysis of this development, AIG increased the reserves by an additional
$75 million beyond the increases identified in the claims review. In response to the continued adverse
development of product aggregate related claims during 2007 and 2008, AIG’s actuaries conducted a special
analysis of product aggregate-related claims development, resulting in an increase in the IBNR reserve for this
exposure of $175 million. In response to the high level of pharmaceutical-related claim emergence during 2007
and 2008, AIG claims staff reviewed the remaining exposure, and based on this review an additional reserve of
$10 million was established. In response to the much greater than expected actual loss emergence for other large
losses for accident years 1998 and subsequent during 2007 and 2008, AIG’s actuaries increased the loss
development factor assumptions for this business, resulting in a further increase of approximately $200 million in
loss reserves for this class. In total, the specific increases in reserves related to these items increased the excess
casualty reserves by approximately $460 million during 2008. During 2008, AIG also recognized approximately
$200 million of losses relating to MTBE, a gasoline additive, which primarily related to excess casualty business
from accident years 2000 and prior.
Loss reserves pertaining to the excess casualty class of business are generally included in the other liability
occurrence line of business, with a small portion of the excess casualty reserves included in the other liability
claims made line of business, as presented in the loss reserves by major lines of business table above.
Excess Workers’ Compensation: AIG experienced significant adverse development for this class during 2010
and 2009, following a year of immaterial development in 2008. This class of business has an extremely long tail
and is one of the most challenging classes of business to reserve for because it is highly sensitive to small changes
in assumptions—in the rate of medical inflation or the longevity of injured workers, for example—which can have
a significant effect on the ultimate reserve estimate. Furthermore claims estimates for this line are highly sensitive
to:
• The assumed future rate of inflation and other economic conditions in the United States;
• Changes in the legal, regulatory, judicial and social environment;
• The expected impact of recently enacted health care reform on workers’ compensation costs;
• Underlying policy pricing, terms and conditions;
• Claims settlement trends that can materially alter the mix and ultimate cost of claims;
• Changes in claims reporting practices of insureds and third-party administrators;
• The cost of new and additional treatment specialties, such as ‘‘pain management’’;
• Changes in injured worker longevity; and
• Territorial experience differences (across states and within regions in a state).
With the passage of the Affordable Care Act in March 2010, management concluded that there is increased
vulnerability to the risk of further cost-shifting to the excess workers’ compensation class of business in particular.
Settlement efforts can also be affected by changes to evaluation protocols implemented by the Centers for
94 AIG 2010 Form 10-K