AIG 2010 Annual Report Download - page 122

American International Group, Inc., and Subsidiaries
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.
In the fourth quarter of 2010, management conducted its more in-depth comprehensive loss-reserve review with
the assistance of its third-party actuary. The more in-depth study to determine the appropriate loss reserve
estimate for its asbestos exposures includes a series of top-down and ground-up reserve analyses. To ensure it has
the most comprehensive analysis possible, AIG engages an independent third-party actuarial firm to assist in
assessing these exposures. The third-party actuarial firm’s ground-up study uses a proprietary model to calculate
the loss exposure on an insured-by-insured basis. Management believes that the accuracy of the reserve estimate is
greatly enhanced through the combination of the third-party actuarial firm’s industry modeling techniques and
industry knowledge and management’s specific account-level experience.
In developing its initial model for AIG in 2005, the third-party actuary reviewed a considerable amount of
account, policy and claim information and collaborated closely with management. The third-party actuary has used
this base model, updated for necessary assumption changes and new industry data, and AIG’s asbestos claims
development when performing its reserve studies for AIG every year since 2005.
AIG has identified approximately 800 existing accounts with asbestos-related exposure. Most of those accounts
represent multiple underlying individual policies and hundreds of claims. In addition, at this point, there are likely
policyholders facing claims who have not yet reported them to AIG, and who may not even be aware they have
policy coverage. Policies also may not have been identified by AIG as being exposed to asbestos claims.
Commencing in 1985, standard (occurrence-based) commercial general liability policies, which are the policies
most likely to respond to asbestos claims, have contained an absolute exclusion for pollution-related damage, and
an absolute asbestos exclusion was also implemented.
Due to the significant amount of individual claims and related data for each account, elements of the account-
specific data are sampled and analyzed in the reserve modeling. Additionally, the high degree of uncertainty in the
estimation process for asbestos reserves reduces the benefit of attempting to develop reserves only on account-
specific data. Therefore, generally consistent with industry practice, a ground-up model for asbestos reserves is
based on standard industry assumptions combined with key relevant AIG account-specific data. Each year, AIG
refines and calibrates this asbestos model with more account-specific data, when appropriate, and with information
gained from actual claims history and industry experience. It is accepted practice in the insurance industry to
make model refinements from a sample of accounts.
As part of the 2010 study, AIG gathered a list of insureds with new asbestos exposures along with the insureds’
policy limits, and information on any closed asbestos claims during the year. AIG initiated additional extensive
audits of claimants to assist in compiling, confirming and analyzing coverage information for industry-wide
distribution of insurance coverage by carrier for certain exposed insureds. As a result of these efforts, AIG was
able to provide more extensive policy and claims data, including settlement agreements, policy details, account
narratives and other claims data on a significant number of accounts with asbestos exposure for this review. The
third-party actuary used the detailed information to refine its model to consider the AIG-specific experience in
addition to reflecting general industry trends In addition, based on this data, AIG reassessed its assumptions about
its ability to negotiate favorable settlement terms and increased its expected average cost per claim.
Management reviews the reserve estimates produced by the third-party actuary each year as an element of its
overall evaluation and applies the appropriate amount of management judgment in making adjustments to the
AIG asbestos reserves when considered necessary.
Key observations from AIG’s third-party actuary that were factors in informing the base-case reserve
strengthening included:
• An analysis was performed on policy-specific information including, for instance, policy limits, layers of
coverage, ground-up attachment points, and self-insured retentions/deductibles. This policyholder-specific
data provided the third-party actuary with an ability to refine its models to produce more account-specific
106 AIG 2010 Form 10-K