AIG 2010 Annual Report Download - page 94

American International Group, Inc., and Subsidiaries
longer-tail lines of business within Commercial Casualty such as primary workers’ compensation, excess
workers’ compensation and excess casualty business are down 72 percent, 45 percent and 42 percent,
respectively since 2006.
• Due in large part to the acquisition of Fuji, at December 31, 2010, Chartis International represents
45 percent of Chartis’ net premiums written compared to 38 percent at December 31, 2008.
• Through a combination of a reduction in its gross writing and reinsurance strategy, since 2008 Chartis
reduced its natural catastrophe net PML, on a 1/250 year Occurrence Exceedance Probability (OEP)
combined peril basis, by 31 percent. Since 2008, Commercial Property writings are down approximately
10 percent. Further, Chartis has re-balanced its reinsurance purchases through its increased use of natural
catastrophe reinsurance in its U.S. business and reduced reinsurance purchases internationally. As part of
this program, Chartis secured $875 million in protection for U.S. hurricanes and earthquakes in 2010
through two separate catastrophe bond transactions.
• As part of AIG’s enhanced enterprise risk management framework, in 2010, Chartis hired a Chief Risk
Officer, created Senior ERM teams in Chartis U.S. and each of its Chartis International regions, enhanced
its risk procedures and implemented an improved ERM framework.
Chartis evaluates its liabilities for unpaid claims and claims adjustment expenses (loss reserves) including
incurred but not yet reported claims (IBNR) and periodically adjusts the loss reserves to reflect management’s
current best estimate of the ultimate value of the underlying claims. These liabilities are necessarily subject to the
impact of future changes in claim severity and frequency, as well as numerous other factors. Although AIG
believes that these estimated liabilities are reasonable, because of the extended period of time over which such
claims are reported and settled, the subsequent development of these liabilities in future periods may not conform
to the assumptions inherent in their determination and, accordingly, may vary materially from the amounts
previously recorded.
During calendar years 2010 and 2009, Chartis recorded net adverse loss development for prior accident years of
$4.3 billion and $2.8 billion net of discount and loss sensitive premium adjustments, respectively. Approximately
80 percent of the 2010 charges of $4.3 billion, relates to the asbestos, excess casualty, excess workers’
compensation, and primary workers’ compensation. Further, 83 percent of this charge relates to accident years
2007 and prior (accident years before the financial crisis in 2008) and 65 percent relates to accident 2005 and
prior (accident years prior to the start of the managed reduction in these long-tail lines of business).
Approximately 98 percent of the 2009 charge of $2.8 billion relates to excess casualty, excess workers’
compensation and asbestos lines of business. Further, 95 percent relates to accident years 2005 and prior (accident
years prior to the start of the managed reduction in these long-tail lines of business).
As noted above, writings in long-tail lines of business that were the drivers of the reserve charges in 2010 and
2009 have been reduced since 2006. In the case of asbestos, since 1985, standard policies have contained an
absolute exclusion for asbestos and pollution-related damages.
Within its Commercial Casualty lines, significant underwriting changes have been made to address historical
experience with respect to adverse development. Changes include exiting certain classes of its excess workers’
compensation business, increased actuarial involvement in product aggregate pricing and attachments, increased
utilization of pricing models with actuarial support, policy form changes, increased policy exclusions and fewer
multi-year policies being offered.
As a result of these changes, at December 31, 2010, its most recent overall accident year loss ratios (excluding
catastrophes) are in line with management’s expectations.
78 AIG 2010 Form 10-K