AIG 2012 Annual Report Download - page 112

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reporting unit. Approximately 80 percent of the 2011 development was associated with accident years 2003 and
prior.
In addition to reserving actions, we have made significant changes to the ongoing environmental business included in
Commercial with the goal of ensuring that the current policies are being written to earn an appropriate risk adjusted
profit. Underwriting guidelines have been revised to no longer cover known or expected clean up costs, which were a
significant driver of historical claims, and a ‘‘new emerging contaminants’’ team has been formed within the dedicated
environmental engineering staff to track any new cleanup standards that may be set by federal or state regulators.
The percentage of long term policies (ten years or more) has decreased from a historical average of 6 percent to
1.5 percent by policy count. In addition, minimum retentions have been increased, and engineering reviews are
required for specific business segments (such as oil and gas, and landfills) that have traditionally generated higher
losses.
Primary Workers’ Compensation and General Liability in Commercial Risk, Specialty Workers’ Compensation and
Energy Business units
The Commercial Risk division writes casualty insurance accounts for businesses with revenues of less than
$700 million. The majority of the business is workers’ compensation. The Energy division writes casualty insurance
accounts (including workers’ compensation) in the mining, oil and gas and power generation sectors. The
Commercial Specialty Workers’ Compensation division writes small monoline guaranteed cost risks. Our Commercial
Specialty Workers’ Compensation business unit grew significantly in the early to mid 2000s but has reduced premium
writings by nearly 70 percent since 2007.
During 2012, we significantly intensified our claims management efforts for those primary workers’ compensation
claims which are managed by AIG. These efforts include consulting with various specialists, including clinical and
public health professionals and other advisors. We also continued to refine our actuarial methodologies for estimating
ultimate loss costs incorporating a more refined segmentation by state (California and New York were analyzed
separately) and a more refined approach for business subject to deductibles as well as business subject to premium
adjustments (loss-sensitive business). Based on these enhanced reviews we increased reserves by $46 million. We
also reviewed the General Liability (GL) loss experience of the primary casualty classes of business using a more
refined segmentation for business subject to a deductible as well as loss-sensitive business. Our review focused on
applying actuarial loss development analyses to those GL claims for which these techniques are appropriate. As a
result of this analysis, we determined that prior year reserves needed to be increased by $235 million for the primary
GL class of business in 2012 to reflect the worse than expected emergence of paid loss severities for both bodily
injury and property damage claims from the more recent accident years (2008 and subsequent).
The Commercial Risk, Commercial Specialty Workers’ Compensation and Energy divisions contributed $265 million,
$145 million and $115 million, respectively, of adverse development in calendar year 2011. The vast majority of this
adverse development emanates from primary workers’ compensation exposure, which was largely from accident year
2010. In 2011, losses for accident year 2010 continued to emerge at higher levels than anticipated at prior year end.
A key driver was the effect of high unemployment on the frequency of higher severity lost time claims. The poor
economic environment precluded some employers from offering ‘‘light duty’’ return-to-work alternatives that might
otherwise have mitigated lost time claims. At the same time, the increased use of pain management strategies has
led to increased medical claims. The increase in lost time frequency and the adverse effects of medical cost trends
resulted in higher loss ratios than anticipated at prior year end. For each of the three classes, our conclusion that the
worsening experience necessitated a strengthening of the reserves was confirmed by an independent third-party
actuarial review during 2011.
We recorded a total of $518 million of adverse loss development for Commercial Specialty Workers’ Compensation in
2010. The need to strengthen the reserves was confirmed by an independent third-party actuarial review during the
fourth quarter of 2010. Approximately 75 percent of the year-end 2010 reserve strengthening for this business
pertained to accident years 2007 through 2009. For similar reasons, the Commercial Risk division strengthened
workers’ compensation reserves in 2010.
For more information on our Loss Reserving Process, see Critical Accounting Estimates.
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AIG 2012 Form 10-K 95
ITEM 7 / RESULTS OF OPERATIONS