AIG 2012 Annual Report Download - page 195

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• Ground-up consideration of the reinsurance recoveries expected for the class of business for reported claims with
extrapolation for unreported claims;
• The effects of various runoff claims management strategies that have been developed by AIG’s newly created
run-off unit.
Overall, our loss reserve reviews for long-tail classes typically utilize a combination of both loss
development and expected loss ratio methods, supplemented by structural drivers analysis of frequency/
severity where available. Loss development methods are generally given more weight for accident years and
classes of business where the loss experience is highly credible. Expected loss ratio methods are given more weight
where the reported loss experience is less credible, or is driven more by large losses. Expected loss ratio methods
require sufficient information to determine the appropriate expected loss ratio. This information generally includes the
actual loss ratios for prior accident years, and rate changes as well as underwriting or other changes which would
affect the loss ratio. Further, an estimate of the loss cost trend or loss ratio trend is required in order to allow for the
effect of inflation and other factors which may increase or otherwise change the loss costs from one accident year to
the next.
The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written
many years ago is subject to greater uncertainty than other types of claims. This is due to inconsistent court
decisions, as well as judicial interpretations and legislative actions that in some cases have tended to broaden
coverage beyond the original intent of such policies or have expanded theories of liability. In addition, reinsurance
recoverable balances relating to asbestos and environmental loss reserves are subject to greater uncertainty due to
the underlying age of the claim, underlying legal issues surrounding the nature of the coverage, and determination of
proper policy period. For these reasons, these balances tend to be subject to increased levels of disputes and legal
collection activity when actually billed. The insurance industry as a whole is engaged in extensive litigation over these
coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify these
exposures.
We continue to receive claims asserting injuries and damages from toxic waste, hazardous substances, and other
environmental pollutants and alleged claims to cover the cleanup costs of hazardous waste dump sites, referred to
collectively as environmental claims, and indemnity claims asserting injuries from asbestos. The vast majority of
these asbestos and environmental claims emanate from policies written in 1984 and prior years. Commencing in
1985, standard policies contained an absolute exclusion for pollution-related damage. An absolute asbestos exclusion
was also implemented. The current AIG Property Casualty Environmental policies that we specifically price and
underwrite for environmental risks on a claims-made basis have been excluded from the analysis.
The majority of our exposures for asbestos and environmental claims are excess casualty coverages, not primary
coverages. The litigation costs are treated in the same manner as indemnity amounts, with litigation expenses
included within the limits of the liability we incur. Individual significant claim liabilities, where future litigation costs are
reasonably determinable, are established on a case-by-case basis.
Reserve Estimation for Asbestos and Environmental Claims
Estimation of asbestos and environmental claims loss reserves is a subjective process. Reserves for asbestos and
environmental claims cannot be estimated using conventional reserving techniques such as those that rely on
historical accident year loss development factors. The methods used to determine asbestos and environmental loss
estimates and to establish the resulting reserves are continually reviewed and updated by management.
Various factors contribute to the complexity and difficulty in determining the future development of asbestos and
environmental claims. Significant factors that influence the asbestos and environmental claims estimation process
include court resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage.
The current case law can be characterized as still evolving, and there is little likelihood that any firm direction will
develop in the near future. Additionally, the exposures for cleanup costs of hazardous waste dump sites involve
issues such as allocation of responsibility among potentially responsible parties and the government’s refusal to
release parties from liability. Future claims development also will be affected by the changes in Superfund and waste
dump site coverage and liability issues.
If the asbestos and environmental reserves develop deficiently, resulting deficiencies could have an adverse effect on
our future results of operations for an individual reporting period.
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AIG 2012 Form 10-K178
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES