AIG 2014 Annual Report Download - page 147

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES
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deductible of $500,000, which generally take several years to emerge and settle. This led to adverse prior year loss reserve
development of $156 million for the automobile subset of primary casualty.
During 2013, we continued to refine the segmentation of our analyses of primary workers’ compensation, which indicated that
prior year loss reserve development was flat after taking into account the initiatives that our claim function has undertaken to
manage high risk claims.
During 2013, for primary general liability, we increased our reserves for prior years by approximately $355 million. Most of the
increase was driven by construction-related primary general liability claims, especially construction defect claims where we
increased our ultimate loss estimates by $219 million to reflect the higher than expected frequency and severity of these
claims especially in states that experienced heavy increases in construction activity after the 2004 and 2005 hurricanes and
during the housing boom prior to 2007. Due to the subsequent home price declines observed in many of these states, the
frequency of reported losses has increased as the losses subsequently represented a larger percentage of the equity values of
the affected homes, and homeowners increasingly looked to insurance recoveries as a way to recoup some of that lost value.
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.
In 2012, we also reviewed the general liability 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 general liability 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 general liability 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).
Healthcare
During 2014, we recognized $109 million of adverse development in this class largely driven by three large and relatively
unusual claims of $25 million each in relatively recent accident years. While there have not been any significant structural
changes to the portfolio, there can be material volatility in loss experience in this class of business where individual claims can
be of high severity.
During 2013, this class recognized $54 million of favorable prior year development due to lower than expected loss emergence
in many classes such as Excess Hospital Liability.
During 2012, this class recognized $68 million of adverse prior year loss reserve development due to several large claims that
involved unusual coverage issues for this class. With the exception of these claims, this class experienced claim activity in line
with expectations.
Financial Lines – U.S. and Canada
Financial Lines business includes Director and Officer (D&O) and Related Management Liability, including various Professional
Liability classes of business as well as the Fidelity book of business. The Financial Lines book consists mostly of the D&O
class of business.
During 2014, we recognized $47 million of favorable development driven by the Professional Liability and D&O and Related
Management Liability classes of business, somewhat offset by adverse development on the Fidelity book in recent accident
years due to the changing economic cycle.
During 2013, we recognized $113 million of favorable development driven somewhat evenly among the Professional Liability,
Fidelity and D&O and Related Management Liability classes of business. The year-end 2013 Professional Liability loss reserve
actuarial review adopted a refined segmentation for this class of business with the selection of differentiated frequency and