AIG 2014 Annual Report Download - page 200

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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• The effects of various run-off claims management strategies that have been developed by AIG’s run-off unit.
During 2014, we continued to expand our analysis of structural drivers as a means of corroborating our judgments using
traditional actuarial techniques. For example, we considered the impact of changes in economic activity (real GDP growth) on
our emerging experience in the Commercial Auto Liability class of business, particularly business written in excess of a large
insured deductible where ground up experience may take several years to pierce our layer. Further, we considered the impact
of expected levels of future inflation as measured by the Personal Consumption Expenditure (PCE) Deflator (Health Services
Component) published by the U.S. Bureau of Economic Analysis on our ultimate loss costs for medical benefits in the primary
workers’ compensation class of business. We believe the PCE Deflator provides a more appropriate measure of workers’
compensation medical inflation as it includes medical expenditures made by employers on behalf of their employees. We also
tested the sensitivity of our estimates to changes in the future path and level of inflation for this class of business.
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 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
absolute exclusions for pollution-related damage and asbestos. The current Non-Life Insurance Companies 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 claims. Significant factors
that influence the 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