AIG 2015 Annual Report Download - page 138

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES
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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 had 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.
Financial Lines – U.S. and Canada
Financial Lines business includes Director and Officer (D&O) and Related Management Liability, 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 2015, we recognized $579 million of adverse development, primarily as a result of our scheduled annual detailed
valuation review conducted in the fourth quarter, driven largely by the adverse loss emergence that we have seen over the last
year, especially in D&O and Professional Liability. In particular, we have observed greater than expected loss costs for several
claims from accident years 2006 through 2010, driven by unfavorable settlements and deterioration in known claims. We
responded to this adverse emergence by updating our loss development factors and expected loss ratio assumptions for all
accident years. In addition, we recognized losses associated with bad-faith claims primarily based on actual settlements in the
fourth quarter.
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
severity trends for various Professional Liability classes of business which appear to be behaving differently in the post
financial crisis years than when reviewed in total.
Healthcare
During 2015, we recognized $207 million of adverse development driven by deteriorating loss experience in accident years
2008 and subsequent characterized by large claims in various segments including hospitals, nursing homes, and
pharmaceutical and medical products liability. We reacted to these large claims by increasing our expected loss ratios for
recent accident years and putting physicians and surgeons and pharmaceutical and medical products classes into runoff.
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.