American International Group disclosed in its annual report that Chartis management decided last year to cease writing excess workers? compensation business as a stand-alone product ? as ?part of its on-going initiatives to reduce exposure to capital intensive long-tail lines.?
Chartis has been one of the biggest writers of excess workers? compensation ? but the insurer experienced significant adverse development for this class during 2010 and 2009 of $825 million and $925 million, respectively, the insurer said.
AIG?s 2011 Form 10-K annual report, filed with the SEC on Feb. 23, pointed out: ?This class of business has an extremely long tail and is one of the most challenging classes of business to reserve for because it is highly sensitive to small changes in assumptions ? in the rate of medical inflation or the longevity of injured workers, for example ? which can have a significant effect on the ultimate reserve estimate.?
Furthermore, AIG noted that claims estimates for this line are highly sensitive to:
? the assumed future rate of inflation and other economic conditions in the U.S.;
? changes in the legal, regulatory, judicial and social environment;
? the expected impact of recently enacted health care reform on workers? compensation costs;
? underlying policy pricing, terms and conditions;
? claims settlement trends that can materially alter the mix and ultimate cost of claims;
? changes in claims reporting practices of insureds and third-party administrators;
? the cost of new and additional treatment specialties, such as ?pain management?;
? changes in injured worker longevity; and
? territorial experience differences (across states and within regions in a state).
?With the passage of the Affordable Care Act in March 2010, management concluded that there is increased vulnerability to the risk of further cost-shifting to the excess workers? compensation class of business in particular,? AIG stated in the annual report.
?Settlement efforts can also be affected by changes to evaluation protocols implemented by the Centers for Medicare & Medicaid Services in 2009, which are expected to result in future prescription drug costs being borne by workers? comp insurers to a significantly greater degree than in the past and thus likely to lead to further deteriorating trends for the excess workers? comp class of business.?
In addition, AIG stated, roughly 20 percent of the reported claims emanate from excess of loss reinsurance contracts provided by Chartis to other third-party insurers in accident years 2002 and prior. These reinsurance contracts generally include the so-called ?follow the fortunes clause? whereby claims management is performed by the ceding insurers and the outcomes of these efforts are binding on Chartis as the reinsurer. Chartis has virtually no ability to affect the outcomes of these claims.
Moreover, underwriting actions in recent years have led to a significant increase in insured retention levels, which reduce the frequency of moderate- severity losses but extend the time period of first report of claim, causing further unpredictability in loss development patterns, according to AIG.
AIG?s 2011 Form 10-K annual report is available online at the U.S. Securities and Exchange Commission?s website.
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