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INSURANCE LIABILITIES
 12 Months Ended
Dec. 31, 2016
LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS  
LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS

13. Insurance Liabilities

Liability for Unpaid Losses and Loss Adjustment Expenses (Loss Reserves)

Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and loss adjustment expenses (IBNR), less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.8 billion and $12.6 billion at December 31, 2016 and 2015, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. Thus, these recoverable amounts represent a credit exposure to us. At December 31, 2016 and 2015, we held collateral of approximately $9.7 billion and $9.6 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements.

The following table presents the roll forward of activity in Loss Reserves:

Years Ended December 31,
(in millions)201620152014
Liability for unpaid loss and loss adjustment expenses, beginning of year$74,942$77,260$81,547
Reinsurance recoverable(14,339)(15,648)(17,231)
Net Liability for unpaid loss and loss adjustment expenses, beginning of year60,60361,61264,316
Foreign exchange effect(463)(1,429)(1,061)
Dispositions(a)(1,058)--
Changes in net liability for unpaid losses and loss adjustment expenses due to
retroactive asbestos reinsurance transaction-20141
Total59,08260,20363,396
Losses and loss adjustment expenses incurred:
Current year20,23220,30821,279
Prior years, excluding discount5,7884,119703
Prior years, discount charge (benefit)(422)(71)478
Total losses and loss adjustment expenses incurred25,59824,35622,460
Losses and loss adjustment expenses paid*:
Current year(5,825)(5,751)(6,358)
Prior years(16,908)(18,205)(17,886)
Total losses and loss adjustment expenses paid(22,733)(23,956)(24,244)
Reclassified to liabilities held for sale(b)(402)--
Liability for unpaid loss and loss adjustment expenses, end of year:
Net liability for unpaid losses and loss adjustment expenses61,54560,60361,612
Reinsurance recoverable15,53214,33915,648
Total$77,077$74,942$77,260

(a) Includes amounts related to dispositions through the date of disposition. Includes sale of UGC and Ascot.

(b) Represents loss reserves included in our pending sale of certain of our insurance operations to Fairfax. Upon consummation of the sale, we may retain a portion of these reserves through reinsurance arrangements.

During 2016, we recognized adverse prior year loss reserve development of $5.8 billion. This adverse development was primarily a result of the following:

  • Higher than expected losses emerging across several casualty product lines, especially in the recent accident years (generally, 2011 to 2015) driven by increased frequency and severity of claims. This recent accident year loss emergence caused us to increase loss development factors applied across many accident years.
  • Loss development factors including workers compensation tail factors, also increased due to an observed lengthening of loss reporting patterns relative to prior expectations.
  • Increases in loss trend assumptions to reflect the latest observed increases in frequency and severity and the impact of these increased loss trends on expected loss ratios.
  • Changes in weights we apply to the various actuarial methods to better align with updated trends.

The Loss Development Tables below include loss development data by our major lines of business for the last 10 accident years. The drivers of prior year development are discussed following each of the Loss Development Tables.

Loss Development

The table below presents the reconciliation of the net incurred and paid claims development in the following tables to Loss Reserves in the Consolidated Balance Sheets for the year ended December 31, 2016:

Net liability forunpaid losses and loss adjustment expensesas presented in the disaggregated tables belowReinsurance recoverable on unpaid losses and loss adjustment expensesincluded in the disaggregated tables belowGross liability forunpaid losses and loss adjustment expenses
(in millions)
Commercial Insurance:
Liability and Financial Lines
U.S. Workers' compensation (before discount)$13,069$2,879$15,948
U.S. Excess casualty8,7491,1159,864
U.S. Other casualty8,7463,20911,955
U.S. Financial lines6,1021,1957,297
Europe Casualty and Financial lines5,5871,3136,900
Total Liability and Financial Lines42,2539,71151,964
Property and Special Risks:
U.S. and Europe5,9131,5967,509
Total Property and Special Risks5,9131,5967,509
Total Commercial Insurance48,16611,30759,473
Consumer - Personal insurance
U.S., Europe and Japan3,4543773,831
Total Consumer - Personal Insurance3,4543773,831
Legacy Portfolio - Run-Off Property
and Casualty Insurance Lines
U.S. Long Tail Insurance lines (before discount)5,9671,6797,646
Total Legacy Portfolio Run-Off Property and
Casualty Insurance Lines5,9671,6797,646
Total$57,587$13,363$70,950
Other Reconciling Items
Discount on workers compensation lines(3,570)
Other product lines6,192
Unallocated loss adjustment expenses3,505
Total$77,077

Loss Development Information

The following is information about incurred and paid loss developments as of December 31, 2016, net of reinsurance. The cumulative number of reported claims, the total of IBNR liabilities and expected development on reported loss included within the net incurred loss amounts are presented in the following section.

Reserving Methodology

We use a combination of methods to project ultimate losses for both long-tail and short-tail exposures, which include:

  • Paid Development method: The Paid Development method estimates ultimate losses by reviewing paid loss patterns and selecting paid ultimate loss development factors. These factors are then applied to paid losses by applying them to accident years, with further expected changes in paid loss. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.
  • Incurred Development method: The Incurred Development method is similar to the Paid Development method, but it uses case incurred losses instead of paid losses. Since this method uses more data (case reserves in addition to paid losses) than the Paid Development method, the incurred development patterns may be less variable than paid development patterns.
  • Expected Loss Ratio method: The Expected Loss Ratio method multiplies premiums by an expected loss ratio to produce ultimate loss estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses.
  • Bornhuetter-Ferguson method: The Bornhuetter-Ferguson method using premiums and paid losses is a combination of the Paid Development method and the Expected Loss Ratio method where the weights given to each method is the reciprocal of the loss development factor. This method normally determines expected loss ratios similar to the method used for the Expected Loss Ratio method. The Bornhuetter-Ferguson method using premiums and incurred losses is similar to the Bornhuetter-Ferguson method using premiums and paid losses except that it uses case incurred losses.
  • Average Loss method: The Average Loss method multiplies a projected number of ultimate claims by an estimated ultimate severity average loss for each accident year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for reserve categories where loss development patterns are inconsistent or too variable to be relied on exclusively.

In updating our loss reserve estimates, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes, including challenges and recommendations from our Enterprise Risk Management group, as well as the views of third party actuarial firms. We use these inputs to improve our evaluation techniques, and to analyze and assess the change in estimated ultimate loss for each accident year by product line. Our analyses produce a range of indications from various methods, from which we select our best estimate.

In determining the actual carried loss reserves, we consider both the internal actuarial best estimate and numerous other internal and external factors, including:

  • an assessment of economic conditions, including real GDP growth, inflation, employment rates or unemployment duration, stock market volatility and changes in corporate bond spreads;
  • changes in the legal, regulatory, judicial and social environment, including changes in road safety, public health and cleanup standards;
  • changes in medical cost trends (inflation, intensity and utilization of medical services) and wage inflation trends;
  • underlying policy pricing, terms and conditions including attachment points and policy limits;
  • claims handling processes and enhancements;
  • third-party claims reviews that are periodically performed for key classes of claims such as toxic tort, environmental and other complex casualty claims;
  • third-party actuarial reviews that are periodically performed for key classes of business;
  • input from underwriters on pricing, terms, and conditions and market trends; and
  • changes in our reinsurance program, pricing and commutations.

The following factors are relevant to the loss development information Included in the tables below:

  • Table Organization: The tables are organized by accident year and include policies written on an occurrence and claims- made basis. Financial Lines business is primarily written on a claims-made basis, while the majority of the Liability business is written on an occurrence basis. Primarily, all short-tail lines in Property and Special Risks and Personal Insurance are written on an occurrence basis.
  • Groupings: We believe our groupings have homogenous risk characteristics with similar development patterns and would generally be subject to similar trends. As an example, we separated U.S. business from non-U.S. business for long-tail classes because the claims for these two product lines can be substantially different, and we only produced a table for Europe, which is the largest region in our non-U.S. portfolio for non-U.S. long-tail business.
  • Reinsurance: Our reinsurance program varies by exposure type and may change from year to year. This may affect the comparability of the data presented in our tables.
  • Incurred but not reported liabilities (IBNR): We include development from past reported losses in IBNR.
  • Data excluded from tables: Information with respect to accident years older than ten years is excluded from the development tables. Unallocated loss adjustment expenses are also excluded.
  • Foreign exchange: The loss development for operations outside of the U.S. is presented for all accident years using the current exchange rate at December 31, 2016. Although this approach requires restating all prior accident year information, the changes in exchange rates do not impact incurred and paid loss development trends.
  • Claim counts: We consider a reported claim to be one claim for each claimant or feature for each loss occurrence. Claims relating to losses that are 100 percent reinsured are excluded from the reported claims in the tables below. Reported claims for losses from assumed reinsurance contracts are not available and hence not included in the reported claims.
  • There are limitations that should be considered on the reported claim count data in the tables below, including:
  • Claim counts are presented only on a reported (not an ultimate) basis;
  • The tables below include lines of business and geographies at a certain aggregated level which may indicate different frequency and severity trends and characteristics, and may not be as meaningful as the claim count information related to the individual products within those lines of business and geographies;
  • Certain lines of business are more likely to be subject to occurrences involving multiple claimants and features, which can distort measures based on the reported claim counts in the table below; and.
  • Reported claim counts are not adjusted for ceded reinsurance, which may distort the measure of frequency or severity.

Supplemental Information: The information about incurred and paid loss development for all periods preceding year ended December 31, 2016 and the related historical claims payout percentage disclosure is unaudited and is presented as supplementary information.

The following tables present undiscounted, incurred and paid losses and allocated loss adjustment expenses by accident year, on a net basis after reinsurance, for 10 years:

U.S. Workers' Compensation

During 2016, we recognized $1.9 billion of adverse prior year development primarily due to increased tail factors and loss development factors. The net earned premium has declined by approximately 72% from accident year 2007 to accident year 2016. The proportion of large deductible business has increased which has slowed the reporting pattern of claims.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$4,505$4,441$4,414$4,544$4,528$4,513$4,469$4,379$4,395$4,548$153$392225,243
20084,1144,1844,4224,4254,4714,3984,3854,3984,547149504198,597
20093,4663,6333,6083,6663,6393,6163,6063,733127547147,209
20102,7063,0493,1253,1483,2113,2143,31197550132,987
20112,9012,9533,0913,1583,1133,15239521124,486
20122,3822,1942,2862,2602,3347457170,426
20131,9321,8801,9502,06011064546,175
20141,7291,7641,91615280739,000
20151,7081,8641561,02734,241
20161,29996525,164
Total$28,764$1,057
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below(19,124)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance3,429850
Unallocated loss adjustment expense prior year development-13
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$13,069$1,920

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$926$1,856$2,452$2,844$3,122$3,359$3,577$3,665$3,773$3,855
20087851,6782,2522,6553,0443,2723,4763,6093,707
20096301,3281,7562,1202,3902,6212,7802,887
20105501,0931,5371,8552,1262,2882,426
20115191,1291,5611,8842,1292,285
20124158041,0891,2721,440
20132826198791,067
2014231558786
2015234524
2016147
Total$19,124

Reserving Process and Methodology

U.S. Workers’ Compensation is an extremely long-tail line of business, with loss emergence extending for decades. We generally use a combination of loss development methods, frequency/severity and expected loss ratio methods for workers’ compensation.

Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. We group guaranteed cost and excess of deductible business separately and then further by state and industry subset to the extent that meaningful differences are determined to exist. We also separately analyze certain subsets of the portfolio that have unique characteristics (e.g., U.S. government sub-contractor accounts and construction wrap-up business). For excess of deductible business, we also segment by size of deductible and whether the claim is handled by AIG or an outside third party administrator (TPA).

For guaranteed cost business, expected loss ratio methods generally are given significant weight only in the most recent accident year. Workers’ compensation claims are generally characterized by high frequency, low severity, and relatively consistent loss development from one accident year to the next. We historically have been a leading writer of workers’ compensation, and thus have sufficient volume of claims experience to use development methods. We generally segregate California (CA) and New York (NY) businesses from the other states to reflect their different development patterns and changing percentage of the mix by state. The claims development tables above are impacted by two other significant initiatives, which offset each other. In recent years, we instituted claims strategy changes and loss mitigation efforts to accelerate settlements, which we believe results in an overall reduction in claim costs. This strategy resulted in an increase in paid losses along the latest diagonals relative to prior years. In addition, we have been reducing premium volume in recent years and shifting a greater proportion of business to insured risk retention structures such as high deductible policies. These mix and volume changes slowed paid and incurred development since excess of deductible claims will typically take longer to emerge and settle.

Expected loss ratio methods for business written in excess of a deductible may be given significant weight in the most recent five accident years. In the current analysis, we have increased our tail factor estimates for states other than NY and CA for guaranteed cost business in recognition of longer medical development patterns that we have been seeing in recent years. In addition, we have reflected increases in legal costs we have seen across the portfolio, particularly in California.

Additionally, over the years we have written a number of very large accounts which include workers’ compensation coverage. These accounts are generally individually priced by our actuaries, and to the extent appropriate, the indicated losses based on the pricing analysis may be used to record the initial estimated loss reserves for these accounts.

Prior Year Development

During 2016, we recognized $1.9 billion of adverse prior year development in primary workers’ compensation coverages primarily driven by the risk sharing programs where we provide coverage in excess of large deductibles. For this excess of large deductible business, in 2016, we observed actual loss emergence and development at significantly greater levels than expected based on our previous experience in particular from losses in excess of $1 million. Since these policies respond to larger claims, the loss reporting pattern is much longer than observed in guaranteed cost workers’ compensation and it takes several years to discern credible changes in the pattern. Furthermore, implementation of claims settlement and loss mitigation strategies over the past several years has made the recent evaluation of data more challenging as historical development patterns may not yet fully reflect these claim and mitigation activities. During 2016, we refined our actuarial methodology by combining data across previously segregated underwriting portfolios to improve our ability to analyze the loss development trends and patterns that had been altered by the mix, claims handling and loss mitigation changes we have made during the last 5 years. We also developed further segmentations by deductible size and other key parameters, such as claims handled by third party administrator’s (TPA) staff and not our claims department. As a result, we determined that the loss emergence patterns had changed and lengthened significantly from our prior expectation and therefore, we increased our loss development factors.

In addition, for workers’ compensation policies with no deductibles (guaranteed cost), we increased our tail factors for the all other states grouping to reflect the latest unfavorable experience in more mature accident years. This change increased the ultimate losses by approximately $440 million in 2016. We also reflected the increasing cost trends for legal and cost containment services, especially in California, as recent trends in this sector have been unfavorable.

Furthermore, in 2016, the Florida Supreme Court issued two separate rulings that have increased the potential liability for workers’ compensation claims in that state by undoing certain aspects of regulations in place since 2003. The Castellanos ruling eliminated statutory caps on claimant attorney fees in certain cases, and the Westphal ruling eliminated the 104-week limitation on temporary total disability benefits. Also in the second quarter, the Florida Court of Appeals issued the Miles decision, declaring unconstitutional certain restrictions on claimant-paid attorney fees. In in the second quarter 2016, we increased our workers’ compensation reserves by $100 million to reflect our estimate of the costs of these rulings on prior years’ claims.

During 2015, we increased our reserves by $234 million, primarily for accident years 2012 and prior in the U.S. Workers’ Compensation line, to reflect estimated increased losses and reduced expectations of future recoveries from our insureds through risk-sharing features. We also recognized $100 million of adverse prior year development in U.S. Workers’ Compensation coverages sold to government contractors in U.S. and non-U.S. military installations as a result of adverse loss emergence from several large accounts in the recent accident years. In addition, we reacted to the adverse emergence by increasing our expected loss ratios in recent accident years. For the remainder of the primary workers’ compensation portfolio, our 2015 analysis was based on the refined segmentation from 2014, and 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 2014, consistent with prior year studies, we continued to refine our segmentation of primary workers’ compensation into guaranteed cost and excess of large deductible businesses by deductible size group. The net result of the analysis was adverse development of $113 million for the primary workers’ compensation line of business. The key drivers of the adverse development in this line of business were increases for guaranteed cost business in California and New York, and increases for excess of large deductible business, as well as adverse experience in the construction line. Our revised selections had the greatest adverse effect on the construction line of business ($140 million adverse development) and the national accounts line of business ($125 million adverse development). The most significant favorable effect was in the special workers’ compensation line of business ($155 million favorable development).

U.S. Excess Casualty

During 2016, we recognized $1.1 billion of adverse development in Excess Casualty driven by continued higher than expected loss emergence as detailed below. The net earned premium for Excess Casualty has declined by approximately 69% from accident 2007 to accident year 2016. The average limit of the excess casualty business has declined over this period and attachment points for certain subsets has been increasing.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$1,854$1,820$1,752$2,246$2,072$2,232$2,208$2,183$2,113$2,194$81$2286,423
20081,9792,0002,1731,9511,8321,8841,7211,6671,638(29)2284,561
20091,8511,9201,8121,6501,4651,3281,4181,5201022243,689
20101,8852,0942,0911,7821,6491,7361,722(14)3993,459
20111,7841,8241,5951,4271,5281,611834253,368
20121,6041,4001,2391,4861,566806213,252
20131,0969981,1361,2761406722,494
20148739961,1851897881,791
20159131,3804679721,325
2016810748540
Total$14,902$1,099
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below(7,690)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance1,53726
Unallocated loss adjustment expense prior year development-(67)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$8,749$1,058

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$8$102$301$732$1,085$1,402$1,613$1,712$1,796$1,857
200811974396678429541,0611,1721,226
20098692494496247889651,175
2010101974756547959461,052
2011563225387716921
20123106288495649
201315105206386
2014370211
20159196
201617
Total$7,690

Reserving Process and Methodology

U.S. Excess Casualty policies tend to attach at a high layer above underlying policies, which causes the loss development pattern to be lagged significantly. Many of the claims notified to the excess layers are closed without payment because the claims never reach our layer as a result of high deductibles and other underlying coverages, while the claims that reach our layer and close with payment can be large and highly variable in terms of reported timing and amount. For a portion of this business, the underlying primary policies are issued by other insurance companies, which can limit our access to relevant information to help inform our judgments as the loss events evolve and mature.

We generally use a combination of loss development methods and expected loss ratio methods for excess casualty product lines. We segment our analysis between automobile-related claims and non-automobile claims, due to the shorter-tail nature of the automobile claims. We then further segment the non-automobile claims for certain latent exposures such as construction defects and mass torts where losses have unique emergence patterns. Mass tort claims in particular may develop over an extended period of time and impact multiple accident years when they emerge. The more standard types of claims are then separately analyzed based on attachment point bands, to recognize that the impact of the level of the attachment point can significantly impact the delay in loss reporting and development. In our analyses, losses capped at $10 million were first analyzed using traditional loss development and expected loss ratio methods and then this estimate was used to derive the expected loss estimate for losses above $10 million reflecting the expected relationships between the layers, reflecting the attachment point and limit.

Expected loss ratio methods are generally used for at least the three latest accident years, due to the relatively low credibility of the reported losses. The loss experience is generally reviewed separately by attachment point. The expected loss ratios used for recent accident years are based on the projected ultimate loss ratios for older years adjusted for rate changes and loss trend.

Prior Year Development

During 2016, we recognized $1.1 billion of adverse development driven by continued higher than expected loss emergence due to increased frequency and severity in recent accident years for both automobile and general liability claims. Approximately $250 million of the adverse development is attributable to a cohort of commercial automobile claims identified in 2015 which continued to increase in severity in 2016 beyond what was observed or reasonably expected in 2015. The most significant increases in incurred losses were for accident years 2011 and subsequent. In particular, the frequency and severity of loss events for accident years 2011 and subsequent showed a significant step change from accident years 2010 and prior. We therefore gave limited credibility to accident year 2010 and prior in selecting our expected loss ratios for 2011 and subsequent accident years due to this shift in loss patterns that is now more evident and credible after examining 2016 data. As a result of the continued adverse emergence, we have increased our loss trend assumptions for general liability and automobile and increased our expected loss ratios for the most recent four accident years.

During 2015, U.S. Excess Casualty experienced $1.4 billion of adverse development largely driven by worse than expected loss emergence reported in 2015. This increase was largely driven by adverse emergence in both general liability and umbrella auto liability, reflecting worsening trends in the number and nature of high severity losses. Approximately $411 million of the adverse development is related to automobile liability. Based on the adverse emergence we updated our assumptions about loss severity, loss development patterns and expected loss ratios for the most recent accident years. We have seen an increasing trend in the frequency of high severity claims, especially in the umbrella automobile liability portfolio. We also observed deterioration in certain class action claims that have complex coverage uncertainties and high limits characterized by increases in new claims and/or demands reported in 2015 and progress towards potential settlements, which have further informed our actuarial projections of ultimate losses for these types of claims. These types of claim classes have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile. In addition, we also increased losses associated with bad-faith claims by approximately $120 million reflecting an increase in recent settlements.

During 2014, U.S. Excess Casualty experienced $106 million of favorable development largely driven by savings on a few large claims. In our excess umbrella analysis in 2014, our revised segmentation led to lower 2005 and subsequent accident year estimates for non-mass tort claims where we expect underwriting actions and reductions in policy limits to have a favorable effect on ultimate losses from accident years 2007 to 2013 in particular. This was entirely offset by higher selected ultimate losses for accident years 2004 and prior as a result of updated loss development patterns for mass tort claims which we segmented separately from the non-ultimate loss ratios of prior years, adjusted for rate changes, estimated loss cost trends and all other changes that can be quantified.

U.S. Other Casualty

U.S Other Casualty includes general liability, commercial auto and medical malpractice.

We recognized $1.6 billion of adverse development in Other Casualty as a result of increased frequency and severity in all three product lines. The net earned premium for Other Casualty has declined by approximately 59% from accident year 2007 to accident year 2016.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$2,892$2,633$2,615$2,736$2,770$2,805$2,787$2,774$2,846$2,874$28$166102,070
20082,8862,6932,7572,8212,9012,9033,0073,0743,11339274116,937
20092,3432,4452,5132,5092,6242,7452,8072,791(16)15189,845
20102,0372,0162,1602,1092,2582,3012,42011932995,749
20111,9702,2222,3212,4582,6012,6393838174,916
20121,8662,0492,1722,1832,32514238141,586
20131,5801,7021,8822,11623457036,174
20141,6951,6771,92024374933,677
20151,2741,60733390929,372
20161,2801,04419,774
Total$23,085$1,160
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below(15,844)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance1,505287
Unallocated loss adjustment expense prior year development116
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$8,746$1,563

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$386$773$1,206$1,621$1,974$2,244$2,377$2,422$2,525$2,577
20082777111,1711,6912,0392,3162,5062,6512,755
20093787701,1801,5771,9292,1682,3142,534
20102795789021,2751,5571,7411,889
20112357261,1091,4881,8222,048
20123827121,0021,3491,644
20131695539181,206
2014204566816
201593303
201672
Total$15,844

Reserving Process and Methodology

U.S. Other Casualty includes general liability, automobile liability, environmental, and medical malpractice lines of business. These lines of business are all long-tail in nature and while somewhat diverse in terms of exposures, these lines are often subject to similar trends. These lines are often significantly impacted by the underwriting cycle and external judicial trends. Many of our policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time.

We generally use a combination of loss development methods, frequency/severity and expected loss ratio methods for primary general liability or products liability product lines. We also supplement the standard actuarial techniques by using evaluations of the ultimate losses on unusual claims or claim accumulations by external specialists on those subsets of claims. The segmentation of the data reflects state differences, industry groups, deductible/non-deductible programs and type of claim.

We segment our analysis by line of business and key coverage structures (claims-made vs. occurrence, large deductible policies, retrospective-rated policies, captives, etc.). Additionally, certain subsets, such as construction defect for general liability, trucking policies for auto liability and hospital policies for medical malpractice and underground storage tanks for environmental are generally reviewed separately from business in other subsets. We continually refine our loss reserving techniques for the domestic primary casualty product lines and adopt further segmentations based on our analysis of the differing emerging loss patterns for certain subsets of insureds. Due to the long-tail nature of general liability business, and the many subsets that are reviewed individually, there is less credibility given to the reported losses and increased reliance on expected loss ratio methods for recent accident years.

For certain product lines with sufficient loss volume, loss development methods may be given significant weight for all but the most recent one or two accident years. For smaller or more volatile subsets of business and excess of a large deductible business, loss development methods may be given limited weight for the five or more recent accident years. Expected loss ratio methods are used for the more recent accident years for these subsets. The loss experience for primary general liability business is generally reviewed at a level that is believed to provide the most appropriate data for reserve analysis. For other subsets, such as environmental, we utilize a combination of claim analysts’ loss projections and actuarial methods estimate ultimate losses.

Expected loss ratio methods are generally given significant weight only in the most recent accident year, except for excess of large deductible business, in which expected loss ratio methods may receive weight for several of the most recent accident years. In recent years, the impact of the increase in the frequency of severe claims was projected in the accident years where it was most prevalent. The resulting increase in ultimate loss projections and loss ratios for those years impacted subsequent years through loss development factors and prior expected loss ratio assumptions.

Prior Year Development

Primary general liability. In 2016, we increased our ultimate loss estimates for prior accident years by $754 million. We increased our assumptions about loss development and expected loss ratios based on the adverse actual versus expected loss emergence driven by increases in severity, especially in the risk-sharing excess of deductible programs. In addition, our segmentation separately evaluated key structural drivers recently identified in the data. As a result, we noted the adverse development that was driven by construction defect claims which continue to increase in severity and which exhibit continued higher development at later ages than previously observed. We also identified and separately analyzed in 2016 certain mass tort claims and increased reserves for such claims due to their much longer claim emergence and loss development patterns than previously observed.

For primary general liability in 2015, we increased our ultimate loss estimates for prior accident years by $172 million largely related to coverage sold to the construction sectors as we reacted to adverse loss emergence throughout the year, by changing our assumptions about loss development and expected loss ratios. For construction, the adverse development was driven by construction defect claims. The construction class was re-underwritten to reduce New York and U.S. residential exposures.

Primary commercial auto liability. In 2016, we continued to observe increases in both the frequency and severity of claims occurring in accident years since the recent U.S. economic downturn. These claims have significantly outpaced both our accident year loss ratio assumptions made in 2015 and the pricing rate increases implemented during the same period. As a result, we recognized $352 million of adverse development during 2016 as we increased the expected loss ratios for recent accident years to reflect continued market deterioration in the trends observed in 2016 and the higher reported losses in very recent accident years.

For primary commercial auto liability in 2015, we observed increases in both the frequency and severity of claims occurring since the recovery from the recent U.S. economic downturn, which have significantly outpaced the pricing rate increases implemented during the same period. As a result, we recognized $105 million of adverse development during 2015 as we increased the expected loss ratios for recent accident years to reflect the deteriorating trends.

For commercial auto liability in 2014, we reacted to an increase in frequency of large claims in the accident years 2010 to 2013, where the economic recovery has contributed to increased frequency and severity, especially for those claims in excess of a client 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.

In 2015, we also reassessed the reasonableness of our primary general liability and commercial auto liability for future claim handling expenses related to existing loss reserves and updated our estimates to reflect the costs from recent investments in claims systems, processes and people with the objective of improving our ability to better manage total loss costs. We increased our reserve estimates by $214 million based on refined analyses, $100 million of which was attributable to U.S. general liability. The balance was distributed among other product lines.

Medical Malpractice. During 2016, we recognized $428 million of adverse development in U.S. Other Casualty Medical Malpractice comprising primary and excess hospitals and nursing homes coverages. This was in reaction to a continued increase in the frequency of unusually large claims in these classes that drove the adverse actual versus expected loss emergence observed in 2016. Based on the observed adverse emergence and its sustained levels over the last several years, we increased our expected incurred losses and loss ratios for accident years 2011 and subsequent to reflect the distinct step change in the loss ratios from accident years 2010 and prior.

During 2015, we recognized $202 million of adverse development in U.S. Other Casualty hospitals coverages 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. Based on the review of these large claims, we increased our expected loss ratios for recent accident years and classified physicians and surgeons and pharmaceutical and medical products classes into runoff.

During 2014, we recognized $57 million of adverse development in U.S. Other Casualty hospitals coverages 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.

U.S. Financial Lines

We recognized $306 million of adverse development during 2016 in U.S. Financial Lines primarily due to higher than expected settlements on large claims from the financial crisis. The net earned premium for U.S. Financial Lines has decreased by approximately 12 percent from accident year 2011 to accident year 2016. The mix of business has been changing over this period as we write more cyber and Mergers and Acquisitions business, which generally report claims faster.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$1,900$2,091$2,079$2,015$2,022$2,008$1,964$1,932$1,972$1,968$(4)$7419,088
20081,9112,0842,0491,8611,9701,9061,9642,0892,112233221,709
20091,7191,8061,8551,9092,1022,2032,1962,289933422,595
20101,5761,5261,4201,3811,3731,4701,485154620,126
20111,8121,7291,8971,8871,9211,951306620,008
20121,5791,7471,7821,8891,9425319920,029
20131,7411,6691,6221,567(55)41718,912
20141,7421,7121,7756361217,091
20151,6701,689191,04515,386
20161,5991,39214,001
Total$18,377$237
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below(12,686)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance41132
Unallocated loss adjustment expense prior year development-37
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$6,102$306

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$61$413$816$1,184$1,364$1,531$1,684$1,748$1,800$1,811
2008324208881,1831,3851,5901,7121,8982,001
20091294998871,2731,6141,8391,9682,075
2010312855668001,0171,1801,281
20111654948861,2101,5291,749
2012764068151,2531,497
201343333687949
201466371854
201566393
201676
Total$12,686

Reserving Process and Methodology

U.S. Financial Lines business includes Directors and Officers (D&O), Errors and Omissions (E&O), Employment Practices Liability Insurance (EPLI) and various professional liability subsets of business, as well as the fidelity book of business. This includes cyber coverage, which has been a growing and evolving portion of this portfolio. These product lines are predominantly claims-made in nature, losses are characterized by low frequency and high severity, and results are often significantly impacted by external economic conditions.

Our analysis is segmented by major coverages, such as D&O, E&O, etc. and then further segmented by major industry groups (e.g. corporate accounts, national accounts, financial institutions, private/not-for-profit etc.) We also separately review primary business from excess business for certain product lines.

We generally use a combination of loss development methods and expected loss ratio methods for D&O, E&O, EPLI, and professional liability. These product lines generally are offered on a claims-made basis, and losses are characterized by low frequency and high severity. In general, expected loss ratio methods are given more weight in the more recent accident years, whereas loss development methods are given more weight in more mature accident years. The loss development factors for the different segments differ significantly in some cases, based on specific coverage characteristics and other factors such as industry group, attachment points, and limits offered. Individual claims projections for accident years 2015 and prior are also used in the analysis. For the more mature accident years, we have generally given more weight to the incurred and legal expense loss development methods than in prior years’ reviews.

Frequency/severity methods are generally not used in isolation for these product lines as the overall losses are driven by large losses more than by claim frequency. Severity trends have varied significantly from accident year to accident year and care is required in analyzing these trends by claim type. We also give weight to claim department ground-up projections of ultimate loss on a claim by claim basis as these may be more predictive of ultimate loss values, especially for older accident years.

We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight is given to this method in the more recent accident years. For surety exposures, we generally use the same method as for short-tail classes whereby frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves.

Expected loss ratio methods are also given weight for the more recent accident years. IBNR factor methods are used, when the nature of losses is low frequency/high severity. The IBNR factors, when applied to earned premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy of the IBNR factor being employed.

Prior Year Development

During 2016, we recognized $306 million of adverse development as we reacted to the adverse actual versus expected in 2016 driven by higher than expected settlements on several large claims from the financial crisis for accident years 2006 to 2010, as well as adverse emergence of errors and omissions losses relative to historical expectations. In addition to the adverse emergence, we also updated our loss development factor assumptions, expected loss ratio assumptions and the weights given to the various methods in recent accident years.

During 2015, we recognized $502 million of adverse development driven largely by the adverse loss emergence that we saw in 2015, 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 also updated our loss development factor assumptions as well as expected loss ratio assumptions.

During 2014, we recognized $160 million of adverse development driven by the D&O and Related Management Liability product lines as well as the fidelity book, somewhat offset by the Professional Liability product lines in the recent accident years due to the changing economic cycle.

Europe Casualty and Financial Lines

During 2016, we recognized $355 million of adverse development in Europe Casualty and Financial Lines driven by continued higher than expected loss emergence. The net earned premium for Europe Casualty and Financial Lines has increased by approximately 8 percent from accident year 2011 to accident year 2016.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$1,047$1,073$1,084$1,057$1,094$1,088$1,167$1,171$1,178$1,184$6$14191,746
20081,3111,3961,4241,4011,4241,4301,4581,4201,426653238,417
20091,5391,6271,6591,6611,6891,6991,7041,7595578232,281
20101,3001,2581,2551,2771,2181,2521,250(2)103265,264
20111,2391,1751,2391,2841,3641,37713157256,431
20121,0741,0411,0051,0811,14665172209,632
20131,0801,1241,1091,12415182176,010
20141,1431,1231,16643376164,208
20151,2041,363159736175,571
20161,4071,029178,185
Total$13,202$360
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below(8,005)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance390(7)
Unallocated loss adjustment expense prior year development-2
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$5,587$355

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$88$297$454$632$765$846$961$996$1,025$1,067
20081164296558701,0141,1281,1991,2421,304
20091253796458811,0331,1561,3091,421
2010133378570725850936995
2011127339507733868985
2012110303438615734
201395340493664
201479273447
201574261
2016127
Total$8,005

Reserving Process and Methodology

Europe is our largest non-U.S. region for Liability and Financial Lines. Europe Casualty and Financial Lines is composed of third party coverages including general liability, auto liability, D&O, professional liability and various other lines of business throughout both the UK and Continental Europe. These lines of business are all long-tail in nature and while somewhat diverse in terms of exposures, these lines are often subject to similar trends. These lines are impacted by the underwriting cycle and external judicial trends. The largest share of business is in the UK, but significant business is also written in other European countries such as Germany, France, and Italy.

We primarily segment our analysis by country and line of business. Additionally, we separately review various product lines, including excess versus primary casualty, commercial versus financial institutions management liability, and other specific programs and subsets of business. We maintain a database of detailed historical premium and loss transactions in original currency for business written outside of the U.S. which allows our actuaries to determine loss reserves without foreign exchange distorting development.

We generally use a combination of loss development methods and expected loss ratio methods. For countries and lines of business with sufficient loss volume, loss development methods may be given significant weight for all but the most recent accident years. For smaller countries and more volatile product lines, loss development methods are typically given limited weight for recent accident years. Further, we may rely on larger data subsets in determining the loss development factors and a priori loss ratio assumptions.

In general, the loss development for long-tail lines in Europe has been more stable than the development in U.S. long-tail lines, although some underlying drivers have affected the results in a similar manner (e.g. the impact of the financial crisis in accident years 2008 and 2009).

Prior Year Development

During 2016, we recognized $355 million of adverse development for Europe Casualty and Financial Lines. Within Europe Financial Lines, we recognized $232 million of adverse development primarily from the D&O line in UK and Continental Europe as result of the adverse actual versus expected loss emergence in 2016 due to increased frequency and severity resulting from increasing litigation. In Europe Casualty we recognized $123 million of adverse development primarily from the unexpected emergence of several large excess casualty claims as well as the impact of declining interest rates that are applied to structured claims in the UK. The actual versus expected loss emergence for Europe Casualty and Financial Lines was more than expected.

During 2015, we recognized $139 million of adverse prior year development, primarily due to primary casualty and professional liability in Continental Europe and the UK. During 2015, we implemented an enhanced claims operating model in Europe which has provided our actuaries with more detailed case reserve data and analysis, enabling AIG’s actuaries to react sooner to case development than in prior years.

During 2014, we had $24 million of adverse development driven by financial lines D&O and professional lines in the UK and Continental Europe where severity emerged worse than expected.

U.S. and Europe Property and Special Risks

During 2016, we recognized $402 million of adverse prior year development in the U.S. and Europe Property and Special Risks mainly due to the U.S. program product line which is a collection of programs offering package policies to small and middle market insureds.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$2,259$2,061$2,153$2,119$2,087$2,073$2,073$2,069$2,072$2,070$(2)$3488,737
20084,1144,3604,3184,2764,2254,1694,1404,1324,124(8)3195,060
20092,6082,3202,3182,3272,2822,2852,2652,27273279,096
20103,0142,7472,6872,7102,7162,6842,69282578,713
20113,7573,5863,5143,5113,4913,532414779,542
20124,1544,2854,2324,2164,3291137671,951
20132,8372,8772,7152,7816613869,782
20143,3073,1543,2449023581,948
20153,5683,6073950082,836
20163,63392161,956
Total$32,284$354
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below(26,468)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance976
Unallocated loss adjustment expense prior year development-42
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$5,913$402

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$520$1,294$1,629$1,784$1,880$1,930$1,962$1,982$2,006$2,007
20081,4553,0293,6003,8253,9704,0134,0304,0464,064
20096611,4381,7801,9852,0972,1562,1842,206
20108281,8492,2072,3962,4962,5702,612
20111,0492,4002,9243,1343,2843,370
20128782,7943,4583,7893,995
20137711,7752,1282,328
20149512,0762,547
20151,0942,255
20161,084
Total$26,468

Reserving Process and Methodology

U.S. and Europe Property products include commercial, industrial and energy-related property insurance products and services that cover exposures to manmade and natural disasters, including business interruption. U.S. and Europe Special Risk products include aerospace, environmental, political risk, trade credit, surety and marine insurance, and various small and medium sized enterprises insurance lines.

We primarily segment our analysis by line of business (and by country for Europe business). Additionally, we separately review various subsets, including hull, cargo, and liability for marine business, aviation and satellite for aerospace business, and various other specific programs and product lines.

Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves for short-tail classes such as U.S. and Europe Property.

IBNR factor methods are used when the nature of losses are low frequency/high severity. The IBNR factors, when applied to earned premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy of the IBNR factor being employed.

We generally use a combination of loss development methods and expected loss ratio methods for aviation exposures. Aviation claims are not very long-tail in nature; however, they are driven by claim severity. Thus a combination of both development and expected loss ratio methods is used for all but the latest accident year to determine the loss reserves. Frequency/severity methods are not employed due to the high severity nature of the claims and different mix of claims from year to year.

We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight is given to this method in the more recent accident years. The claims staff also provides specific estimates to assist in the setting of reserves for natural catastrophe losses.

Expected loss ratio methods are used to determine the loss reserves for the latest accident year. We also use ground-up claim projections provided by our claims staff to assist in developing the appropriate reserve.

Prior Year Development

During 2016, the adverse development of $402 million was driven by our U.S. program business where we recognized $350 million of adverse prior year development due to higher than expected claim emergence in certain automobile, habitational and professional liability programs that resulted in us increasing expected loss ratios and loss development factors for several program subsets. This was partially offset by favorable prior year development in Europe Special Risk. Property had favorable emergence of $62 million mainly driven by the Europe property segment.

During 2015, we recognized $128 million of favorable development from a number of large individual property claims.

U.S., Europe and Japan Personal Insurance

We recognized $114 million of favorable prior year development in U.S., Europe and Japan Personal Insurance mainly due to international accident and health business.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$4,662$4,805$4,725$4,710$4,729$4,739$4,742$4,742$4,745$4,744$(1)$41,737,033
20084,5354,5924,5924,6114,6184,6214,6254,6314,630(1)91,851,828
20094,6984,6344,5904,6244,6164,6144,6124,611(1)71,959,522
20104,8194,8264,8464,8364,8384,8324,832-132,215,816
20115,2265,3155,2755,2725,2585,250(8)252,159,211
20125,1355,0284,9984,9564,943(13)152,096,881
20134,7144,6404,6024,576(26)522,023,707
20144,3764,3924,376(16)1262,008,729
20154,4334,385(48)2761,949,211
20164,4269021,702,448
Total$46,773$(114)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below(43,345)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance26(3)
Unallocated loss adjustment expense prior year development-3
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$3,454$(114)

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$2,867$4,162$4,395$4,547$4,628$4,670$4,699$4,717$4,727$4,731
20082,7813,9584,2754,4324,5114,5574,5844,5964,608
20092,7804,0164,2684,4284,5044,5454,5704,587
20102,9204,1844,4964,6434,7214,7644,788
20113,2704,6314,9275,0645,1465,182
20122,8684,3334,6244,7744,858
20132,6713,9634,2614,408
20142,4953,7084,024
20152,4973,712
20162,447
Total$43,345

Reserving Process and Methodology

U.S., Europe and Japan Personal Insurance lines consist of accident and health and other personal lines. Accident and health products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations as well as a broad range of travel insurance products and services for leisure and business travelers. Other personal lines include automobile and homeowners’ insurance, extended warranty, and consumer specialty products, such as identity theft and credit card protection. Other personal insurance also provides insurance for high net worth individuals offered through AIG Private Client Group, including auto, homeowners, umbrella, yacht, fine art and collections insurance. Other personal lines are generally short-tail in nature.

We primarily segment our analysis by line of business (and by country for Europe and Japan business) and may separately review various sub-segments, such as specific accident and health products and property damage versus liability for other personal lines products.

Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves for short-tail product lines such as personal property.

Frequency/severity and loss development methods are utilized for domestic personal auto product lines.

For these classes of business, reliance is placed on frequency/severity methods as claim counts emerge quickly for personal auto. Frequency/severity methods allow for more immediate analysis of resulting loss trends and comparisons to industry and other diagnostic metrics.

In general, development for U.S., Europe and Japan Personal Insurance classes has been very stable, with only modest changes in the initial selected loss ratios for this business.

Prior Year Development

During 2016, 2015 and 2014, we recognized $114 million, $47 million, and $89 million of favorable development, respectively, mainly driven by the international accident and health business.

During 2016, 2015 and 2014, we experienced favorable loss reserve development of $3 million, $10 million and $16 million, respectively, from natural catastrophes.

U.S. Run-Off Long Tail Insurance lines

During 2016, the U.S. Run-Off Long Tail Insurance Lines experienced adverse prior year development of $390 million driven by Legacy pre-1986 pollution losses and the Run-Off public entity casualty business.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)December 31, 2016
Accident Year20072008200920102011201220132014201520162016 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2007$959$743$807$801$833$843$851$859$860$876$16$5556,148
20089361,02587285589591196496196767540,046
2009543523532566621588584564(20)9116,213
201063352152754857657260129818,475
20115285385716356696789887,776
2012623674736781745(36)1054,033
2013477530585566(19)1522,483
2014374472451(21)1922,246
2015434520862042,154
20162921971,483
Total$6,260$50
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table
below(4,171)-
Liabilities for losses and loss adjustment expenses and prior year development before 2007, net of reinsurance3,878345
Unallocated loss adjustment expense prior year development-(5)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$5,967$390

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year2007200820092010201120122013201420152016
Unaudited
2007$145$230$321$431$578$641$710$751$770$784
2008130360485559643711773817830
200938125220273354394414431
201055142235313395425445
201119135253379442525
201285191282409476
201386152258316
20142093183
201534129
201652
Total$4,171

Reserving Process and Methodology

U.S. Run-Off Long Tail Insurance lines includes run-off lines for asbestos and environmental (1986 and prior), excess workers’ compensation, and other casualty coverages consisting of environmental liability, medical malpractice, and general liability. Asbestos coverage has been excluded from AIG polices commencing in 1985. Most of AIG’s asbestos claims exposures are ceded to National Indemnity Company (NICO) under a retroactive reinsurance arrangement entered into in 2011. Many of other asbestos-related exposures are very long-tailed in nature and with exposures dating back 30 years or more. In some cases, the exposures in the more recent years have declined since the portfolio is in run-off.

U.S. Long Tail Insurance lines - Asbestos and Environmental (1986 and prior)

We consider a number of factors and recent experience in addition to the results of both external and internal analyses, to estimate asbestos and environmental loss reserves. We primarily base our determination of these loss reserves on a combination of ground-up and top-down analyses of historical claims and available insurance coverages. Nonetheless, we believe that significant uncertainty remains as to our ultimate liability for asbestos and environmental claims, which is due to several factors, including:

  • the long latency period between asbestos exposure and disease manifestation, leading to the potential for involvement of multiple policy periods for individual claims;
  • claims filed under the non-aggregate premises or operations section of general liability policies;
  • the number of insureds seeking bankruptcy protection and the effect of prepackaged bankruptcies;
  • diverging legal interpretations; and
  • the difficulty in estimating the allocation of remediation cost among various parties with respect to environmental claims.

Loss 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.

At December 31, 2016 and 2015, our net loss reserves included $670 million and $722 million, respectively, for asbestos and environmental-related claims (net of reinsurance, including retroactive reinsurance). We cede the bulk of AIG Property Casualty’s net domestic asbestos liabilities under a 2011 retroactive reinsurance agreement with NICO with an aggregate limit of $3.5 billion. Reinsurance recoverables related to this agreement was $1.7 billion and $1.8 billion, respectively, at December 31, 2016 and 2015, respectively. Under retroactive reinsurance accounting, contractual gains are deferred and amortized into income over the settlement period of the underlying reinsured claims. During 2016, 2015 and 2014, we recognized approximately $(53.4) million, $213 million and $(10.7) million, respectively, of additional recoveries under the NICO agreement for which the income statement benefit was deferred. The deferred gain associated with this retroactive reinsurance is $377 million and $430 million at December 31, 2016 and 2015, respectively, and is reported in Other Liabilities. The expense related to this increase in the deferred gain liability is reported in other income/expense rather than losses incurred.

Prior Year Development

During 2016, the Legacy U.S. Runoff Property and Casualty segment recognized $390 million of adverse prior year development.

Asbestos and Environmental (1986 and prior). In 2016, we increased gross undiscounted asbestos incurred losses by $106 million and decreased net undiscounted asbestos incurred losses by $20 million. The gross undiscounted change reflects an increase in estimates related to our accounts retroceded to NICO. The favorable development of the net incurred losses was largely a result of higher estimated external reinsurance recoveries on our retained asbestos exposures. For environmental, we increased incurred losses by $211 million primarily due to adverse development on several large clean-up sites and related accounts as well as a result of top down actuarial analyses performed during the year.

During 2015, the reported claim activity on the assumed claims increased. We responded to this by modifying certain of our loss-reserve-related assumptions to better reflect our loss development. Additionally, we considered recent industry-wide trends regarding expanding coverage theories for liability. In 2015, both the retained accounts and retroceded accounts ground-up reviews for asbestos were updated. As a result, we increased gross undiscounted asbestos incurred losses by $13 million and increased net undiscounted asbestos incurred losses by $164 million. The net undiscounted change reflects an increase primarily due to third party assumed reinsurance exposures. With the gross incurred loss increase less than the net incurred loss increase, the resulting ceded incurred losses were reduced. For environmental, we increased gross environmental incurred losses by $214 million and net environmental incurred losses by $117 million as a result of top down actuarial analyses performed during the year, as well as development on a large sediment site.

U.S. Excess Workers’ Compensation. The U.S. Long Tail Insurance Lines excess workers’ compensation has an extremely long tail and is one of the most challenging lines of business from a reserving perspective, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to small changes in assumptions (for example — in the rate of medical inflation or the longevity of injured workers) which can have a significant effect on the ultimate reserve cost estimate.

During 2016 and 2015, we did not experience significant development in the loss development trends. The proactive management of settlement negotiations and other claims mitigation strategies minimized the volatility observed during 2015. The nominal reduction in reserves as a result of commutations and individual claims settlement strategies amounted to $222 million in 2015 compared to $242 million in 2014.

During 2014, we updated our analyses of run-off excess workers’ compensation lines using a range of scenarios and methodologies and determined that our carried reserves were adequate after recognizing $20 million of favorable prior year development resulting from claim settlements and commutations on our assumed reinsurance business, as well as reflecting changes in estimates in our loss mitigation strategies. We commuted several large assumed reinsurance agreements in 2014 and reduced the reserves faster than was previously expected as a result of proactive management by the run-off unit.

Other Casualty Run-Off. We increased the reserves for these coverages by $190 million and $636 million during 2016 and 2015, respectively, to reflect updated assumptions about future loss development. The 2016 increase was driven by runoff public entity business where we reacted to the adverse emergence over the last year by increasing our loss development factors to reflect its own experience especially in the loss tail instead of relying on the overall excess casualty loss development factors.

Prior Year Development before 2007

The previous development tables include only accident years 2007 to 2016. The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment expenses for accident year 2006 and prior by operating segment and major class of business:

Years Ended December 31,
(in millions)201620152014
2006 and prior accident year development by major class
of business and driver of development:
U.S. Workers Compensation$850$122$158
U.S. Excess Casualty26476437
U.S. Other Casualty287366242
U.S. Financial Lines32135(24)
Property and Special Risks616(4)
Legacy Portfolio345621258
All Other(2)623
Total$1,544$1,798$1,070

Claims Payout Patterns

The following table presents the historical average annual percentage claims payout on an accident year basis at the same level of disaggregation as presented in the claims development table.

Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited)
Year12345678910
U.S. Workers' compensation15.5%17.8%12.6%9.2%7.5%5.2%4.4%2.6%2.3%1.8%
U.S. Excess casualty0.76.812.413.512.810.78.58.43.52.8
U.S. Other casualty10.315.214.414.812.28.65.54.73.51.8
U.S. Financial lines4.017.621.217.312.910.16.55.63.80.5
Europe Casualty and Financial lines8.217.614.014.710.07.47.04.13.43.5
U.S. and Europe Property and Special Risks28.737.014.57.14.32.31.20.80.8-
U.S. Europe and Japan Personal insurance58.927.26.13.11.70.90.60.30.20.1
U.S. Run-off Long Tail Insurance lines10.415.715.512.711.97.75.24.11.81.6

Discounting of Loss Reserves

At December 31, 2016, the loss reserves reflect a net loss reserve discount of $3.6 billion, including tabular and non-tabular calculations based upon the following assumptions:

Certain asbestos claims are discounted when allowed by the regulator and when payments are fixed and determinable, based on the investment yields of the companies and the payout pattern for the claims. At December 31, 2016, the discount for asbestos reserves was fully amortized.

The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the mortality rate used in the 2007 U.S. Life Table.

The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state. For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns. In 2012, for Pennsylvania companies, the statute has specified discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.

In 2013, our Pennsylvania regulator approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania-domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios.

In the fourth quarter of 2016, our Pennsylvania and Delaware regulators approved an updated discount rate that we applied to our workers’ compensation loss reserves for the legal entities domiciled in those states.

The discount consists of $932 million of tabular discount for workers’ compensation and $2.6 billion of non-tabular discount for workers’ compensation. During the years ended December 31, 2016, 2015 and 2014 the benefit/(charge) from changes in discount of $422 million, $71 million and $(478) million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Consolidated Statement of Income.

The following table presents the components of the loss reserve discount discussed above:

December 31,20162015
LegacyLegacy
Portfolio -Portfolio -
PropertyProperty
and Casualtyand Casualty
U.S.run-offU.S.run-off
Liability andInsuranceLiability andInsurance
(in millions)Financial LinesLinesTotalFinancial LinesLinesTotal
U.S. workers' compensation$2,583$987$3,570$2,177$964$3,141
Asbestos----77
Total reserve discount$2,583$987$3,570$2,177$971$3,148

The following table presents the net loss reserve discount benefit (charge):

Years Ended December 31,201620152014
LegacyLegacyLegacy
Portfolio -Portfolio -Portfolio -
PropertyPropertyProperty
and Casualtyand Casualtyand Casualty
U.S.run-offU.S.run-offU.S.run-off
Liability andInsuranceLiability andInsuranceLiability andInsurance
(in millions)Financial LinesLinesTotalFinancial LinesLinesTotalFinancial LinesLinesTotal
Current accident year$177$-$177$182$-$182$189$-$189
Accretion and other
adjustments to prior
year discount28764351(262)(74)(336)(35)(235)(270)
Effect of interest rate
changes(58)(48)(106)14877225(225)(172)(397)
Net reserve discount
benefit (charge)4061642268371(71)(407)(478)
Amount transferred to run-off
insurance lines---(39)39----
Net change in total reserve
discount$406$16$422$29$42$71$(71)$(407)$(478)
Comprised of:
U.S. Workers' compensation$406$23$429$29$46$75$(71)$(385)$(456)
Asbestos$-$(7)$(7)$-$(4)$(4)$-$(22)$(22)

During 2016, effective interest rates declined due to a decrease in the forward yield curve component of the discount rates reflecting a decline in U.S. Treasury rates along the changes in payout pattern assumptions. This resulted in a decrease in the loss reserve discount by $106 million.

During 2015, the effective interest rate increased due to the increase in Treasury rates and credit spreads that resulted in an increase in the loss reserve discount by $225 million.

During 2014, the effective interest rate decreased due to the decrease in Treasury rates along with changes in payout pattern assumptions that resulted in a decrease in the loss reserve discount by $397 million.

On January 1, 2014, we merged two internal pooling arrangements of our U.S. Property Casualty companies into one pool, and changed the participation percentages of the pool members resulting in a reallocation of loss reserves from New York-domiciled companies to those domiciled in Pennsylvania and Delaware. As a result of these changes in the participation percentages and domiciliary states of the participants of the combined pool, we recognized a discount benefit of $110 million in the first quarter of 2014.

Future Policy Benefits

Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of the present value of future benefits less the present value of future net premiums. Included in Future policy benefits are liabilities for annuities issued in structured settlement arrangements whereby a claimant has agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinable period of time with a life contingency feature.

Future policy benefits also include certain guaranteed benefits of variable annuity products that are not considered embedded derivatives, primarily guaranteed minimum death benefits. See Note 14 for additional information on guaranteed minimum death benefits.

The liability for long-duration future policy benefits has been established including assumptions for interest rates which vary by year of issuance and product, and range from approximately 0.1 percent to 14 percent. Mortality and surrender rate assumptions are generally based on actual experience when the liability is established.

Policyholder Contract Deposits

The liability for Policyholder contract deposits is primarily recorded at accumulated value (deposits received and net transfers from separate accounts, plus accrued interest credited at rates ranging from 0.2 percent to 9.0 percent at December 31, 2016, less withdrawals and assessed fees). Deposits collected on investment-oriented products are not reflected as revenues, because they are recorded directly to Policyholder contract deposits upon receipt. Amounts assessed against the contract holders for mortality, administrative, and other services are included in revenues.

In addition to liabilities for universal life, fixed annuities, fixed options within variable annuities, annuities without life contingencies, funding agreements and GICs, policyholder contract deposits also include our liability for (a) certain guaranteed benefits and indexed features accounted for as embedded derivatives at fair value, (b) annuities issued in a structured settlement arrangement with no life contingency and (c) certain contracts we have elected to account for at fair value. See Note 14 herein for additional information on guaranteed benefits accounted for as embedded derivatives.

For universal life policies with secondary guarantees, we recognize certain liabilities in addition to policyholder account balances. For universal life policies with secondary guarantees, as well as other universal life policies for which profits followed by losses are expected at contract inception, a liability is recognized based on a benefit ratio of (a) the present value of total expected payments, in excess of the account value, over the life of the contract, divided by (b) the present value of total expected assessments over the life of the contract. For universal life policies without secondary guarantees, for which profits followed by losses are first expected after contract inception, we establish a liability, in addition to policyholder account balances, so that expected future losses are recognized in proportion to the emergence of profits in the earlier (profitable) years. Universal life account balances as well as these additional liabilities related to universal life products are reported within Policyholder contract deposits in the Consolidated Balance Sheet.

Under a funding agreement-backed notes issuance program, an unaffiliated, non-consolidated statutory trust issues medium-term notes to investors, which are secured by GICs issued to the trust by one of our Life Insurance Companies through our Institutional Markets business.

The following table presents Policyholder contract deposits by product line:

At December 31,
(in millions)20162015
Policyholder contract deposits:
Fixed Annuities$51,278$52,103
Group Retirement39,57837,854
Life Insurance11,85511,691
Variable and Index Annuities16,93413,927
Institutional Markets7,2866,533
Legacy Portfolio5,2855,480
Total Policyholder contract deposits$132,216$127,588

Other Policyholder Funds

Other policyholder funds include unearned revenue reserves (URR). URR consist of front-end loads on investment-oriented contracts, representing those policy loads that are non-level and typically higher in initial policy years than in later policy years. URR for investment-oriented contracts are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits (EGPs) to be realized over the estimated lives of the contracts and are subject to the same adjustments due to changes in the assumptions underlying EGPs as DAC. Amortization of URR is recorded in Policy fees.

Other policyholder funds also include provisions for future dividends to participating policyholders, accrued in accordance with all applicable regulatory or contractual provisions. Participating life business represented approximately 1.9 percent of gross insurance in force at December 31, 2016 and 3.1 percent of gross domestic premiums and other considerations in 2016. The amount of annual dividends to be paid is approved locally by the boards of directors of the Life Insurance Companies. Provisions for future dividend payments are computed by jurisdiction, reflecting local regulations. The portions of current and prior net income and of current unrealized appreciation of investments that can inure to our benefit are restricted in some cases by the insurance contracts and by the local insurance regulations of the jurisdictions in which the policies are in force.

Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts, accident and health insurance contracts/riders attached to life policies and, to a limited extent, reinsurance agreements with other direct insurers. Ultimate premiums from these contracts are estimated and recognized as revenue with the unearned portions of the premiums recorded as liabilities in Other policyholder funds. Experience adjustments vary according to the type of contract and the territory in which the policy is in force and are subject to local regulatory guidance.