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AIG to increase reserves by $100 million after change in UK discount rate

Posted On: Apr. 20, 2017 9:35 AM CST

American International Group Inc. announced Wednesday that it expects to book a $100 million increase in loss reserves in the first quarter due to changes in the United Kingdom’s discount rate for bodily injury claims.

AIG is one of several insurers with operations in the U.K. that have announced reserve increases recently due to changes in the rate.

The reduction in the so-called Ogden rate to minus 0.75% from 2.5%, which became effective last month, prompted an outcry by insurers in the U.K. who had expected a more modest reduction.

The rate is used to help determine the size of bodily injury awards based on expected investment income. The higher the rate, the less insurers pay upfront, based on the assumption that the lump-sum payment will grow over time as interest accumulates. The previous rate was set in 2001, when interest rates were significantly higher.

In a statement, AIG said: “Our carried reserves as at Dec. 31, 2016, were estimated using an assumption that the Ogden rate would decline to 1%. This discount rate change primarily impacts the liability and financial lines business within commercial insurance in the United Kingdom.”

In addition, AIG said it would start recognizing pretax gains in the first quarter related to its adverse development coverage with Berkshire Hathaway Inc. 

The reinsurance agreement became effective in early February. AIG will begin amortizing a deferred gain over the reinsurance recovery period and the first quarter results will reflect a partial quarter amortization of approximately $40 million, the statement said.