AIG Settlement Includes $343 Million to States for Workers’ Comp Errors

February 10, 2006

As part of its record $1.6 billion overall settlement with state and federal officials for fraud and improper accounting, American International Group will pay states $343.5 million for underpayment of workers compensation premiums taxes and residual market assessments.

The combined tax and assessment amounts going to states vary. They include $57 million to Florida, $34 million to Massachusetts and $100 million to Rhode Island.

AIG was found to have improperly booked workers’ compensation premiums as general liability premiums from at least 1985 through 1996. One effect was to reduce AIG’s taxes and residual market payments for those years.

A report by INS Regulatory Insurance Services, Inc., consultants retained by the New York State Insurance Department, cited two reasons for the improper bookings. AIG issued contracts for three lines of business (commercial auto, general liability and workers’ compensation). Due to its estimation process for the workers’ compensation portion, premium was improperly allocated among the three lines of business or not booked to the proper line. Subsequent premium adjustments were not booked to the proper lines either, the report found.

In addition, the report says that AIG’s premium adjustments were “severely backlogged and often not done at all. When finally done, care was not taken to ensure proper booking to the correct line of business.”

To uncover how much money was involved in the misreporting, the consultants had AIG estimate the amount of premium that should have been allocated as workers’ compensation during the years in question. INS Regulatory Services says it tested AIG’s data and assumptions and “determined them to be reasonable.” The firm then calculated the impact on premium taxes and assessments by residual markets plus interest.

The estimated workers’ compensation premium tax impact was $15.3 million or $42.4 million with interest. The residual assessment impact was $101.5 million or $301.2 million with interest.

AIG was also accused of improperly booking direct workers’ compensation premiums as assumed reinsurance premiums for the purpose of avoiding workers’ compensation premium taxes and residual market assessments. However, the consultants were unable to conclude whether this happened.

Under the settlement, AIG is to begin repaying states for their lost premium taxes and fees on or before March 1 with an $87,801 wire transfer to the state of New York. At the same time it is to pay each of the other 49 states and the District of Columbia a total of $42.3 million to cover past taxes and fees.

AIG has further agreed to pay $301.2 million into a fund for the payment of claims with the states and workers compensation residual market pools, including those administered by the National Council on Compensation Insurance, for “alleged injury caused by AIG’s underpayment” of assessments. None of the monies are going to insurers or lawyers.

Attorneys general of the states can elect to accept the settlement or pursue their own settlements with AIG.

In another portion of the $1.6 billion settlement having to do wit a scheme of bid-rigging, AIG must establish a similar $375 million fund to pay policyholders who bought AIG Excess Casualty policies (excluding workers’ compensation) between Jan. 1, 2000 and Sept. 30, 2004.

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