AIG 2011 Annual Report Download - page 195

development. However there can be no assurance that future loss development patterns will be the same as in the
past, or that they will not deviate by more than the amounts noted above and discussed below.
Class of Business Loss Cost Trend Loss Development Factor
Excess Casualty
The assumed loss cost trend was approximately After evaluating the historical loss development
five percent. After evaluating the historical loss factors from prior accident years since the early
cost trends from prior accident years since the 1990s, in AIG’s judgment, it is reasonably likely
early 1990s, in AIG’s judgment, it is reasonably that actual loss development factors will range
likely that actual loss cost trends applicable to the from approximately 5.1 percent below those
year-end 2011 loss reserve review for excess actually utilized in the year-end 2011 reserve
casualty will range from negative five percent to review to approximately 4.5 percent above those
positive 15 percent, or approximately 10 percent factors actually utilized. Excess casualty is a
lower or higher than the assumption actually long-tail class of business and any deviation in
utilized in the year-end 2011 reserve review. The loss development factors might not be discernible
loss cost trend assumption is critical for the for an extended period of time subsequent to the
excess casualty class of business due to the recording of the initial loss reserve estimates for
long-tail nature of the claims and therefore is any accident year. Thus, there is the potential for
applied across many accident years. Thus, there is the reserves with respect to a number of accident
the potential for the reserves with respect to a years to be significantly affected by changes in
number of accident years to be significantly loss development factors that were initially relied
affected by changes in loss cost trends that were upon in setting the reserves. These changes in
initially relied upon in setting the reserves. These loss development factors could be attributable to
changes in loss trends could be attributable to changes in inflation or in the judicial
changes in inflation or in the judicial environment, or in other social or economic
environment, or in other social or economic conditions affecting claims.
conditions affecting claims.
D&O and Related Management Liability Classes of Business
The assumed loss cost trend was approximately The assumed loss development factors are also
one percent. After evaluating the historical loss an important assumption but less critical than for
cost trends from prior accident years since the excess casualty. Because these classes are written
early 1990s, including the potential effect of on a claims made basis, the loss reporting and
recent claims relating to the credit crisis, in AIG’s development tail is much shorter than for excess
judgment, it is reasonably likely that actual loss casualty. However, the high severity nature of the
cost trends applicable to the year-end 2011 loss claims does create the potential for significant
reserve review for these classes will range from deviations in loss development patterns from one
negative 14 percent to positive 21 percent, or year to the next. After evaluating the historical
approximately 15 percent lower or 20 percent loss development factors for these classes of
higher than the assumption actually utilized in the business for accident years since the early 1990s,
year-end 2011 reserve review. Because the D&O in AIG’s judgment, it is reasonably likely that
class of business has exhibited highly volatile loss actual loss development factors will range from
trends from one accident year to the next, there approximately 7 percent lower to 10 percent
is the possibility of an exceptionally high higher than those factors actually utilized in the
deviation. year-end 2011 loss reserve review for these
classes.
AIG 2011 Form 10-K 181