AIG 2011 Annual Report Download - page 312

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further, the charge relates to accident years 2005 and prior (accident years prior to the start of the managed
reduction in these long-tail lines of business).
In 2010 and 2009, the reserve charges were primarily due to long-tail lines of business which have been reduced
since 2006. In the case of asbestos, since 1985, standard policies have contained an absolute exclusion for asbestos
and pollution-related damages. The factors driving excess casualty loss cost were primarily due to medical inflation
and the exhaustion of underlying primary policies for products liability coverage and for homebuilders. In 2010,
excess workers’ compensation experienced significant prior year development related to the passage of the
Affordable Care Act in March 2010 as management concluded that there is increased vulnerability to the risk of
further cost-shifting to the excess workers’ compensation class of business.
At December 31, 2011, net loss reserves reflect a loss reserve discount of $3.18 billion, including tabular and
non-tabular calculations based upon the following assumptions.
• The tabular workers’ compensation discount is calculated using a 3.5 percent interest rate and the
1979-81 Decennial Mortality Table.
• The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New
York and Pennsylvania, and follows the statutory regulations for each state. For New York companies, the
discount is based on a five percent interest rate and the companies’ own payout patterns. For Pennsylvania
companies, the statute has specified discount factors for accident years 2001 and prior, which are based on a
six 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.
• Certain asbestos business that was written by Chartis is 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 this business.
The discount consists of the following: $777 million — tabular discount for workers’ compensation in the
domestic operations of Chartis and $2.32 billion — non-tabular discount for workers’ compensation in the
domestic operations of Chartis; and $88 million — non-tabular discount for asbestos for Chartis.
The following table presents the components of future policy benefits:
At December 31,
(in millions) 2011 2010
Future policy benefits:
Long duration and structured settlement contracts $ 33,322 $ 30,992
Short duration contracts 995 276
Total future policy benefits $ 34,317 $ 31,268
Long duration contract liabilities included in future policy benefits, as presented in the preceding table, result
primarily from life products. Short duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established on the basis of the following assumptions:
• Interest rates (exclusive of immediate/terminal funding annuities), which vary by year of issuance and
products, range from 1 percent to 9.5 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 13.5 percent and grade to not greater than 0.5 percent.
298 AIG 2011 Form 10-K
DISCOUNTING OF RESERVES
FUTURE POLICY BENEFITS