AIG 2013 Annual Report Download - page 211

adjusted loss trend or loss development factor assumptions, and other assumptions made in the reserving process
may materially affect reserve development for a particular class of business.
The assumed loss cost trend was After evaluating the historical loss
approximately five percent in the 2013 development factors from prior
reserve review. After evaluating the accident years since the early 1990s,
historical loss cost trends from prior in our judgment, it is reasonably likely
accident years since the early 1990s, that actual loss development factors
in our judgment, it is reasonably likely will range from approximately
that actual loss cost trends applicable 3.4 percent below those actually
to the year-end 2013 loss reserve utilized in the year-end 2013 reserve
review for excess casualty will range review to approximately 6.0 percent
from 0 percent to positive ten percent. above those factors actually utilized.
The loss cost trend assumption is Excess casualty is a long-tail class of
critical for the excess casualty class of business and any deviation in loss
business due to the long-tail nature of development factors might not be
the claims and therefore is applied discernible for an extended period of
across many accident years. Thus, time subsequent to the recording of the
there is the potential for the reserves initial loss reserve estimates for any
with respect to a number of accident accident year. Thus, there is the
years (the expected loss ratio years) to potential for the reserves with respect
be significantly affected by changes in to a number of accident years to be
loss cost trends that were initially relied significantly affected by changes in
upon in setting the reserves. These loss development factors that were
changes in loss trends could be initially relied upon in setting the
attributable to changes in inflation or in reserves. These changes in loss
the judicial environment, or in other development factors could be
social or economic conditions affecting attributable to changes in inflation or in
claims. the judicial environment, or in other
social or economic conditions affecting
claims.
The assumed loss cost trend was The assumed loss development factors
approximately half of one percent. are also an important assumption but
After evaluating the historical loss cost less critical than for excess casualty.
trends from prior accident years since Because these classes are written on
the early 1990s, including the potential a claims made basis, the loss reporting
effect of recent claims relating to the and development tail is much shorter
credit crisis, in our judgment, it is than for excess casualty. However, the
reasonably likely that actual loss cost high severity nature of the claims does
trends applicable to the year-end 2013 create the potential for significant
loss reserve review for these classes deviations in loss development
will range from approximately patterns from one year to the next.
28 percent lower or 25.5 percent After evaluating the historical loss
higher than the assumption actually development factors for these classes
utilized in the year-end 2013 reserve of business for accident years since
review. Because the D&O class of the early 1990s, in our judgment, it is
business has exhibited highly volatile reasonably likely that actual loss
loss trends from one accident year to development factors will range from
the next, there is the possibility of an approximately 8.5 percent lower to
exceptionally high deviation. 16 percent higher than those factors
actually utilized in the year-end 2013
loss reserve review for these classes.
Excess Casualty
D&O and Related Management Liability Classes of Business
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AIG 2013 Form 10-K 193
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Class of Business Loss Cost Trend Loss Development Factor