AIG 2015 Annual Report Download - page 298

ITEM 8 / NOTE 12. INSURANCE LIABILITIES
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Reserves for asbestos and environmental claims cannot be estimated using conventional reserving techniques such as those
that rely on historical accident year loss development factors. The methods used to determine asbestos and environmental
loss estimates and to establish the resulting reserves are continually reviewed and updated by management.
Various factors contribute to the complexity and difficulty in determining the future development of claims such as court
resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage.
We primarily base our determination of these reserves on a combination of ground-up and top-down analyses of historical
claims and available insurance coverages. We consider a number of factors and recent experience, in addition to the results
of both external and internal analyses, to estimate asbestos and environmental loss reserves.
Discounting of Reserves
At December 31, 2015, the liability for unpaid losses and loss adjustment expenses reflects a net loss reserve discount of $3.1
billion, including tabular and non-tabular calculations based upon the following assumptions:
 Certain asbestos business that was written by Non-Life Insurance Companies 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 tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the mortality table used
in the 2007 U.S. Life Table.
 The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and
Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state. For New York companies, the
discount is based on a five percent interest rate and the companies’ own payout patterns.
 Our Delaware and Pennsylvania regulators approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity
premium) to all of our workers’ compensation reserves in companies domiciled in those states, as well as our use of
updated payout patterns specific to our primary and excess workers compensation portfolios.
 In the fourth quarter of 2015, our Pennsylvania and Delaware regulators approved an updated discount rate that we
applied to our workers’ compensation loss reserves for the legal entities domiciled in those states.
The discount consists of the following: $853 million of tabular discount for workers’ compensation, $2.3 billion of non-tabular
discount for workers’ compensation in the domestic operations; and $7 million — non-tabular discount for asbestos.
Future Policy Benefits
Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of
the present value of future benefits less the present value of future net premiums. Included in Future policy benefits are
liabilities for annuities issued in structured settlement arrangements whereby a claimant has agreed to settle a general
insurance claim in exchange for fixed payments over a fixed determinable period of time with a life contingency feature.
Future policy benefits also include certain guaranteed benefits of variable annuity products that are not considered embedded
derivatives, primarily guaranteed minimum death benefits. See Note 13 for additional information on guaranteed minimum
death benefits.
The liability for long-duration future policy benefits has been established including assumptions for interest rates which vary by
year of issuance and product, and range from approximately 3 percent to 14 percent. Mortality and surrender rate assumptions
are generally based on actual experience when the liability is established.