AIG 2008 Annual Report Download - page 100

made basis, the loss reporting and development tail is much shorter than for excess casualty. However, the high
severity nature of the claims does create the potential for significant deviations in loss development patterns from
one year to the next. After evaluating the historical loss development factors for these classes of business for
accident years since the early 1990s, in AIG’s judgment, it is reasonably likely that actual loss development factors
will range from approximately 8.5 percent lower to 3.5 percent higher than those factors actually utilized in the
year-end 2008 loss reserve review for these classes. If the loss development factor assumptions were changed by
8.5 percent and 3.5 percent, respectively, the net loss reserves for these classes would be estimated to decrease or
increase by approximately $300 million and $150 million, respectively. As noted above for excess casualty, actual
historical loss development factors are generally used to project future loss 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 8.5 percent or 3.5 percent amounts.
Excess Workers’ Compensation: For excess workers’ compensation business, loss costs were trended at six
percent per annum. After reviewing actual industry loss trends for the past ten years, in AIG’s judgment, it is
reasonably likely that actual loss cost trends applicable to the year-end 2008 loss reserve review for excess workers’
compensation will range five percent lower or higher than this estimated loss trend. A five percent change in the
assumed loss cost trend would cause approximately a $425 million increase or a $275 million decrease in the net
loss reserves for this business. It should be emphasized that the actual loss cost trend could vary significantly from
this assumption, and there can be no assurance that actual loss costs will not deviate, perhaps materially, by greater
than five percent.
For excess workers’ compensation business, the assumed loss development factors are a critical assumption.
Excess workers’ compensation is an extremely long-tail class of business, with a much greater than normal
uncertainty as to the appropriate loss development factors for the tail of the loss development. After evaluating the
historical loss development factors for prior accident years since the 1980s, in AIG’s judgment, it is reasonably
likely that actual loss development factors will range from approximately 12 percent lower to 20 percent higher than
those factors actually utilized in the year-end 2008 loss reserve review for excess workers’ compensation. If the loss
development factor assumptions were increased by 20 percent or decreased by 12 percent, the net loss reserves for
excess workers’ compensation would increase or decrease by approximately $950 million and $550 million,
respectively. Given the exceptionally long-tail for this class of business, there is the potential for actual deviations in
the loss development tail to exceed the deviations assumed, perhaps materially.
Primary Workers’ Compensation: For primary workers’ compensation, the loss cost trend assumption is not
believed to be material with respect to AIG’s loss reserves. This is primarily because AIG’s actuaries are generally
able to use loss development projections for all but the most recent accident year’s reserves, so there is limited need
to rely on loss cost trend assumptions for primary workers’ compensation business.
However, for primary workers’ compensation business the loss development factor assumptions are important.
Generally, AIG’s actual historical workers’ compensation loss development factors would be expected to provide a
reasonably accurate predictor of future loss development. However, workers’ compensation is a long-tail class of
business, and AIG’s business reflects a very significant volume of losses particularly in recent accident years due to
growth of the business. After evaluating the actual historical loss developments since the 1980s for this business, in
AIG’s judgment, it is reasonably likely that actual loss development factors will fall within the range of
approximately 3.6 percent below to 9.4 percent above those actually utilized in the year-end 2008 loss reserve
review. If the loss development factor assumptions were changed by 3.6 percent and 9.4 percent, respectively, the
net loss reserves for workers’ compensation would decrease or increase by approximately $900 million and
$2.4 billion, respectively. For this class of business, there can be no assurance that actual deviations from the
expected loss development factors will not exceed the deviations assumed, perhaps materially.
Other Casualty Classes of Business: For casualty business other than the classes discussed above, there is
generally some potential for deviation in both the loss cost trend and loss development factor assumptions.
However, the effect of such deviations is expected to be less material when compared to the effect on the classes
cited above.
94 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries