AIG 2008 Annual Report Download - page 130

Liability for Unpaid Claims and Claims Adjustment Expenses (General Insurance):
•Loss trend factors: used to establish expected loss ratios for subsequent accident years based on premium
rate adequacy and the projected loss ratio with respect to prior accident years.
•Expected loss ratios for the latest accident year: in this case, accident year 2008 for the year-end 2008 loss
reserve analysis. For low-frequency, high-severity classes such as excess casualty, expected loss ratios
generally are utilized for at least the three most recent accident years.
•Loss development factors: used to project the reported losses for each accident year to an ultimate amount.
•Reinsurance recoverable on unpaid losses: the expected recoveries from reinsurers on losses that have not
yet been reported and/or settled.
For discussion of sensitivity analysis on the reserve for unpaid claims and claims adjustment expenses, see
Results of Operations — Segment Results — General Insurance Operations — Liability for Unpaid Claims and
Claims Adjustment Expense.
Future Policy Benefits for Life and Accident and Health Contracts (Life Insurance & Retirement
Services):
•Interest rates: which vary by geographical region, year of issuance and products.
•Mortality, morbidity and surrender rates: based upon actual experience by geographical region modified
to allow for variation in policy form, risk classification and distribution channel.
Periodically, the net benefit reserves (policy benefit reserves less DAC) established for Life Insurance &
Retirement Services companies are tested to ensure that, including consideration of future expected premium
payments, they are adequate to provide for future policyholder benefit obligations. The assumptions used to
perform the tests are current best-estimate assumptions as to policyholder mortality, morbidity, terminations,
company maintenance expenses and invested asset returns. For long duration traditional business, a “lock-in”
principle applies, whereby the assumptions used to calculate the benefit reserves and DAC are set when a policy is
issued and do not change with changes in actual experience. These assumptions include margins for adverse
deviation in the event that actual experience might deviate from these assumptions. For business in-force outside of
North America, 52 percent of total policyholder benefit liabilities at December 31, 2008 resulted from traditional
business where the lock-in principle applies. In most foreign locations, various guarantees are embedded in policies
in force that may remain applicable for many decades into the future.
As experience changes over time, the best-estimate assumptions are updated to reflect observed changes.
Because of the long-term nature of many of AIG’s liabilities subject to the lock-in principle, small changes in
certain of the assumptions may cause large changes in the degree of reserve adequacy. In particular, changes in
estimates of future invested asset return assumptions have a large effect on the degree of reserve adequacy.
Deferred Policy Acquisition Costs (Life Insurance & Retirement Services):
•Recoverability: based on current and future expected profitability, which is affected by interest rates,
foreign exchange rates, mortality/morbidity experience, expenses, investment returns and policy
persistency.
Deferred Policy Acquisition Costs (General Insurance):
•Recoverability: based upon the current terms and profitability of the underlying insurance contracts.
Estimated Gross Profits for Investment-Oriented Products (Life Insurance & Retirement Services):
•Estimated gross profits: to be realized over the estimated duration of the contracts (investment-oriented
products) affect the carrying value of DAC, unearned revenue liability, SIAs and associated amortization
patterns. Estimated gross profits include investment income and gains and losses on investments less
required interest, actual mortality and other expenses.
124 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries