AIG 2010 Annual Report Download - page 178

American International Group, Inc., and Subsidiaries
The following table summarizes the sensitivity analyses that estimate the effect on the loss reserve position of
using alternative loss cost trend or loss development factor assumptions rather than those actually used in
determining AIG’s estimates in the year-end loss reserve analyses in 2010.
December 31, 2010 Effect on Effect on
(in millions) Loss Reserves Loss Reserves
Loss cost trends: Loss development factors:
Excess casualty: Excess casualty:
10 percent increase $ 2,800 7 percent increase $ 1,500
10 percent decrease (2,000) 5.3 percent decrease (1,600)
D&O: D&O:
15 percent decrease (600) 7 percent increase 450
20 percent increase 950 3 percent decrease (200)
Excess workers’ compensation: Excess workers’ compensation:
5 percent increase 450 (b) 1,250
5 percent decrease (300) (b) (1,250)
Primary workers’ compensation(a):Primary workers’ compensation:
7.5 percent increase 2,180
3.9 percent decrease (1,130)
(a) Loss cost trend assumption is not material for this line of business.
(b) Not applicable due to extremely long-tailed nature of workers’ compensation.
The sensitivity analysis presented above addresses each major class of business for which a material deviation to
AIG’s overall reserve position is believed reasonably possible, and uses what AIG believes is a reasonably likely
range of potential deviation for each class. There can be no assurance, however, that actual reserve development
will be consistent with either the original or the adjusted loss trend or loss development factor assumptions, or
that other assumptions made in the reserving process will not materially affect reserve development for a
particular class of business.
Alternative Loss Cost Trend and Loss Development Factor Assumptions by Class of Business
For casualty business other than the classes discussed below, 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 noted above and discussed below.
Loss Cost Trends: It should be emphasized that the percentage deviations noted in the table below are not
considered the highest possible deviations that might be expected, but rather what is considered by AIG to reflect
a reasonably likely range of potential deviation. Actual loss cost trends in the early 1990s were negative for several
years whereas actual loss cost trends exceeded the figures cited above for several other years. Thus, there can be
no assurance that loss trends will not deviate by more than amounts noted above and discussed below.
Loss Development Factors: Except for Primary Workers’ Compensation, the assumed loss development factors
are a key assumption. Generally, actual historical loss development factors are used to project future loss
162 AIG 2010 Form 10-K