AIG 2010 Annual Report Download - page 180

American International Group, Inc., and Subsidiaries
Class of Business Loss Cost Trend Loss Development Factor
Excess Workers’ Loss costs were trended at six percent per Excess workers’ compensation is an extremely
Compensation annum. After reviewing actual industry loss trends long-tail class of business, with a much greater
for the past ten years, in AIG’s judgment, it is than normal uncertainty as to the appropriate loss
reasonably likely that actual loss cost trends development factors for the tail of the loss
applicable to the year-end 2010 loss reserve development. After evaluating the historical loss
review for excess workers’ compensation will development factors for prior accident years since
range five percent lower or higher than this the 1980s as well as the development over the
estimated loss trend. past several years of the ground up claim
projections utilized to help select the loss
development factors in the tail for this class of
business, in AIG’s judgment, it is reasonably
likely that actual loss development for excess
workers’ compensation could increase or decrease
the current reserves by up to approximately
$1.25 billion.
Primary Workers’ The loss cost trend assumption is not believed to Generally, AIG’s actual historical workers’
Compensation be material with respect to AIG’s loss reserves. compensation loss development factors would be
This is primarily because AIG’s actuaries are expected to provide a reasonably accurate
generally able to use loss development projections predictor of future loss development. However,
for all but the most recent accident year’s workers’ compensation is a long-tail class of
reserves, so there is limited need to rely on loss business, and AIG’s business reflects a very
cost trend assumptions for primary workers’ significant volume of losses, particularly in recent
compensation business. accident years. After evaluating the actual
historical loss development 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 3.9 percent
below to 7.5 percent above those actually utilized
in the year-end 2010 loss reserve review.
See Results of Operations — Segment Results — Chartis Operations — Liability for unpaid claims and claims
adjustment expense for additional information on AIG’s reserve for unpaid claims and claims adjustment expenses.
Future Policy Benefits for Life and Accident and Health Contracts (life insurance and retirement services
companies):
•Investment returns: 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.
Annually, AIG evaluates estimates used in establishing liabilities for future policy benefits for life insurance and
accident and health contracts. AIG also evaluates estimates used in amortizing Deferred Policy Acquisition Costs
(DAC), Value of Business Acquired (VOBA) and Sales Inducement Assets (SIA) assets for these products. These
estimates are evaluated against actual experience and are adjusted based on management judgment regarding
mortality, morbidity, persistency, company maintenance expenses, and investment 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.
AIG 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 assumptions may cause large changes in the degree of reserve adequacy. In particular, changes in estimates
of future invested asset returns assumptions have a large effect on the degree of reserve deficiency.
164 AIG 2010 Form 10-K