AIG 2012 Annual Report Download - page 203

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Alternative Loss Cost Trend and Loss Development Factor Assumptions by Class of Business
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For classes of 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.
The effect of these deviations is expected to be less material compared to the effect on the
classes noted below
• The percentage deviations noted in the table below are not considered the highest
possible deviations that might be expected, but rather what we consider 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. Loss trends may deviate by more
than the amounts noted above and discussed below.
• The percentage deviations noted in the table below are not considered the
highest possible deviations that might be expected, but rather what we consider to reflect a reasonably likely
range of potential deviation. Except for excess workers’ compensation, the assumed loss development factors
are a key assumption. Generally, actual historical loss development factors are used to project future loss
development. Future loss development patterns may be different from those in the past, or may deviate by
more than the amounts noted above and discussed below.
AIG’s loss reserve analyses do not generally provide a range of loss reserve estimates. A large portion of the loss
reserves from AIG Property Casualty business relates to longer-tail casualty classes of business, such as excess
casualty and D&O, which are driven by severity rather than frequency of claims. Using the reserving methodologies
described above, our actuaries determine their actuarial central estimates of the loss reserves and advise
management on their final recommendation for management’s best estimate of the recorded reserves. Subject matter
experts from underwriting and claims play an important part in informing the actuarial assumptions and methods. The
governance process over the establishment of loss reserves also ensures robust considerations of the changes in
the loss trends, terms and conditions, claims handling practices, and large loss impact when determining the
methods, assumptions and the estimations. This multi-disciplinary process engages underwriting, claims, risk
management, business unit executives and senior management and involves several iterative levels of feedback and
response during the regular reserving process.
The sensitivity analysis below addresses each major class of business for which there is a possibility of a material
deviation from our overall reserve position. The analysis uses what we believe is a reasonably likely range of
potential deviation for each class. Actual reserve development may not be consistent with either the original or the
adjusted loss trend or loss development factor assumptions, and other assumptions made in the reserving process
may materially affect reserve development for a particular class of business.
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AIG 2012 Form 10-K186
Loss cost trends:
Loss development factors:
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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