AIG 2012 Annual Report Download - page 206

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The following sensitivity analysis table summarizes the effect on the loss reserve position of using certain
alternative loss cost trend (for accident years where we use expected loss ratio methods) or loss
development factor assumptions rather than the assumptions actually used in determining our estimates in
the year-end loss reserve analyses in 2012.
Loss cost trends: Loss development factors:
5 percent increase $ 1,500 4.6 percent increase $ 1,100
5 percent decrease (1,100) 3.3 percent decrease (700)
26.5 percent increase 1,000 11 percent increase 650
25.5 percent decrease (700) 6.8 percent decrease (400)
5 percent increase 400 Increase(b) 1,300
5 percent decrease (250) Decrease(b) (850)
6.9 percent increase 2,200
3.1 percent decrease (1,000)
(a) Loss cost trend assumption does not have a material impact for this line of business.
(b) Percentages not applicable due to extremely long-tailed nature of workers’ compensation.
Future Policy Benefits for Life and Accident and Health Insurance Contracts (AIG Life and
Retirement)
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for life and
accident and health insurance contracts, which include liabilities for certain payout annuities. We also evaluate
estimates used in amortizing Deferred Policy Acquisition Costs (DAC), Value of Business Acquired (VOBA) and
Sales Inducement Assets (SIA) for these products. We evaluate these estimates against actual experience and
adjust them based on management judgment regarding mortality, morbidity, persistency, maintenance expenses, and
investment returns.
The assumptions used to calculate the
benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience,
unless a loss recognition event occurs. These assumptions include margins for adverse deviation in the event that
actual experience might deviate from these assumptions.
As we experience changes over time, we update the assumptions to reflect these The key assumptions used in
observed changes. Because of the long term nature of many of our liabilities subject estimating future policy benefit
to the ‘‘lock-in’’ principle, small changes in certain assumptions may cause large reserves are:
changes in the degree of reserve adequacy. In particular, changes in estimates of •Investment returns: which
future invested asset returns have a large effect on the degree of reserve deficiency. vary by year of issuance and
If observed changes in actual experience or estimates result in projected future products.
losses under loss recognition testing, we adjust DAC through amortization expense,
and may record additional liabilities through a charge to policyholder benefit expense. •Mortality, morbidity and
Loss recognition testing is performed at an aggregate AIG Life and Retirement surrender rates: based upon
reporting segment level. Once loss recognition has been recorded for a block of actual experience modified to
business, the old assumption set is replaced (i.e., a DAC unlocking), and the allow for variation in policy
assumption set used for the loss recognition would then be subject to the lock-in form, risk classification and
principle. See Note 10 to the Consolidated Financial Statements for additional distribution channel.
information. •Premium rate increases
(Long-term care)
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AIG 2012 Form 10-K 189
Effect on Loss Effect on Loss
December 31, 2012
(in millions) Reserves Reserves
Excess casualty: Excess casualty:
D&O: D&O:
Excess workers’ compensation: Excess workers’ compensation:
Primary workers’ compensation(a):Primary workers’ compensation:
Periodically, we evaluate estimates used in establishing liabilities for future policy benefits
For long duration traditional business, a ‘‘lock-in’’ principle applies.
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES