AIG 2012 Annual Report Download - page 301

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the case of asbestos, since 1985, standard policies have contained an absolute exclusion for asbestos and pollution-
related damages. The factors driving excess casualty loss cost were primarily due to medical inflation and the
exhaustion of underlying primary policies for products liability coverage and for homebuilders. In 2010, excess
workers’ compensation also experienced significant prior year development related to the passage of the Affordable
Care Act in March 2010 as we concluded that there is increased vulnerability to the risk of further cost-shifting to the
excess workers’ compensation class of business.
Discounting of Reserves
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At December 31, 2012, the liability for unpaid claims and claims adjustment expense reflects a net loss reserve
discount of $3.2 billion, including tabular and non-tabular calculations based upon the following assumptions:
• The tabular workers’ compensation discount is calculated using a 3.5 percent interest rate and the
1979-81 Decennial Mortality Table.
• The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and
Pennsylvania, and follows the statutory regulations for each state. For New York companies, the discount is based
on a five percent interest rate and the companies’ own payout patterns. For Pennsylvania companies, the statute
has specified discount factors for accident years 2001 and prior, which are based on a six percent interest rate
and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout
patterns and investment yields of the companies.
• Certain asbestos business that was written by AIG Property Casualty is discounted, when allowed by the regulator
and when payments are fixed and determinable, based on the investment yields of the companies and the payout
pattern for this business.
The discount consists of the following: $801 million – tabular discount for workers’ compensation in the domestic
operations of AIG Property Casualty and $2.4 billion – non-tabular discount for workers’ compensation in the
domestic operations of AIG Property Casualty; and $51 million – non-tabular discount for asbestos for AIG Property
Casualty.
Future Policy Benefits
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Future policy benefits for life and accident and health insurance contracts include provisions for future dividends to
participating policyholders, accrued in accordance with all applicable regulatory or contractual provisions. Also
included in Future policy benefits are liabilities for annuities issued in structured settlement arrangements whereby a
claimant has agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinable
period of time with a life contingency feature. Structured settlement liabilities are presented on a discounted basis
because the settled claims are fixed and determinable. Policyholder contract deposits also include our liability for
(a) certain guarantee benefits accounted for as embedded derivatives at fair value, (b) annuities issued in a
structured settlement arrangement with no life contingency and (c) certain contracts we elected to account for at fair
value.
The following table presents the components of future policy benefits:
Future policy benefits:
Long duration and contracts $ 33,322
Short duration contracts 995
Total future policy benefits $ 34,317
Long duration contract liabilities included in future policy benefits, as presented in the preceding table, result primarily
from life products. Short duration contract liabilities are primarily accident and health products. The liability for future
life policy benefits has been established on the basis of the following assumptions:
• Interest rates (exclusive of immediate/terminal funding annuities), which vary by year of issuance and products,
range from 1 percent to 9.5 percent within the first 20 years. Interest rates on immediate/terminal funding annuities
are at a maximum of 13.5 percent and grade to not greater than zero percent.
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AIG 2012 Form 10-K284
At December 31,
(in millions) 2012 2011
$ 36,121
219
$ 36,340
ITEM 8 / NOTE 13. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE AND FUTURE POLICY
BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS AND POLICYHOLDER CONTRACT DEPOSITS