AIG 2014 Annual Report Download - page 214

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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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 2014.
December 31, 2014 Effect on Effect on
(in millions) Loss Reserves Loss Reserves
Loss cost trends: Loss development factors:
Excess casualty: Excess casualty:
5 percent increase $ 1,200 6 percent increase $ 900
5 percent decrease (800) 3 percent decrease (650)
D&O: D&O:
27 percent increase 1,240 16 percent increase 935
29 percent decrease (925) 6 percent decrease (360)
Excess workers' compensation: Excess workers' compensation:
5 percent increase N/A Increase(b) 1,000
5 percent decrease N/A Decrease (b) (250)
Primary workers' compensation(a): Primary workers' compensation:
11 percent increase(c) 1,400
9 percent decrease(c) (1,100)
(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.
(c) Impact was determined based on analysis of aggregate variability of loss development assumptions.
Reinsurance Assets
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as
asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss
adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar
judgments and uncertainties as the estimation of gross loss reserves.
We assess the collectability of reinsurance recoverable balances through either detailed reviews of the underlying nature of the
reinsurance balance or comparisons with historical trends of disputes and credit events. We record adjustments to reflect the
results of these assessments through an allowance for uncollectable reinsurance that reduces the carrying amount of
reinsurance assets in the balance sheet. This estimate requires significant judgment for which key considerations include:
• paid and unpaid amounts recoverable;
• whether the balance is in dispute or subject to legal collection;
• whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal or
informal regulatory restriction); and
• whether collateral and collateral arrangements exist.
At December 31, 2014, the allowance for estimated unrecoverable reinsurance was $258 million.
See Note 8 to the Consolidated Financial Statements for additional information on reinsurance.
Future Policy Benefits for Life and Accident and Health Insurance Contracts (Life Insurance Companies)
Long-duration traditional products include whole life insurance, term life insurance, accident and health insurance, long-
term care insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our
single premium immediate annuities and structured settlements.