AIG 2015 Annual Report Download - page 209

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Loss cost trends: 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 based on historical
loss cost trends. The impacts cited below are only for the years for which we used an expected loss ratio approach. Actual loss
cost trends in the early 1990s were negative for several years whereas actual loss cost trends exceeded the figures cited
below for 1997 through 2001. These observed variations were considered in establishing the percentage deviations, and result
in asymmetrical selections. Loss trends may deviate by more than the amounts noted above and discussed below.
Loss development factors: 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. While
multiple scenarios are performed, 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. Further, there is a greater
incidence of these factors increasing, which is reflected in the deviations selected.
A large portion of the loss reserves from the Non-Life Insurance Companies 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 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 2015.
December 31, 2015 Effect on Effect on
(in millions) Loss Reserves Loss Reserves
Loss cost trends: Loss development factors:
Excess casualty: Excess casualty:
5 percent increase $ 1,646 3 percent increase $ 945
5 percent decrease (1,067) 4 percent decrease (874)
D&O: D&O:
31 percent increase 1,400 14 percent increase 800
30 percent decrease (950) 5 percent decrease (300)
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:
Increase(b) 1,400
Decrease(b) (900)
(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.