AIG 2015 Annual Report Download - page 210

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Class of Business Loss Cost Trend Loss Development Factor
Excess Casualty
In the analysis we utilize various loss cost trend assumptions for
different segments of the portfolio. After evaluating the historical
loss cost trends from prior accident years since the early 1990s,
in our judgment, it is reasonably likely that actual loss cost trends
applicable to the year-end 2015 loss reserve review for excess
casualty will range five percent lower or higher than this estimated
loss trend. The loss cost trend assumption is critical for the
excess casualty class of business due to the long-tail nature of
the claims and therefore is applied across many accident years.
Thus, there is the potential for the reserves with respect to a
number of accident years (the expected loss ratio years) to be
significantly affected by changes in loss cost trends that were
initially relied upon in setting the reserves. These changes in loss
trends could be attributable to changes in inflation or in the
judicial environment, or in other social or economic conditions
affecting claims.
After evaluating the historical loss
development factors from prior
accident years since the early
1990s, in our judgment, it is
reasonably likely that actual loss
development factors will range
from approximately 3 percent
below those actually utilized in the
year-end 2015 reserve review to
approximately 3.5 percent above
those factors actually utilized.
Excess casualty is a long-tail class
of business and any deviation in
loss development factors might not
be discernible for an extended
period of time subsequent to the
recording of the initial loss reserve
estimates for any accident year.
Thus, there is the potential for the
reserves with respect to a number
of accident years to be significantly
affected by changes in loss
development factors that were
initially relied upon in setting the
reserves. Similar to loss cost
trends, these changes in loss
development factors could be
attributable to changes in inflation
or in the judicial environment, or in
other social or economic conditions
affecting claims.