AIG 2015 Annual Report Download - page 211

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Class of Business Loss Cost Trend Loss Development Factor
D&O and Related Management Liability Classes of Business
The assumed loss cost trend was approximately 1 percent. After
evaluating the historical loss cost trends from prior accident years
since the early 1990s, including the potential effect of recent
claims relating to the credit crisis, in our judgment, it is reasonably
likely that actual loss cost trends applicable to the year-end 2015
loss reserve review for these classes will range from
approximately 30 percent lower or 31 percent higher than the
assumption actually utilized in the year-end 2015 reserve review.
Because the D&O class of business has exhibited highly volatile
loss trends from one accident year to the next, there is the
possibility of an exceptionally high deviation.
The assumed loss development
factors are also an important
assumption but less critical than for
excess casualty. Because these
classes are written on a claims
made basis, the loss reporting and
development tail is much shorter
than for excess casualty. However,
the high severity nature of the
claims does create the potential for
significant deviations in loss
development patterns from one
year to the next. After evaluating
the historical loss development
factors for these classes of
business for accident years since
the early 1990s, in our judgment, it
is reasonably likely that actual loss
development factors will range
from approximately 5 percent lower
to approximately 14 percent higher
than those factors actually
indicated in the year-end 2015 loss
reserve review for these classes.
Primary Workers’ Compensation
The loss cost trend assumption is not believed to be material with
respect to our loss reserves. This is primarily because our
actuaries are generally able to use loss development projections
for all but the most recent accident year’s reserves, so there is
limited need to rely on loss cost trend assumptions for primary
workers’ compensation business.
Generally, our actual historical
workers’ compensation loss
development factors would be
expected to provide a reasonably
accurate predictor of future loss
development. However, workers’
compensation is a long-tail class of
business, and our business reflects a
very significant volume of losses,
particularly in recent accident years.
After evaluating the actual historical
loss development since the 1980s for
this business, in our judgment, it is
reasonably likely that actual loss
reserves will fall within the range of
approximately 7 percent below to
approximately 11 percent above those
actually indicated in the 2015 loss
reserve review.