AIG 2015 Annual Report Download - page 212

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Class of Business Loss Cost Trend Loss Development Factor
Based on our sensitivity testing, we
also estimate that a 1 percent rise in
the future rate of inflation (PCE
Deflator for Health Care Services
increased by 1 percent at the 30-year
time horizon, with increases in the
forward rate of inflation assumed to
occur proportionally over time (i.e. the
zero-year/1-year forward inflation rate
would change by 1/30th of 1
percentage point)) would increase our
ultimate loss cost estimates by
approximately $215 million as of
December 31, 2015.
In 2014, however, we began
incorporating three-dimensional loss
development models incorporating
accident year, development year and
calendar year trends with our
traditional loss development
projections. This allows us to consider
for example, the effect of changing
levels of inflation (specifically the PCE
Deflator for Health Care Services) on
our ultimate loss costs for medical
benefits. These methodologies also
facilitate a more quantitative
assessment of the uncertainty in our
estimates reflecting structural drivers
of loss along each dimension.
Excess Workers’ Compensation (run-off only)
Loss costs were trended at six percent per annum. After
reviewing actual industry loss trends for the past ten years, in our
judgment, it is reasonably likely that actual loss cost trends
applicable to the year-end 2015 loss reserve review for excess
workers’ compensation will range five percent lower or higher
than this estimated loss trend. However, given the small volume
of business written in these years, the range in reserve estimates
as a result of varying these loss cost trends is not very wide.
Excess workers’ compensation is an
extremely long-tail class of business,
with a much greater than normal
uncertainty as to the appropriate loss
development factors for the tail of the
loss development. After evaluating the
historical loss development factors for
prior accident years since the 1980s
as well as the development over the
past several years of the ground up
claim projections utilized to help select
the loss development factors in the tail
for this class of business, in our
judgment, it is reasonably likely that
actual loss development for excess
workers’ compensation could increase
the current reserves by up to
approximately $1.0 billion or decrease
them by approximately $250 million.