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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................Alternative Loss Cost Trend and Loss Development Factor Assumptions by Class of Business..............................................................................................................................................................................................For classes of business other than the classes discussed below, there is generally some potential for deviation inboth the loss cost trend and loss development factor assumptions.The effect of these deviations is expected to be less material compared to the effect on theclasses noted below• Loss cost trends:The percentage deviations noted in the table below are not considered the highestpossible deviations that might be expected, but rather what we consider to reflect a reasonably likely range ofpotential deviation. Actual loss cost trends in the early 1990s were negative for several years whereas actualloss cost trends exceeded the figures cited above for several other years. Loss trends may deviate by morethan the amounts noted above and discussed below.• Loss development e efactors:The percentage deviations noted in the table below are not considered thehighest possible deviations that might be expected, but rather what we consider to reflect a reasonably likelyrange of potential deviation. Except for excess workers’ compensation, the assumed loss development factorsare a key assumption. Generally, actual historical loss development factors are used to project future lossdevelopment. Future loss development patterns may be different from those in the past, or may deviate bymore than the amounts noted above and discussed below.AIG’s loss reserve analyses do not generally provide a range of loss reserve estimates. A large portion of the lossreserves from AIG Property Casualty business relates to longer-tail casualty classes of business, such as excesscasualty and D&O, which are driven by severity rather than frequency of claims. Using the reserving methodologiesdescribed above, our actuaries determine their actuarial central estimates of the loss reserves and advisemanagement on their final recommendation for management’s best estimate of the recorded reserves. Subject matterexperts from underwriting and claims play an important part in informing the actuarial assumptions and methods. Thegovernance process over the establishment of loss reserves also ensures robust considerations of the changes inthe loss trends, terms and conditions, claims handling practices, and large loss impact when determining themethods, assumptions and the estimations. This multi-disciplinary process engages underwriting, claims, riskmanagement, business unit executives and senior management and involves several iterative levels of feedback andresponse during the regular reserving process.The sensitivity analysis below addresses each major class of business for which there is a possibility of a materialdeviation from our overall reserve position. The analysis uses what we believe is a reasonably likely range ofpotential deviation for each class. Actual reserve development may not be consistent with either the original or theadjusted loss trend or loss development factor assumptions, and other assumptions made in the reserving processmay materially affect reserve development for a particular class of business...................................................................................................................................................................................................................................186 AIG 2012 Form 10-K