AIG 2013 Annual Report Download - page 285

credit were replaced with two new, renegotiated bilateral letters of credit totaling $450 million. These new letters of
credit expire on February 7, 2018, but will be automatically extended without amendment by one year on each
anniversary of the issuance date, unless the issuer provides notice of non-renewal. See Note 19 for additional
information on the use of affiliated reinsurance for Regulation XXX and Guideline AXXX reserves.
Our third-party reinsurance arrangements do not relieve us from our direct obligations to our beneficiaries. Thus, a
credit exposure exists with respect to both short-duration and long-duration reinsurance ceded to the extent that any
reinsurer fails to meet the obligations assumed under any reinsurance agreement. We hold substantial collateral as
security under related reinsurance agreements in the form of funds, securities, and/or letters of credit. A provision
has been recorded for estimated unrecoverable reinsurance.
Deferred policy acquisition costs (DAC) represent those costs that are incremental and directly related to the
successful acquisition of new or renewal of existing insurance contracts. We defer incremental costs that result
directly from, and are essential to, the acquisition or renewal of an insurance contract. Such deferred policy
acquisition costs generally include agent or broker commissions and bonuses, premium taxes, and medical and
inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each
cost is analyzed to assess whether it is fully deferrable. We partially defer costs, including certain commissions, when
we do not believe that the entire cost is directly related to the acquisition or renewal of insurance contracts.
We also defer a portion of employee total compensation and payroll-related fringe benefits directly related to time
spent performing specific acquisition or renewal activities, including costs associated with the time spent on
underwriting, policy issuance and processing, and sales force contract selling. The amounts deferred are derived
based on successful efforts for each distribution channel and/or cost center from which the cost originates.
Policy acquisition costs are deferred and amortized over the period in which
the related premiums written are earned, generally 12 months. DAC is grouped consistent with the manner in which
the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based
on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the
recoverability of DAC. We assess the recoverability of DAC on an annual basis or more frequently if circumstances
indicate an impairment may have occurred. This assessment is performed by comparing recorded net unearned
premiums and anticipated investment income on in-force business to the sum of expected claims, claims adjustment
expenses, unamortized DAC and maintenance costs. If the sum of these costs exceeds the amount of recorded net
unearned premiums and anticipated investment income, the excess is recognized as an offset against the asset
established for DAC. This offset is referred to as a premium deficiency charge. Increases in expected claims and
claims adjustment expenses can have a significant impact on the likelihood and amount of a premium deficiency
charge.
Policy acquisition costs for participating life, traditional life and accident and
health insurance products are generally deferred and amortized, with interest, over the premium paying period. The
assumptions used to calculate the benefit liabilities and DAC for these traditional products are set when a policy is
issued and do not change with changes in actual experience, unless a loss recognition event occurs. These
‘‘locked-in’’ assumptions include mortality, morbidity, persistency, maintenance expenses and investment returns, and
include margins for adverse deviation to reflect uncertainty given that actual experience might deviate from these
assumptions. Loss recognition exists when there is a shortfall between the carrying amounts of future policy benefit
liabilities net of DAC and the amount the future policy benefit liabilities net of DAC would be when applying updated
current assumptions. When we determine a loss recognition exists, we first reduce any DAC related to that block of
business through amortization of acquisition expense, and after DAC is depleted, record additional liabilities through
a charge to Policyholder benefits and claims incurred. Groupings for loss recognition testing are consistent with our
manner of acquiring and servicing the business and applied by product groupings. We perform separate loss
recognition tests for traditional life products, payout annuities and long-term care products. Once loss recognition has
been recorded for a block of business, the old assumption set is replaced and the assumption set used for the loss
recognition would then be subject to the lock-in principle.
Reinsurance Security
9. DEFERRED POLICY ACQUISITION COSTS
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AIG 2013 Form 10-K 267
ITEM 8 / NOTE 8. REINSURANCE
Short-duration insurance contracts:
Long-duration insurance contracts:
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