AIG 2013 Annual Report Download - page 39

• Statutory practices in the United States require reserves to be shown net of applicable reinsurance recoverable;
and
• Unlike statutory financial statements, AIG’s consolidated Liability for unpaid claims and claims adjustment expense
excludes the effect of intercompany transactions.
Gross loss reserves are calculated without reduction for reinsurance recoverables and represent the accumulation of
estimates for reported losses and IBNR, net of estimated salvage and subrogation. We review the adequacy of
established gross loss reserves in the manner previously described for net loss reserves. A reconciliation of activity
in the Liability for unpaid claims and claims adjustment expense is included in Note 12 to the Consolidated Financial
Statements.
For further discussion of asbestos and environmental reserves, see Item 7. MD&A — Results of Operations —
Segment Results — AIG Property Casualty Operations — Liability for Unpaid Claims and Claims Adjustment
Expense — Asbestos and Environmental Reserves.
Reinsurance is used primarily to manage overall capital adequacy and mitigate the insurance loss exposure related
to certain events such as natural and man-made catastrophes.
AIG subsidiaries operate worldwide primarily by underwriting and accepting risks for their direct account on a gross
basis and reinsuring a portion of the exposure on either an individual risk or an aggregate basis to the extent those
risks exceed the desired retention level. In addition, as a condition of certain direct underwriting transactions, we are
required by clients, agents or regulation to cede all or a portion of risks to specified reinsurance entities, such as
captives, other insurers, local reinsurers and compulsory pools.
Over the last several years, AIG Property Casualty revised its ceded reinsurance framework and strategy to improve
capital management and support our global product line risk and profitability objectives. As a result of adopting the
revised framework and strategy, many individual reinsurance contracts were consolidated into more efficient global
programs and reinsurance ceded to third parties in support of risk and capital management objectives has decreased
for the full year 2013 compared to the prior year. There are many different forms of reinsurance agreements and
different markets that may be used to achieve our risk and profitability objectives. We continually evaluate the relative
attractiveness of various reinsurance markets and arrangements that may be used to achieve our risk and profitability
objectives.
Reinsurance markets include:
• Traditional local and global reinsurance markets including in the United States, Bermuda, London and Europe,
accessed directly and through reinsurance intermediaries;
• Capital markets through investors in insurance-linked securities and collateralized reinsurance transactions, such
as catastrophe bonds, ‘‘sidecars’’ (special purpose entities that allow investors to take on the risk of a book of
business from an insurance company in exchange for a premium) and similar vehicles; and
• Other insurers that engage in both direct and assumed reinsurance and/or engage in swaps.
The form of reinsurance that we may choose from time to time will generally depend on whether we are seeking
(i) proportional reinsurance, whereby we cede a specified percentage of premium and losses to reinsurers, or
non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a
specified amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis and
(ii) treaties that cover a defined book of policies, or facultative placements that cover an individual policy. The vast
majority of our reinsurance is non-proportional.
Reinsurance arrangements do not relieve AIG subsidiaries from their direct obligations to insureds. However, an
effective reinsurance program substantially mitigates our exposure to potentially significant losses.
In certain markets, we are required to participate on a proportional basis in reinsurance pools based on our relative
share of direct writings in those markets. Such mandatory reinsurance generally covers higher-risk consumer
exposures such as assigned-risk automobile and earthquake, as well as certain commercial exposures such as
workers’ compensation.
REINSURANCE ACTIVITIES
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AIG 2013 Form 10-K 21
ITEM 1 / BUSINESS
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