AIG 2013 Annual Report Download - page 47

statutes that delegate regulatory and supervisory powers to an insurance official. The regulation and supervision
relate primarily to the financial condition of the insurers and their corporate conduct and market conduct activities.
This includes approval of policy forms and rates, the standards of solvency that must be met and maintained,
including with respect to risk-based capital, the licensing of insurers and their agents, the nature of and limitations on
investments, restrictions on the size of risks that may be insured under a single policy, deposits of securities for the
benefit of policyholders, requirements for acceptability of reinsurers, periodic examinations of the affairs of insurance
companies, the form and content of reports of financial condition required to be filed and reserves for unearned
premiums, losses and other purposes. In general, such regulation is for the protection of policyholders rather than the
equity owners of these companies.
In the U.S., the Risk-Based Capital (RBC) formula is designed to measure the adequacy of an insurer’s statutory
surplus in relation to the risks inherent in its business. Virtually every state has adopted, in substantial part, the RBC
Model Law promulgated by the NAIC, which allows states to act upon the results of RBC calculations, and provides
for four incremental levels of regulatory action regarding insurers whose RBC calculations fall below specific
thresholds. Those levels of action range from the requirement to submit a plan describing how an insurer would
regain a calculated RBC ratio above the respective threshold through a mandatory regulatory takeover of the
company. The action thresholds are based on RBC levels that are calculated so that a company subject to such
actions is solvent but its future solvency is in doubt without some type of corrective action. The RBC formula
computes a risk-adjusted surplus level by applying discrete factors to various asset, premium and reserve items.
These factors are developed to be risk-sensitive so that higher factors are applied to items exposed to greater risk.
The statutory surplus of each of our U.S.-based life and property and casualty insurance subsidiaries exceeded RBC
minimum required levels as of December 31, 2013.
If any of our insurance entities fell below prescribed levels of statutory surplus, it would be our intention to provide
appropriate capital or other types of support to that entity, under formal support agreements or capital maintenance
agreements (CMAs) or otherwise. For additional details regarding CMAs that we have entered into with our insurance
subsidiaries, see Item 7. MD&A — Liquidity and Capital Resources — Liquidity and Capital Resources of AIG Parent
and Subsidiaries — AIG Property Casualty — AIG Life and Retirement and — Other Operations — Mortgage
Guaranty.
The NAIC’s Model Regulation ‘‘Valuation of Life Insurance Policies’’ (Regulation XXX) requires insurers to establish
additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life
policies with secondary guarantees (ULSGs). NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application
of Regulation XXX as to these guarantees, including certain ULSGs. See Item 1A — Risk Factors and Note 19 to the
Consolidated Financial Statements for risks and additional information related to these statutory reserving
requirements.
The NAIC has undertaken the Solvency Modernization Initiative (SMI) which focuses on a review of insurance
solvency regulations throughout the U.S. financial regulatory system and is expected to lead to a set of long-term
solvency modernization goals. SMI is broad in scope, but the NAIC has stated that its focus will include the U.S.
solvency framework, group solvency issues, capital requirements, international accounting and regulatory standards,
reinsurance and corporate governance.
A substantial portion of AIG Property Casualty’s business is conducted in foreign countries. The degree of regulation
and supervision in foreign jurisdictions varies. Generally, our subsidiaries operating in foreign jurisdictions must
satisfy local regulatory requirements, licenses issued by foreign authorities to our subsidiaries are subject to
modification or revocation by such authorities, and therefore these subsidiaries could be prevented from conducting
business in certain of the jurisdictions where they currently operate.
In addition to licensing requirements, our foreign operations are also regulated in various jurisdictions with respect to
currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves,
amount and type of capital to be held, amount and type of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries regulate rates on various types of policies. Certain
countries have established reinsurance institutions, wholly or partially owned by the local government, to which
admitted insurers are obligated to cede a portion of their business on terms that may not always allow foreign
insurers, including our subsidiaries, full compensation. In some countries, regulations governing constitution of
technical reserves and remittance balances may hinder remittance of profits and repatriation of assets.
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AIG 2013 Form 10-K 29
ITEM 1 / BUSINESS
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