AIG 2015 Annual Report Download - page 35

ITEM 1A / RISK FACTORS
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and people. Vendor models and proprietary assumptions and processes that we use to manage catastrophe exposure may
prove to be ineffective due to incorrect assumptions or estimates.
In addition, legislative and regulatory initiatives and court decisions following major catastrophes could require us to pay the
insured beyond the provisions of the original insurance policy and may prohibit the application of a deductible, resulting in
inflated catastrophe claims.
For further details on potential catastrophic events, including a sensitivity analysis of our exposure to certain catastrophes, see
Item 7. MD&A — Enterprise Risk Management —Insurance Operations Risks.
Reinsurance may not be available or affordable and may not be adequate to protect us against losses. Our subsidiaries
are major purchasers of reinsurance and we use reinsurance as part of our overall risk management strategy. While
reinsurance does not discharge our subsidiaries from their obligation to pay claims for losses insured under our policies, it
does make the reinsurer liable to them for the reinsured portion of the risk. For this reason, reinsurance is an important tool to
manage transaction and insurance line risk retention and to mitigate losses from catastrophes. Market conditions beyond our
control determine the availability and cost of reinsurance. For example, reinsurance may be more difficult or costly to obtain
after a year with a large number of major catastrophes. As a result, we may, at certain times, be forced to incur additional
expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms. In that case, we would have
to accept an increase in exposure risk, reduce the amount of business written by our subsidiaries or seek alternatives in line
with our risk limits. Additionally, we are exposed to credit risk with respect to our subsidiaries’ reinsurers to the extent the
reinsurance receivable is not secured by collateral or does not benefit from other credit enhancements. We also bear the risk
that a reinsurer may be unwilling to pay amounts we have recorded as reinsurance recoverable for any reason, including that
(i) the terms of the reinsurance contract do not reflect the intent of the parties of the contract or there is a disagreement
between the parties as to their intent, (ii) the terms of the contract cannot be legally enforced, (iii) the terms of the contract are
interpreted by a court or arbitration panel differently than intended, (iv) the reinsurance transaction performs differently than we
anticipated due to a flawed design of the reinsurance structure, terms or conditions, or (v) a change in laws and regulations, or
in the interpretation of the laws and regulations, materially impacts a reinsurance transaction. The insolvency of one or more of
our reinsurers, or inability or unwillingness to make timely payments under the terms of our contracts, could have a material
adverse effect on our results of operations and liquidity. Additionally, the use of reinsurance placed in the capital markets, such
as through catastrophe bonds, may not provide the same levels of protection as traditional reinsurance transactions and any
disruption, volatility and uncertainty in the catastrophe bond market, such as following a major catastrophe event, may limit our
ability to access such market on terms favorable to us or at all. Also, to the extent that we intend to utilize catastrophe bond
transactions based on an industry loss index or other non-indemnity trigger rather than on actual losses incurred by us, we
could be subject to residual risk. Our inability to obtain adequate reinsurance or other protection could have a material adverse
effect on our business, results of operations and financial condition.
We currently have limited reinsurance coverage for terrorist attacks. Further, the availability of private sector reinsurance for
terrorism is limited. As a result, we rely heavily on the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which
provides U.S. government risk assistance to the insurance industry to manage the exposure to terrorism incidents in the United
States. TRIPRA was reauthorized in January 2015 and is scheduled to expire on December 31, 2020. Under TRIPRA, once
our losses for certain acts of terrorism exceed a deductible equal to 20 percent of our commercial property and casualty
insurance premiums for covered lines for the prior calendar year, the federal government will reimburse us for losses in excess
of our deductible, starting at 85 percent of losses in 2015, and reducing by one percentage point each year, ending at 80
percent in 2020, up to a total industry program limit of $100 billion. TRIPRA does not cover losses in certain lines of business
such as consumer property and consumer casualty.
For additional information on our reinsurance recoverable, see Item 7. MD&A — Enterprise Risk Management — Insurance
Operations Risks — Reinsurance Recoverable.