AIG 2012 Annual Report Download - page 187

.....................................................................................................................................................................................
• whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal
or informal regulatory restriction);
• whether collateral and collateral arrangements exist; and
• the credit quality of the underlying reinsurer.
We record adjustments to reflect the results of the detailed review through an allowance for uncollectable
reinsurance. At December 31, 2012, the allowance for estimated unrecoverable reinsurance was $338 million. At
December 31, 2012, we had no significant general reinsurance recoverables due from any individual reinsurer that
was financially troubled. In the current environment of weaker economic conditions and strained financial markets,
certain reinsurers are reporting losses and could be subject to rating downgrades. Our reinsurance recoverable
exposures are primarily to the regulated subsidiaries of such companies which are subject to minimum regulatory
capital requirements. The RCD, in conjunction with the credit executives within ERM, reviews these developments,
monitors compliance with credit triggers that may require the reinsurer to post collateral, and will seek to use other
appropriate means to mitigate any material risks arising from these developments. See Note 9 to the Consolidated
Financial Statements for additional information on reinsurance.
AIG Life and Retirement Key Insurance Risks
..............................................................................................................................................................................................
For AIG Life and Retirement, the primary risks are the following:
• – represents the potential exposure to loss if actual policy experience emerges adversely in
comparison to the assumptions made in product pricing. These assumptions include investment results, mortality,
morbidity, surrenders, other observed policyholder behavior and expenses;
• – represents the exposure to loss if the cash flows from the invested assets are less than
required to meet the obligations of the expected policy and contract liabilities and the necessary return on
investments;
• – represents the exposure to loss due to the sensitivity of the liabilities and assets to changes in
interest rates; and
• – represents the potential exposure to higher claim costs for guaranteed benefits associated
with variable annuities and the potential reduction in expected fee revenue.
AIG Life and Retirement manages these risks through product design, exposure limitations and active management
of the relationships between assets and liabilities. The emergence of significant adverse experience would require an
adjustment to DAC and benefit reserves which could have a material adverse effect on our consolidated results of
operations for a particular period. For a further discussion of this risk, see Item 1A. Risk Factors – Business and
Operations.
AIG Life and Retirement companies generally limit their maximum underwriting exposure on life insurance of a single
life to $15 million or less of coverage. In certain circumstances, this is achieved by using yearly renewable term
reinsurance. For the AIG Life and Retirement companies, the reinsurance programs provide risk mitigation per life for
individuals and group and for catastrophic risk events.
United Guaranty Corporation Key Insurance Risks
..............................................................................................................................................................................................
For United Guaranty Corporation (UGC), risks emanate primarily from the following:
•Residential Housing Market risk – represents the potential exposure to loss due to borrower default on a
first-lien residential mortgage; the primary drivers of this risk are home price depreciation, changes in the
unemployment rate, changes in mortgage rates, and a borrower’s willingness to pay.
•Pricing risk – represents the potential exposure to loss if actual policy experience emerges adversely in
comparison to the assumptions made in product pricing. This may be related to adverse economic conditions,
prepayment of policies, investment results, and expenses;
UGC manages the quality of the loans it insures through use of a proprietary risk quality index. UGC uses this index
to determine an insurability threshold as well as to manage the risk distribution of its new business. Along with
traditional mortgage underwriting variables, UGC’s risk-based pricing model uses rating factors such as geography
and the quality of a lender’s origination process to establish premium rates.
UGC’s risk appetite statement establishes various concentration limits on the business UGC insures (for example,
geography), and defines underwriting characteristics for which UGC will not insure loans.
..................................................................................................................................................................................................................................
AIG 2012 Form 10-K170
Pricing risk
Investment risk
Interest rate risk
Equity market risk
ITEM 7 / ENTERPRISE RISK MANAGEMENT