AIG 2012 Annual Report Download - page 284

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9. REINSURANCE
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In the ordinary course of business, our insurance companies may use both treaty and facultative reinsurance to
minimize their net loss exposure to any single catastrophic loss event or to an accumulation of losses from a number
of smaller events or to provide greater diversification of our businesses. In addition, our general insurance
subsidiaries assume reinsurance from other insurance companies. We determine the portion of the incurred but not
reported (IBNR) loss that will be recoverable under our reinsurance contracts by reference to the terms of the
reinsurance protection purchased. This determination is necessarily based on the estimate of IBNR and accordingly,
is subject to the same uncertainties as the estimate of IBNR. Reinsurance assets include the balances due from
reinsurance and insurance companies under the terms of our reinsurance agreements for paid and unpaid losses
and loss expenses, ceded unearned premiums and ceded future policy benefits for life and accident and health
insurance contracts and benefits paid and unpaid. Amounts related to paid and unpaid losses and benefits and loss
expenses with respect to these reinsurance agreements are substantially collateralized. We remain liable to the
extent that our reinsurers do not meet their obligation under the reinsurance contracts, and as such, we regularly
evaluate the financial condition of our reinsurers and monitor concentration of our credit risk. The allowance for
doubtful accounts on reinsurance assets was $338 million and $365 million at December 31, 2012 and 2011,
respectively.
The following table provides supplemental information for loss and benefit reserves, gross and net of ceded
reinsurance:
Liability for unpaid claims and claims adjustment expense(a) $ (91,145) $ (70,825)
Future policy benefits for life and accident and health insurance
contracts (34,317) (33,312)
Reserve for unearned premiums (23,465) (19,553)
Reinsurance assets(b) 25,237 –
(a) In 2012 and 2011, the Net of Reinsurance amount reflects the cession under the June 17, 2011 transaction with National Indemnity Company
(NICO) of $1.6 billion and $1.7 billion, respectively.
(b) Represents gross reinsurance assets, excluding allowances and reinsurance recoverable on paid losses.
Short-Duration Reinsurance
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Short-duration reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain of
these reinsurance arrangements consist of excess of loss contracts that protect us against losses above stipulated
amounts. Ceded premiums are considered prepaid reinsurance premiums and are recognized as a reduction of
premiums earned over the contract period in proportion to the protection received. Amounts recoverable from
reinsurers on short-duration contracts are estimated in a manner consistent with the claims liabilities associated with
the reinsurance and presented as a component of Reinsurance assets. Assumed reinsurance premiums are earned
primarily on a pro-rata basis over the terms of the reinsurance contracts and the portion of premiums relating to the
unexpired terms of coverage is included in the reserve for unearned premiums. For both ceded and assumed
reinsurance, risk transfer requirements must be met for reinsurance accounting to apply. If risk transfer requirements
are not met, the contract is accounted for as a deposit, resulting in the recognition of cash flows under the contract
through a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, a reinsurance
contract must include both insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility
of a significant loss for the assuming entity. Similar risk transfer criteria are used to determine whether directly written
insurance contracts should be accounted for as insurance or as a deposit.
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AIG 2012 Form 10-K 267
2012 2011
At December 31, As Net of As Net of
(in millions) Reported Reinsurance Reported Reinsurance
$ (87,991) $ (68,782)
(36,340) (35,408)
(22,537) (18,934)
23,744 –
ITEM 8 / NOTE 9. REINSURANCE