AIG 2012 Annual Report Download - page 45

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standards relative to these areas and incorporate them within that body’s Insurance Core Principles. IAIS Insurance
Core Principles form the baseline threshold for how countries’ financial services regulatory efforts are measured
relative to the insurance sector. That measurement is made by periodic Financial Sector Assessment Program
(FSAP) reviews conducted by the World Bank and the International Monetary Fund and the reports thereon spur the
development of country-specific additional or amended regulatory changes. Lawmakers and regulatory authorities in
a number of jurisdictions in which our subsidiaries conduct business have already begun implementing legislative and
regulatory changes consistent with these recommendations, including proposals governing consolidated regulation of
insurance holdings companies by the Financial Services Agency in Japan, financial and banking regulation adopted
in France and compensation regulations proposed or adopted by the financial regulators in Germany and the United
Kingdom Financial Services Authority.
Legislation in the European Union could also affect our international insurance operations. The Solvency II Directive
(2009/138/EEC) (Solvency II), which was adopted on November 25, 2009 and is expected to become effective in
January 2014, reforms the insurance industry’s solvency framework, including minimum capital and solvency
requirements, governance requirements, risk management and public reporting standards. The impact on us will
depend on whether the U.S. insurance regulatory regime is deemed ‘‘equivalent’’ to Solvency II; if the U.S. insurance
regulatory regime is not equivalent, then we, along with other insurance companies, could be required to be
supervised under Solvency II standards. Whether the U.S. insurance regulatory regime will be deemed ‘‘equivalent’’
is still under consideration by European authorities and remains uncertain, so we are not currently able to predict the
impact of Solvency II.
We expect that the regulations applicable to us and our regulated entities will continue to evolve for the foreseeable
future.
Regulation of Insurance Subsidiaries
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Certain states require registration and periodic reporting by insurance companies that are licensed in such states and
are controlled by other corporations. Applicable legislation typically requires periodic disclosure concerning the
corporation that controls the registered insurer and the other companies in the holding company system and prior
approval of intercompany services and transfers of assets, including in some instances payment of dividends by the
insurance subsidiary, within the holding company system. Our subsidiaries are registered under such legislation in
those states that have such requirements.
Our insurance subsidiaries are subject to regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies but generally has its source in
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 National Association of Insurance Commissioners (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, 2012.
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AIG 2012 Form 10-K28
ITEM 1 / BUSINESS