AIG 2013 Annual Report Download - page 192

We also have exposure to terrorist attacks due to coverage at airport locations for airline hull, airline and airport
property. The exposure is expected to be less than the exposure in New York City to losses from a conventional
five-ton bomb attack.
Our exposure to terrorism risk is mitigated by TRIPRA in addition to limited private reinsurance protections. TRIPRA
covers terrorist attacks in the United States only and excludes certain lines of business as specified by applicable
law. TRIPRA covers 85 percent of insured losses above a deductible. The current estimate of our deductible is about
$2.8 billion for 2013. TRIPRA is set to expire on December 31, 2014. We are closely monitoring the legislative
developments related to TRIPRA renewal or expiration, and developing appropriate business strategies for potential
legislation outcomes, including non-renewal of TRIPRA.
We offer terrorism coverage in many other countries through various insurance products and participate in country
terrorism pools when applicable. International terrorism exposure is estimated using scenario-based modeling and
exposure concentration is monitored routinely. Targeted reinsurance purchases are made for some lines of business
to cover potential losses due to terrorist attacks.
AIG’s reinsurance recoverable assets are comprised of:
• Paid losses recoverable — balances due from reinsurers for losses and loss expenses paid by our subsidiaries
and billed, but not yet collected.
• Ceded loss reserves — ultimate ceded reserves for losses and loss expenses, including reserves for claims
reported but not yet paid and estimates for IBNR.
• Ceded reserves for unearned premiums.
At December 31, 2013, total reinsurance recoverable assets were $23.8 billion. These assets include general
reinsurance paid losses recoverable of $1.3 billion, ceded loss reserves of $17.3 billion including reserves for IBNR,
and ceded reserves for unearned premiums of $3.4 billion, as well as life reinsurance recoverables of $1.8 billion.
The methods used to estimate IBNR and to establish the resulting ultimate losses involve projecting the frequency
and severity of losses over multiple years. These methods are continually reviewed and updated by management.
Any adjustments are reflected in income. We believe that the amount recorded for ceded loss reserves at
December 31, 2013 reflect a reasonable estimate of the ultimate losses recoverable. Actual losses may, however,
differ, perhaps materially, from the reserves currently ceded.
The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and
condition of current and potential reinsurers, both foreign and domestic. The RCD monitors both the financial
condition of reinsurers as well as the total reinsurance recoverable ceded to reinsurers, and set limits with regard to
the amount and type or exposure we are willing to take with reinsurers. As part of these assessments, we attempt to
identify whether a reinsurer is appropriately licensed, assess its financial capacity and liquidity; and evaluate the local
economic and financial environment in which a foreign reinsurer operates. The RCD reviews the nature of the risks
ceded and the need for measures, including collateral to mitigate credit risk. For example, in our treaty reinsurance
contracts, we frequently include provisions that require a reinsurer to post collateral or use other measures to reduce
exposure when a referenced event occurs. Furthermore, we limit our unsecured exposure to reinsurers through the
use of credit triggers such as insurer financial strength rating downgrades, declines in regulatory capital, or specified
declines in risk-based capital (RBC) ratios. We also set maximum limits for reinsurance recoverable exposure, which
in some cases is the recoverable amount plus an estimate of the maximum potential exposure from unexpected
events for a reinsurer. In addition, credit executives within ERM review reinsurer exposures and credit limits and
approve reinsurer credit limits above specified levels. Finally, even where we conclude that uncollateralized credit risk
is acceptable, we require collateral from active reinsurance counterparties where it is necessary for our subsidiaries
to recognize the reinsurance recoverable assets for statutory accounting purposes. At December 31, 2013, we held
$7.5 billion of collateral, in the form of funds withheld, securities in reinsurance trust accounts and/or irrevocable
letters of credit, in support of reinsurance recoverable assets from unaffiliated reinsurers. We believe that no
exposure to a single reinsurer represents an inappropriate concentration of risk to AIG, nor is our business
substantially dependent upon any single reinsurance contract.
Reinsurance Recoverable
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AIG 2013 Form 10-K174
ITEM 7 / ENTERPRISE RISK MANAGEMENT
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