AIG 2013 Annual Report Download - page 216

The reserving methodology and assumptions used to measure the liabilities of our two largest guaranteed benefit
features are presented in the following table:
We determine the GMDB liability at each balance sheet Key assumptions include:
date by estimating the expected value of death benefits • Interest rates, which vary by year of issuance and
in excess of the projected account balance and products
recognizing the excess ratably over the accumulation
period based on total expected fees. See Note 13 to the • Mortality rates, which are based upon actual
Consolidated Financial Statements for additional experience modified to allow for variations in policy
information on how we reserve for variable annuity form
products with guaranteed benefit features. • Lapse rates, which are based upon actual experience
modified to allow for variations in policy form
• Investment returns, using assumptions from a
randomly generated model
• In applying asset growth assumptions for the valuation
of the GMDB liability, we use a ‘‘reversion to the
mean’’ methodology, similar to that applied for DAC.
For a description of this methodology, see Estimated
Gross Profits for Investment-Oriented Products (AIG
Life and Retirement) below.
GMWB living benefits are embedded derivatives that are The fair value of the embedded derivatives is based on
required to be bifurcated from the host contract and actuarial and capital market assumptions related to
carried at fair value. The fair value estimates of the living projected cash flows over the expected lives of the
benefit guarantees include assumptions such as equity contracts. Key assumptions include:
market returns, interest rates, market volatility, and • Equity market returns
policyholder behavior. See Note 13 to the Consolidated
Financial Statements for additional information on how • Interest rates
we reserve for variable annuity products with guaranteed • Market volatility
benefit features, and Note 5 to the Consolidated
Financial Statements for information on fair value • Benefits and related fees assessed, when applicable
measurement of these embedded derivatives, including • Policyholder behavior, including mortality, exercise of
how AIG incorporates its own non-performance risk. guarantees and policy lapses. Estimates of future
policyholder behavior are subjective and based
primarily on our historical experience.
• In applying asset growth assumptions for the valuation
of GMWBs, we use market-consistent assumptions
consistent with fair value measurement.
Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful
acquisition of new or renewal of existing insurance contracts related to universal life and investment-type products
(collectively, investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of
estimated gross profits to be realized over a period that approximates the estimated lives of the contracts. Estimated
gross profits include net investment income and spreads, net realized investment gains and losses, fees, surrender
charges, expenses, and mortality gains and losses. In estimating future gross profits, lapse assumptions require
GMDB
GMWB
Estimated Gross Profits for Investment — Oriented Products (AIG Life and Retirement)
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AIG 2013 Form 10-K198
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Reserving Methodology Assumptions and Accounting Judgments