AIG 2013 Annual Report Download - page 54

Accounting Estimates — Liability for Unpaid Claims and Claims Adjustment Expense (AIG Property Casualty and
Mortgage Guaranty).
Reinsurance may not be available or affordable and may not be adequate to protect us against losses. Our
subsidiaries are major purchasers of reinsurance and we use reinsurance as part of our overall risk management
strategy, and have continued our strategy, adopted in 2010, to improve the allocation of our reinsurance between
traditional reinsurance markets and the capital markets, such as through the utilization of catastrophe bonds, to
manage risks more efficiently. While reinsurance does not discharge our subsidiaries from their obligation to pay
claims for losses insured under our policies, it does make the reinsurer liable to them for the reinsured portion of the
risk. For this reason, reinsurance is an important risk management tool to manage transaction and insurance line risk
retention and to mitigate losses from catastrophes. Market conditions beyond our control determine the availability
and cost of reinsurance. For example, reinsurance may be more difficult or costly to obtain after a year with a large
number of major catastrophes. As a result, we may, at certain times, be forced to incur additional expenses for
reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms. In that case, we would have to
accept an increase in exposure risk, reduce the amount of business written by our subsidiaries or seek alternatives.
Additionally, we are exposed to credit risk with respect to our subsidiaries’ reinsurers to the extent the reinsurance
receivable is not secured by collateral or does not benefit from other credit enhancements. We also bear the risk that
a reinsurer may be unwilling to pay amounts we have recorded as reinsurance recoverable for any reason, including
that (i) the terms of the reinsurance contract do not reflect the intent of the parties of the contract, (ii) the terms of
the contract cannot be legally enforced, (iii) the terms of the contract are interpreted by a court differently than
intended, (iv) the reinsurance transaction performs differently than we anticipated due to a flawed design of the
reinsurance structure, terms or conditions, or (v) a change in laws and regulations, or in the interpretation of the laws
and regulations, materially impacts a reinsurance transaction. The insolvency of one or more of our reinsurers, or
inability or unwillingness to make timely payments under the terms of our agreements, could have a material adverse
effect on our results of operations and liquidity. Additionally, the use of catastrophe bonds may not provide the same
levels of protection as traditional reinsurance transactions and any disruption, volatility and uncertainty in the
catastrophe bond market, such as following a major catastrophe event, may limit our ability to access such market on
terms favorable to us or at all. Also, some catastrophe bond transactions may be based on an industry loss index
rather than on actual losses incurred by us, which would result in residual risk. Our inability to obtain adequate
reinsurance or other protection could have a material adverse effect on our business, results of operations and
financial condition.
We currently have limited reinsurance coverage for terrorist attacks. Further, the availability of private sector
reinsurance for terrorism is limited. As a result, we rely heavily on the Terrorism Risk Insurance Program
Reauthorization Act of 2007 (TRIPRA), which provides U.S. government risk assistance to the insurance industry to
manage the exposure to terrorism incidents in the United States. Under TRIPRA, once our losses for certain acts of
terrorism exceed a deductible equal to 20 percent of our commercial property and casualty insurance premiums for
the prior calendar year, the federal government will reimburse us for 85 percent of losses in excess of our deductible,
up to a total industry program limit of $100 billion. However, TRIPRA is scheduled to expire in December 2014, and
there is no assurance that TRIPRA will be renewed in its current form or at all. To the extent that TRIPRA is
renewed on less favorable terms or is not renewed at all, we may not hold adequate terrorism reinsurance coverage
or reserves in the event of one or more insured terrorist incidents in the United States, which could result in a
material adverse effect on our business, results of operations, financial condition and liquidity.
For additional information on our reinsurance, see Item 7. MD&A — Enterprise Risk Management — Insurance
Operations Risks — AIG Property Casualty Key Insurance Risks — Reinsurance Recoverable.
Our internal sources of liquidity may be insufficient to meet our needs. We need liquidity to pay our operating
expenses, interest on our debt, maturing debt obligations and to meet any statutory capital requirements of our
subsidiaries. If our liquidity is insufficient to meet our needs, we may at the time need to have recourse to third-party
financing, external capital markets or other sources of liquidity, which may not be available or could be prohibitively
expensive. The availability and cost of any additional financing at any given time depends on a variety of factors,
including general market conditions, the volume of trading activities, the overall availability of credit, regulatory
actions and our credit ratings and credit capacity. It is also possible that, as a result of such recourse to external
financing, customers, lenders or investors could develop a negative perception of our long- or short-term financial
LIQUIDITY, CAPITAL AND CREDIT
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AIG 2013 Form 10-K36
ITEM 1A / RISK FACTORS
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