AIG 2014 Annual Report Download - page 190

ITEM 7 / ENTERPRISE RISK MANAGEMENT

173
Terrorism Risk Insurance Act (TRIA) and reinsurance recoveries are estimated to be $3.1 billion as of September 30, 2014. We
also have smaller terrorism exposure in Canadian cities and in London.
Our exposure to terrorism risk is mitigated by TRIA in addition to limited private reinsurance protections. TRIA covers terrorist
attacks within the United States or U.S. missions and against certain U.S. carriers or vessels and excludes certain lines of
business as specified by applicable law. In 2015, TRIA covers 85 percent of insured losses above a deductible, decreasing by
one percent each year to 80 percent in 2020. The current estimate of our deductible is about $2.7 billion for 2014.
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.
Mortgage Risk
For Mortgage Guaranty, the potential exposure to loss is due to borrower default on a first-lien residential mortgage; the
primary drivers of this risk are changes in mortgage underwriting standards, home price depreciation, changes in the
unemployment rate, changes in mortgage rates, and mortgagee behavior.
Mortgage Guaranty manages the quality of the loans it insures through use of a proprietary risk quality index. Mortgage
Guaranty uses this index to determine an insurability threshold as well as to manage the risk distribution of its new business.
Along with traditional mortgage underwriting variables, Mortgage Guaranty’s risk-based pricing model uses rating factors such
as geography and the historical quality of a lender’s origination process to establish premium rates.
Reinsurance Recoverable
AIG’s reinsurance recoverable assets are comprised of:
• Paid losses recoverable – balances due from reinsurers for losses and loss adjustment expenses paid by our subsidiaries
and billed, but not yet collected.
• Ceded loss reserves – ultimate ceded reserves for losses and loss adjustment expenses, including reserves for claims
reported but not yet paid and estimates for IBNR.
• Ceded reserves for unearned premiums.
At December 31, 2014, total reinsurance recoverable assets were $22.0 billion. These assets include general reinsurance paid
losses recoverable of $1.5 billion, ceded loss reserves of $15.7 billion including reserves for IBNR, and ceded reserves for
unearned premiums of $3.0 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, 2014 reflects 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