AIG 2015 Annual Report Download - page 187

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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The RCD, in conjunction with the credit executives within ERM, reviews these developments, monitors compliance with credit
triggers that may require the reinsurer to post collateral, and seeks to use other appropriate means to mitigate any material
risks arising from these developments.
See Item 7. MD&A – Critical Accounting Estimates – Reinsurance Assets for further discussion of reinsurance recoverable.
Life Insurance Companies Key Insurance Risks
Our Retirement and Life segments manage risk through product design, experience monitoring, pricing actions, risk limitations,
reinsurance and active monitoring and management of the relationships between assets and liabilities, including hedging.
For our Retirement and Life products offered by the Life Insurance Companies, key insurance risks include the following:
• Mortality risk – represents the risk of loss arising from actual mortality rates being higher than expected mortality rates.
This risk could arise from pandemics or other events, including longer-term societal changes that cause higher than
expected mortality. This risk exists in a number of our product lines, but is most significant for our life insurance products.
• Longevity risk – represents the risk of a change in value of a policy or benefit as a result of actual mortality rates being
lower than the expected mortality rates. This risk could arise from longer-term societal health changes as well as other
factors. This risk exists in a number of our product lines but is most significant for our retirement, institutional and annuity
products.
• Policyholder behavior risk including surrender/lapse risk – represents the risk that actual policyholder behavior differs
from expected behavior in a manner that has an adverse effect on our results of operations. There are many assumptions
made when products are sold, including how long the contracts will persist. Actual experience can vary significantly from
these assumptions. This risk is impacted by a number of factors including changes in market conditions, especially interest
rate and equity market changes, tax law, regulations and policyholder preferences. This risk exists in the majority of our
product lines.
• Interest rate risk - represents the potential for loss due to a change in interest rates. Interest rate risk is measured with
respect to assets, liabilities (both insurance-related and financial) and derivatives. This risk manifests itself when interest
rates move significantly in a short period of time. Rapidly rising interest rates create the potential for increased surrenders.
Interest rate risk can also manifest itself over a longer period of time, such as in a persistent low interest rate environment.
Low long-term interest rates put pressure on investment returns, which may negatively affect sales of interest rate sensitive
products and reduce future profits on certain existing fixed rate products.
• Equity risk – represents the potential for loss due to changes in equity prices. It affects equity-linked insurance products,
including but not limited to index annuities, variable annuities (and associated guaranteed living and death benefits, as
discussed below), universal life insurance and variable universal life insurance. In addition, changes in the volatility of equity
prices can affect the valuation of insurance features that are accounted for as embedded derivatives and the related
economic hedges.
The emergence of significant adverse experience compared to the initial assumptions at policy issuance or updated
assumption would require an adjustment to DAC and benefit reserves, which could have a material adverse effect on our
consolidated results of operations for a particular period. For additional discussion of the impact of actual and expected
experience on DAC and benefit reserves, see Critical Accounting Estimates – Future Policy Benefits for Life and Accident and
Health (Life Insurance Companies) and Critical Accounting Estimates – Guaranteed Benefit Features of Variable Annuity
Products (Life Insurance Companies). For additional discussion of business risks, see Item 1A. Risk Factors — Business and
Operations.
Variable Annuity Risk Management and Hedging Program
Our Retirement Income Solutions and Group Retirement businesses offer variable annuity products with riders that guarantee
a certain level of benefits. Certain guaranteed living benefits, which include GMWB and GMAB, are accounted for as