AIG 2015 Annual Report Download - page 213

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Reinsurance Assets
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as
asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss
adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar
judgments and uncertainties as the estimation of gross loss reserves.
We assess the collectability of reinsurance recoverable balances through either detailed reviews of the underlying nature of the
reinsurance balance or comparisons with historical trends of disputes and credit events. We record adjustments to reflect the
results of these assessments through an allowance for uncollectable reinsurance that reduces the carrying amount of
reinsurance assets in the balance sheet. This estimate requires significant judgment for which key considerations include:
• paid and unpaid amounts recoverable;
• whether the balance is in dispute or subject to legal collection;
• whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal or
informal regulatory restriction); and
• whether collateral and collateral arrangements exist.
At December 31, 2015, the allowance for estimated unrecoverable reinsurance was $272 million.
See Note 7 to the Consolidated Financial Statements for additional information on reinsurance.
Future Policy Benefits for Life and Accident and Health Insurance Contracts (Life Insurance Companies)
Long-duration traditional products include whole life insurance, term life insurance, accident and health insurance, long-
term care insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our
single premium immediate annuities and structured settlements.
For long-duration traditional business, a “lock-in” principle applies. The assumptions used to calculate the benefit
liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss
recognition event occurs. The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment
returns. These assumptions are typically consistent with pricing inputs. The assumptions also include margins for adverse
deviation, principally for key assumptions such as mortality and interest rates used to discount cash flows, to reflect uncertainty
given that actual experience might deviate from these assumptions. Establishing margins at contract inception requires
management judgment. The extent of the margin for adverse deviation may vary depending on the uncertainty of the cash
flows, which is affected by the volatility of the business and the extent of our experience with the product.
Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss
recognition testing. To determine whether loss recognition exists, we determine whether a future loss is expected based on
updated current assumptions. If loss recognition exists, we recognize the loss by first reducing DAC through amortization
expense, and, if DAC is depleted, record additional liabilities through a charge to policyholder benefit expense. See Note 8 to
the Consolidated Financial Statements for additional information on loss recognition. Because of the long-term nature of many
of our liabilities subject to the “lock-in” principle, small changes in certain assumptions may cause large changes in the degree
of reserve adequacy. In particular, changes in estimates of future invested asset returns have a large effect on the degree of
reserve deficiency.
Groupings for loss recognition testing are consistent with our manner of acquiring, servicing, and measuring the profitability of
the business and applied by product groupings. We perform separate loss recognition tests for traditional life products, payout
annuities, and long-term care insurance. Once loss recognition has been recorded for a block of business, the old assumption
set is replaced and the assumption set used for the loss recognition would then be subject to the lock-in principle. Key
judgments made in loss recognition testing include the following: