AIG 2015 Annual Report Download - page 30

ITEM 1 / BUSINESS
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Our insurance subsidiaries are subject to regulation and supervision by the states and by other jurisdictions in which they do
business. Within the United States, the method of such regulation varies but generally has its source in statutes that delegate
regulatory and supervisory powers to an insurance official. The regulation and supervision relate primarily to the financial
condition of the insurers and their corporate conduct and market conduct activities. This includes approval of policy forms and
rates, the standards of solvency that must be met and maintained, including with respect to risk-based capital, the standards
on transactions between insurance company subsidiaries and their affiliates, including restrictions and limitations on the
amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, the licensing
of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks that may be insured
under a single policy, deposits of securities for the benefit of policyholders, requirements for acceptability of reinsurers, periodic
examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed,
reserves for unearned premiums, losses and other purposes and enterprise risk management and corporate governance
requirements. In general, such regulation is for the protection of policyholders rather than the equity owners of these
companies.
In the U.S., the Risk-Based Capital (RBC) formula is designed to measure the adequacy of an insurer's statutory surplus in
relation to the risks inherent in its business. Virtually every state has adopted, in substantial part, the RBC Model Law
promulgated by the NAIC, which allows states to act upon the results of RBC calculations, and provides for four incremental
levels of regulatory action regarding insurers whose RBC calculations fall below specific thresholds. Those levels of action
range from the requirement to submit a plan describing how an insurer would regain a specified RBC ratio to a mandatory
regulatory takeover of the company. The RBC formula computes a risk-adjusted surplus level by applying discrete factors to
various asset, premium and reserve items. These factors are developed to be risk-sensitive so that higher factors are applied
to items exposed to greater risk. The statutory surplus of each of our U.S. based insurance companies exceeded RBC
minimum required levels as of December 31, 2015.
If any of our insurance entities fell below prescribed levels of statutory surplus, it would be our intention to provide appropriate
capital or other types of support to that entity. For additional information, see Item 7. MD&A — Liquidity and Capital Resources
— Liquidity and Capital Resources of AIG Parent and Subsidiaries — Non-Life Insurance Companies and — Life Insurance
Companies.
The NAIC’s Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) requires insurers to establish additional
statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary
guarantees (ULSGs). NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these
guarantees, including certain ULSGs. See Item 1A – Risk Factors and Note 18 to the Consolidated Financial Statements for
risks and additional information related to these statutory reserving requirements. Additionally, the NAIC has adopted a
Principle-Based Reserving (PBR) approach for life insurance products, which will become operational once adopted in 42 U.S.
jurisdictions accounting for at least 75 percent of U.S. insurance premiums combined. Once it becomes operational, PBR
would replace Regulation XXX and Guidelines AXXX with respect to new life insurance business issued. Two of our
domiciliary states (Missouri and Texas) have adopted regulations necessary to implement PBR once the required number of
jurisdictions and insurance premiums threshold have been satisfied.
The NAIC has undertaken the Solvency Modernization Initiative (SMI) which focuses on a review of insurance solvency
regulations throughout the U.S. financial regulatory system and is expected to lead to a set of long-term solvency
modernization goals. SMI is broad in scope, but the NAIC has stated that its focus will include the U.S. solvency framework,
group solvency issues, capital requirements, international accounting and regulatory standards, reinsurance and corporate
governance.
The NAIC has adopted revisions to the NAIC Insurance Holding Company System Regulatory Act (the Model Holding
Company Act) and the Insurance Holding Company System Model Regulation. The revised models include provisions
authorizing NAIC commissioners to act as global group-wide supervisors for internationally active insurance groups, and the
requirement that the ultimate controlling person of a U.S. insurer file an annual enterprise risk report with the lead state of the
insurer identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its
insurance holding company system as a whole. To date, a majority of the states where AIG has domestic insurers have
enacted a version of the revised Model Holding Company Act, including the enterprise risk reporting requirement.