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ITEM 8 / NOTE 9. REINSURANCE.....................................................................................................................................................................................9. REINSURANCE..............................................................................................................................................................................................In the ordinary course of business, our insurance companies may use both treaty and facultative reinsurance tominimize their net loss exposure to any single catastrophic loss event or to an accumulation of losses from a numberof smaller events or to provide greater diversification of our businesses. In addition, our general insurancesubsidiaries assume reinsurance from other insurance companies. We determine the portion of the incurred but notreported (IBNR) loss that will be recoverable under our reinsurance contracts by reference to the terms of thereinsurance protection purchased. This determination is necessarily based on the estimate of IBNR and accordingly,is subject to the same uncertainties as the estimate of IBNR. Reinsurance assets include the balances due fromreinsurance and insurance companies under the terms of our reinsurance agreements for paid and unpaid lossesand loss expenses, ceded unearned premiums and ceded future policy benefits for life and accident and healthinsurance contracts and benefits paid and unpaid. Amounts related to paid and unpaid losses and benefits and lossexpenses with respect to these reinsurance agreements are substantially collateralized. We remain liable to theextent that our reinsurers do not meet their obligation under the reinsurance contracts, and as such, we regularlyevaluate the financial condition of our reinsurers and monitor concentration of our credit risk. The allowance fordoubtful accounts on reinsurance assets was $338 million and $365 million at December 31, 2012 and 2011,respectively.The following table provides supplemental information for loss and benefit reserves, gross and net of cededreinsurance:2012 2011At December 31, As Net of As Net of(in millions) Reported Reinsurance Reported ReinsuranceLiability for unpaid claims and claims adjustment expense (a) $ (87,991) $ (68,782) $ (91,145) $ (70,825)Future policy benefits for life and accident and health insurancecontracts (36,340) (35,408) (34,317) (33,312)Reserve for unearned premiums (22,537) (18,934) (23,465) (19,553)Reinsurance assets (b) 23,744 – 25,237 –(a) In 2012 and 2011, the Net of Reinsurance amount reflects the cession under the June 17, 2011 transaction with National Indemnity Company(NICO) of $1.6 billion and $1.7 billion, respectively.(b)Represents gross reinsurance assets, excluding allowances and reinsurance recoverable on paid losses.Short-Duration Reinsurance..............................................................................................................................................................................................Short-duration reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain ofthese reinsurance arrangements consist of excess of loss contracts that protect us against losses above stipulatedamounts. Ceded premiums are considered prepaid reinsurance premiums and are recognized as a reduction ofpremiums earned over the contract period in proportion to the protection received. Amounts recoverable fromreinsurers on short-duration contracts are estimated in a manner consistent with the claims liabilities associated withthe reinsurance and presented as a component of Reinsurance assets. Assumed reinsurance premiums are earnedprimarily on a pro-rata basis over the terms of the reinsurance contracts and the portion of premiums relating to theunexpired terms of coverage is included in the reserve for unearned premiums. For both ceded and assumedreinsurance, risk transfer requirements must be met for reinsurance accounting to apply. If risk transfer requirementsare not met, the contract is accounted for as a deposit, resulting in the recognition of cash flows under the contractthrough a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, a reinsurancecontract must include both insurance risk, consisting of both underwriting and timing risk, and a reasonable possibilityof a significant loss for the assuming entity. Similar risk transfer criteria are used to determine whether directly writteninsurance contracts should be accounted for as insurance or as a deposit...................................................................................................................................................................................................................................AIG 2012 Form 10-K 267