Understanding Accounting
Menu
Case study · CASE:real-companies/aig-finite-reinsurance

AIG: insurance contract or balance-sheet window dressing?

Use the SEC's 2006 AIG settlement to analyze risk transfer, accounting substance, reserves, and the boundary between transaction form and reporting effect.

Updated Aug 7, 2026 Review due Nov 7, 2026
On this page
  1. Your role and decision
  2. Evidence packet
  3. Required work
  4. Constraints
  5. Evaluation
Decision brief

Your assignment

Role: Transaction-review adviser evaluating whether a proposed reinsurance arrangement transfers meaningful insurance risk

Deliverable: A substance-over-form transaction review identifying cash flows, contractual risk, reporting effects, sensitivity, missing evidence, approvals, and claim posture.

Evidence basis: public records

Visible standard

Evaluation criteria

  • transaction substance map (30%): Maps premiums, claims exposure, fees, side arrangements, repayment economics, timing, and parties before applying a label.
  • risk transfer and sensitivity (25%): Explains which assumptions determine meaningful risk transfer and how reporting changes when those assumptions change.
  • institutional and claim analysis (20%): Uses the settlement accurately and separates company responsibility, auditor work, regulator action, and standard-setting roles.
  • governance and evidence (25%): Specifies independent review, confirmations, side-letter search, model validation, approval, and disclosure evidence.

Your role and decision

Executives describe a proposed arrangement as reinsurance and emphasize its favorable effect on reported reserves. Your job is to decide whether the contract's economics support that accounting description and what governance is required before approval.

Evidence packet

Use the SEC's 2006 release describing its settled action against AIG. A settlement provides an enforcement outcome, but the release is still a summary, not the complete contract file or a substitute for current technical guidance.

Required work

  1. Map parties, premiums, fees, maximum and expected claims, timing, collateral, repayment features, and any side understanding. Mark every missing term.
  2. Explain what evidence would demonstrate meaningful risk transfer and which assumptions drive the conclusion. Show how the statements could differ if the arrangement were financing rather than insurance.
  3. Identify incentives created by reserve, capital, earnings, or transaction targets without treating incentive as proof of intent.
  4. Design independent transaction approval, confirmation, side-letter search, model validation, sensitivity, disclosure, and post-transaction back-testing.

Constraints

Do not apply the historical settlement as current technical guidance. Do not decide substance from the contract title or from cash moving at inception. Distinguish the SEC's resolved claims from your hypothetical review.

Evaluation

A strong submission reconstructs economics before accounting. It identifies which facts could falsify the proposed treatment and which institution is responsible for preparation, audit, oversight, rulemaking, and enforcement.