GE 2015 Annual Report Download - page 172

FINANCIAL STATEMENTS PRESENTATION & POLICIES
144 GE 2015 FORM 10-K
INVESTMENT CONTRACTS, INSURANCE LIABILITIES AND INSURANCE ANNUITY BENEFITS
Our run-off insurance activities include providing insurance and reinsurance for life and health risks and providing certain annuity
products. Two primary product types are provided: traditional insurance contracts and investment contracts. Insurance contracts are
contracts with significant mortality and/or morbidity risks, while investment contracts are contracts without such risks.
For short-duration insurance contracts, including accident and health insurance, we report premiums as earned income over the terms
of the related agreements, generally on a pro-rata basis. For traditional long-duration insurance contracts, including long-term care,
term, whole life and annuities payable for the life of the annuitant, we report premiums as earned income when due.
Premiums received on investment contracts (including annuities without significant mortality risk) are not reported as revenues but
rather as deposit liabilities. We recognize revenues for charges and assessments on these contracts, mostly for mortality, contract
initiation, administration and surrender. Amounts credited to policyholder accounts are charged to expense.
Liabilities for traditional long-duration insurance contracts represent the present value of such benefits less the present value of future
net premiums based on mortality, morbidity, interest and other assumptions at the time the policies were issued or acquired. Liabilities
for investment contracts equal the account value, that is, the amount that accrues to the benefit of the contract or policyholder including
credited interest and assessments through the financial statement date.
Liabilities for unpaid claims and estimated claim settlement expenses represent our best estimate of the ultimate obligations for
reported and incurred-but-not-reported claims and the related estimated claim settlement expenses. Liabilities for unpaid claims and
estimated claim settlement expenses are continually reviewed and adjusted through current operations.
FAIR VALUE MEASUREMENTS
The following sections describe the valuation methodologies we use to measure financial and non-financial instruments accounted for
at fair value including certain assets within our pension plans and retiree benefit plans.
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or
pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets
for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that
occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1 ± Quoted prices for identical instruments in active markets.
Level 2 ± Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 ± Significant inputs to the valuation model are unobservable.
We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we have risk
management teams that review valuation, including independent price validation for certain instruments. With regard to Level 3
valuations (including instruments valued by third parties), we perform a variety of procedures to assess the reasonableness of the
valuations. Such reviews, which may be performed quarterly, monthly or weekly, include an evaluation of instruments whose fair value
change exceeds predefined thresholds (and/or does not change) and consider the current interest rate, currency and credit
environment, as well as other published data, such as rating agency market reports and current appraisals. These reviews are
performed within each business by the asset and risk managers, pricing committees and valuation committees. A detailed review of
methodologies and assumptions is performed by individuals independent of the business for individual measurements with a fair value
exceeding predefined thresholds. This detailed review may include the use of a third-party valuation firm.
144 GE 2015 FORM 10-K