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the world. Our priority is to help ensure adherence to criteria for risk selection by maintaining high levels of

experience and expertise in our underwriting staff. In addition, we employ a business review structure that helps

ensure control of risk quality and conservative use of policy limits and terms and conditions. Underwriting discipline

is at the heart of our operating philosophy.

Qualified actuaries in each region work closely with the underwriting teams to provide additional expertise in the

underwriting process. We use sophisticated catastrophe loss and risk modeling techniques designed to ensureappropriate spread of risk and to analyze correlation of risk across different product lines and territories. This helps

to ensure that losses are contained within our risk tolerance and appetite for individual product lines, businesses,and ACE as a whole. We also purchase reinsurance as a tool to diversify risk and limit the net loss potential of

catastrophes and large or unusually hazardous risks. For additional information refer to Reinsurance Protection,

below, Insurance and Reinsurance Markets, under Item 1A, Catastrophe Management and Natural Catastrophe

Property Reinsurance Program, under Item 7, and Note 5 to the Consolidated Financial Statements, under Item 8.

_____________________________________________________________________________________________Reinsurance Protection

As part of our risk management strategy, we purchase reinsurance protection to mitigate our exposure to losses,

including catastrophes, to an acceptable level. Although reinsurance agreements contractually obligate our

reinsurers to reimburse us for an agreed-upon portion of our gross paid losses, this reinsurance does not dischargeour primary liability to our insureds and, thus, we ultimately remain liable for the gross direct losses. In certain

countries, reinsurer selection is limited by local laws or regulations. In most countries there is more freedom of

choice, and the counterparty is selected based upon its financial strength, claims settlement record, management,

line of business expertise, and its price for assuming the risk transferred. In support of this process, we maintain an

ACE authorized reinsurer list that stratifies these authorized reinsurers by classes of business and acceptable limits.This list is maintained by our Reinsurance Security Committee (RSC), a committee comprising senior management

personnel and a dedicated reinsurer security team. Changes to the list are authorized by the RSC and

recommended to the Chair of the Enterprise Risk Management Board. The reinsurers on the authorized list and

potential new markets are regularly reviewed and the list may be modified following these reviews. In addition to theauthorized list, there is a formal exception process that allows authorized reinsurance buyers to use reinsurers

already on the authorized list for higher limits or different lines of business, for example, or other reinsurers not on

the authorized list if their use is supported by compelling business reasons for a particular reinsurance program.

A separate policy and process exists for captive reinsurance companies. Generally, these reinsurance companiesare established by our clients or our clients have an interest in them. It is generally our policy to obtain collateral

equal to the expected losses that may be ceded to the captive. Where appropriate, exceptions to the collateralrequirement are granted but only after senior management review. Specific collateral guidelines and an exception

process are in place for ACE USA and Insurance Overseas General, both of which have credit management unitsevaluating the captive's credit quality and that of their parent company. The credit management units, working with

actuaries, determine reasonable exposure estimates (collateral calculations), ensure receipt of collateral in an

acceptable form, and coordinate collateral adjustments as and when needed. Currently, financial reviews and

expected loss evaluations are performed annually for active captive accounts and as needed for run-off exposures.In addition to collateral, parental guarantees are often used to enhance the credit quality of the captive.

In general, we seek to place our reinsurance with highly rated companies with which we have a strong trading

relationship. For additional information refer to Catastrophe Management and Natural Catastrophe Property

Reinsurance Program under Item 7, and Note 5 to the Consolidated Financial Statements._____________________________________________________________________________________________

Unpaid Losses and Loss ExpensesWe establish reserves for unpaid losses and loss expenses, which are estimates of future payments on reported

and unreported claims for losses and related expenses, with respect to insured events that have occurred. Thesereserves are recorded in Unpaid losses and loss expenses in the consolidated balance sheets. The process of

establishing loss and loss expense reserves for P&C claims can be complex and is subject to considerable

uncertainty as it requires the use of informed estimates and judgments based on circumstances known at the date

of accrual. These estimates and judgments are based on numerous factors, and may be revised as additional

experience and other data become available and are reviewed, as new or improved methodologies are developed,or as laws change. We have actuarial staff in each of our segments who regularly analyze the levels of loss and loss

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expense reserves, taking into consideration factors that may impact the ultimate settlement value of the unpaid

losses and loss expenses. These analyses could result in future changes in the estimates of loss and loss expensereserves or reinsurance recoverables and any such changes would be reflected in our results of operations in the

period in which the estimates are changed. Losses and loss expenses are charged to income as incurred. The

reserve for unpaid losses and loss expenses represents the estimated ultimate losses and loss expenses less paid

losses and loss expenses, and comprises

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effective reinsurance program. All of these contracts transferred risk and were accounted for as reinsurance. Inaddition, we maintain a few aggregate excess of loss reinsurance contracts that were principally entered into prior to2003, such as the National Indemnity Company (NICO) contracts referred to in the section entitled, Asbestos andEnvironmental (A&E) and Other Run-off Liabilities. Subsequent to the ACE INA acquisition in 1999, we have notpurchased any other retroactive ceded reinsurance contracts.

With respect to assumed reinsurance and insurance contracts, products giving rise to judgments regarding risktransfer were primarily sold by our financial solutions business. Although we have significantly curtailed writingfinancial solutions business, several contracts remain in-force and principally include multi-year retrospectively-ratedcontracts and loss portfolio transfers. Because transfer of insurance risk is generally a primary client motivation forpurchasing these products, relatively few insurance and reinsurance contracts have historically been written forwhich we concluded that risk transfer criteria had not been met. For certain insurance contracts that have beenreported as deposits, the insured desired to self-insure a risk but was required, legally or otherwise, to purchaseinsurance so that claimants would be protected by a licensed insurance company in the event of non-payment fromthe insured.

A significant portion of ACE Tempest Re USA's business is written through quota share treaties (approximately $474million of net premiums earned in 2012, comprising $408 million of first dollar quota share treaties and $66 million ofexcess quota share treaties), a small portion of which are categorized as structured products. Structured quotashare treaties typically contain relatively low aggregate policy limits, a feature that reduces loss coverage in somemanner, and a profit sharing provision. These have been deemed to have met risk transfer requirements.

Reinsurance recoverable

Reinsurance recoverable includes the balances due to us from reinsurance companies for paid and unpaid lossesand loss expenses and is presented net of a provision for uncollectible reinsurance. The provision for uncollectiblereinsurance is determined based upon a review of the financial condition of the reinsurers and other factors. Cededreinsurance contracts do not relieve our primary obligation to our policyholders. Consequently, an exposure existswith respect to reinsurance recoverable to the extent that any reinsurer is unable or unwilling to meet its obligationsor disputes the liabilities assumed under the reinsurance contracts. We determine the reinsurance recoverable onunpaid losses and loss expenses using actuarial estimates as well as a determination of our ability to cede unpaidlosses and loss expenses under existing reinsurance contracts.

The recognition of a reinsurance recoverable asset requires two key judgments. The first judgment involves our

estimation based on the amount of gross reserves and the percentage of that amount which may be ceded toreinsurers. Ceded IBNR, which is a major component of the reinsurance recoverable on unpaid losses and lossexpenses, is generally developed as part of our loss reserving process and, consequently, its estimation is subjectto similar risks and uncertainties as the estimation of gross IBNR (refer to Critical Accounting Estimates - Unpaidlosses and loss expenses). The second judgment involves our estimate of the amount of the reinsurancerecoverable balance that we may ultimately be unable to recover from reinsurers due to insolvency, contractualdispute, or for other reasons. Amounts estimated to be uncollectible are reflected in a provision that reduces thereinsurance recoverable asset and, in turn, shareholders' equity. Changes in the provision for uncollectiblereinsurance are reflected in net income.

Although the obligation of individual reinsurers to pay their reinsurance obligations is based on specific contractprovisions, the collectability of such amounts requires estimation by management. The majority of the balance wehave accrued as recoverable will not be due for collection until sometime in the future, and the duration of our

recoverables may be longer than the duration of our direct exposures. Over this period of time, economic conditionsand operational performance of a particular reinsurer may impact their ability to meet these obligations and whilethey may continue to acknowledge their contractual obligation to do so, they may not have the financial resources orwillingness to fully meet their obligation to us.

To estimate the provision for uncollectible reinsurance, the reinsurance recoverable must first be determined foreach reinsurer. This determination is based on a process rather than an estimate, although an element of judgmentmust be applied. As part of the process, ceded IBNR is allocated to reinsurance contracts because ceded IBNR isnot generally calculated on a contract by contract basis. The allocations are generally based on premiums ceded


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under reinsurance contracts, adjusted for actual loss experience and historical relationships between gross andceded losses. If actual premium and loss experience vary materially from historical experience, the allocation of

reinsurance recoverable by reinsurer will change. While such change is unlikely to result in a large percentage

change in the provision for uncollectible reinsurance, it could, nevertheless, have a material effect on our net income

in the period recorded.

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5 ace ltd., 2012 annual report (form 10-k), at 10, 53

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