AIG 2011 Annual Report Download - page 186

Terrorism
Exposure to loss from terrorist attack is controlled by limiting the aggregate accumulation of workers’
compensation and property insurance that is underwritten within defined target locations. Modeling is used to
provide projections of PML by target location based upon the actual exposures of AIG policyholders.
Terrorism risk is monitored to manage AIG’s exposure. AIG shares its exposures to terrorism risks under the
Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). During 2011, AIG’s deductible under
TRIPRA was approximately $2.9 billion, with a 15 percent share of certified terrorism losses in excess of the
deductible. As of January 1, 2012, the deductible was approximately $3 billion, with a 15 percent share of certified
terrorism losses in excess of the deductible.
Reinsurance
AIG uses reinsurance programs for its insurance risks as follows:
• facultative agreements to cover large individual exposures;
• quota share treaties to cover specific books of business;
• excess-of-loss treaties to cover large losses;
• excess or surplus automatic treaties to cover individual life risks in excess of stated per-life retention limits;
and
• catastrophe treaties to cover specific catastrophes, including earthquake, windstorm and flood.
AIG monitors its exposures to natural catastrophes and takes corrective actions to limit its exposure with
respect to particular geographic areas, companies, or perils.
The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and
condition of current and potential reinsurers, both foreign and domestic. The RCD monitors both the nature of
the risks ceded to the reinsurers and the aggregation of total reinsurance recoverables ceded to reinsurers. Such
assessments may include, but are not limited to: identifying whether a reinsurer is appropriately licensed; has
sufficient financial capacity and liquidity; and an evaluation of the local economic and financial environment in
which a foreign reinsurer operates.
The RCD reviews the nature of the risks and the need for credit risk mitigants or covenants. For example, in
AIG’s treaty reinsurance contracts, AIG frequently includes provisions that require a reinsurer to post collateral
when a referenced event occurs. Furthermore, AIG limits its unsecured exposure to reinsurers through the use of
credit triggers which include, but are not limited to, insurer financial strength rating downgrades, declines in
statutory surplus below pre-determined levels, decreases in NAIC risk-based capital (RBC) below certain levels, or
setting maximum limits for reinsurance recoverable exposure, which in some cases is the recoverable amount plus
the largest single peril limit for a reinsurer. In addition, AIG’s credit executives within corporate ERM review all
reinsurer exposures and credit limits and approves most large reinsurer credit limits above pre-set limits that
represent actual or potential credit concentrations. AIG believes that no exposure to a single reinsurer represents
an inappropriate concentration of risk to AIG, nor is AIG’s business substantially dependent upon any single
reinsurance contract.
AIG enters into intercompany reinsurance transactions for its Chartis and SunAmerica operations. AIG enters
into these transactions as a sound and prudent business practice in order to maintain underwriting control and
spread insurance risk among AIG’s various insurance company subsidiaries and to take advantage of economies of
scale with external reinsurers. When required for statutory recognition, AIG obtains letters of credit from third-
party financial institutions to collateralize these intercompany transactions. A portion of the approximately
$1.5 billion of letters of credit issued in favor of Chartis companies as at December 31, 2011, secures such
intercompany transactions.
Although reinsurance arrangements do not relieve AIG subsidiaries from their direct obligations to insureds, an
efficient and effective reinsurance program substantially mitigates AIG’s exposure to potentially significant losses.
172 AIG 2011 Form 10-K