AIG 2013 Annual Report Download - page 189

Our major categories of insurance risks are:
•Property and Casualty (AIG Property Casualty) — risks covered include property, casualty, fidelity/surety,
accident and health, aviation and management liability. We manage risks in the general insurance segment
through aggregations and limitations of concentrations at multiple levels: policy, line of business, geography,
industry and legal entity.
•Life Insurance & Retirement Services (AIG Life and Retirement) — risks include mortality and morbidity in the
insurance-oriented products and insufficient cash flows to cover contract liabilities in the retirement savings-
oriented products. We manage risks through product design, sound medical underwriting, and external traditional
reinsurance programs.
•Mortgage Guaranty (United Guaranty Corporation) — We manage risks in the mortgage insurance business
through geographic location of the insured properties, the relative economic conditions in the local housing
markets, credit attributes of the borrowers, and the loan amount relative to the value of the respective collateral.
We purchase reinsurance for our insurance operations. Reinsurance facilitates insurance risk management
(retention, volatility, concentrations) and capital planning. We may purchase reinsurance on a pooled basis. Pooling
of our reinsurance risks enables us to purchase reinsurance more efficiently at a consolidated level, manage global
counterparty risk and relationships and manage global catastrophe risks, both for AIG Property Casualty and AIG Life
and Retirement.
A primary goal in managing our AIG Property Casualty operations is to achieve an acceptable return on equity. To
achieve this goal, we must be disciplined in risk selection, premium adequacy, and appropriate terms and conditions
to cover the risk accepted.
We manage insurance risks through risk review and selection processes, exposure limitations, exclusions,
deductibles, self-insured retentions, coverage limits, attachment points, and reinsurance. This management is
supported by sound underwriting practices, pricing procedures and the use of actuarial analysis to help determine
overall adequacy of provisions for insurance. Underwriting practices and pricing procedures incorporate historical
experience, current regulation and judicial decisions as well as proposed or anticipated regulatory changes.
For AIG Property Casualty, insurance risks primarily emanate from the following:
•Unpaid Loss and Loss Expense Reserves — The potential inadequacy of the liabilities we establish for unpaid
losses and loss expenses is a key risk faced by AIG Property Casualty. There is significant uncertainty in factors
that may drive the ultimate development of losses compared to our estimates of losses and loss expenses. We
manage this uncertainty through internal controls and oversight of the loss reserve setting process, as well as
reviews by external experts. See Item 1. Business — A review of Liability for unpaid claims and claims adjustment
expense herein for further details.
•Underwriting — The potential inadequacy of premiums charged for future risk periods on risks underwritten in our
portfolios can impact AIG Property Casualty’s ability to achieve an underwriting profit. We develop pricing based on
our estimates of losses and expenses, but factors such as market pressures and the inherent uncertainty and
complexity in estimating losses may result in premiums that are inadequate to generate underwriting profit.
•Catastrophe Exposure — Our business is exposed to various catastrophic events in which multiple losses can
occur and affect multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakes
and other catastrophes, have the potential to adversely affect our operating results. Other risks, such as
man-made catastrophes or pandemic disease, could also adversely affect our business and operating results to the
extent they are covered by our insurance products. Concentration of exposure in certain industries or geographies
may cause us to suffer disproportionate losses.
•Reinsurance — Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsurance
including the unrecoverability of expected payments from reinsurers either due to an inability or unwillingness to
pay, contracts that do not respond properly to the event, or that actual reinsurance coverage is different than
anticipated.
AIG Property Casualty Key Insurance Risks
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AIG 2013 Form 10-K 171
ITEM 7 / ENTERPRISE RISK MANAGEMENT
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