AIG 2013 Annual Report Download - page 190

We manage catastrophe exposure with multiple approaches such as setting risk limits based on aggregate Probable
Maximum Loss (PML) modeling, monitoring overall exposures and risk accumulations, and purchasing catastrophe
reinsurance through both traditional reinsurance markets and capital markets in addition to other reinsurance
protections.
We use third-party catastrophe risk models and other tools to evaluate and simulate frequency and severity of
catastrophic events and associated losses to our portfolios of exposures. We apply a proprietary multi-model
approach to account for relative strengths and weaknesses of vendor models, and make adjustments to modeled
losses to account for loss adjustment expenses, model biases, data quality and non-modeled risks.
In addition, we perform post-catastrophe event studies to identify model weaknesses, underwriting gaps and lessons,
and improvement opportunities. Lessons learned from post-catastrophe event studies are incorporated into the
modeling and underwriting process of risk pricing and selection. The majority of policies exposed to catastrophic risks
are one-year contracts which allow us to adjust our underwriting guidelines and exposures accumulation in a
relatively short period.
We recognize that climate change has implications for insurance industry exposure to natural catastrophe risk. With
multiple levels of risk management processes in place, we actively analyze the latest climate science and policy to
anticipate potential changes to our risk profile, pricing models and strategic planning. For example, we continually
consider changes in climate and weather patterns as an integral part of the underwriting process. In addition, we are
committed to providing innovative insurance products and services to help our clients be proactive against the threat
of climate change, including expanding natural disaster resilience, promoting adaptation, and reducing greenhouse
gas emissions. Our internal product development, underwriting, modeling, and sustainability practices will continue to
adapt to and evolve with the developing risk exposures attributed to climate change.
Our natural catastrophe exposure is primarily driven by the U.S. and Japan, though our overall exposure is
diversified across multiple countries. For example, we have exposures to additional perils such as European
windstorms and flood. Within the U.S., we have significant hurricane exposure in Florida, the Gulf of Mexico and the
Northeast U.S. and mid-Atlantic regions. Events impacting the Northeast U.S. and the mid-Atlantic may result in a
higher share of industry losses than other regions primarily due to our relative share of exposure in those regions.
Within the U.S., we have significant earthquake exposure in California and the Pacific Northwest and New Madrid
regions. Earthquakes impacting the Pacific Northwest region may result in a higher share of industry losses than
other regions primarily due to our relative share of exposure in that region.
The estimates below are the Occurrence Exceedance Probability (OEP) losses, which reflect losses that may occur
in any single year due to the defined peril. The 1-in-100 and 1-in-250 PMLs are the probable maximum losses from a
single natural catastrophe event with probability of 1 percent and 0.4 percent, respectively.
The following table presents an overview of modeled losses (OEP) for top perils and countries.
Exposures:
U.S. Hurricane (1-in-100)(a) $ 4,729 $ 2,661 $ 1,730 1.7%
U.S. Earthquake (1-in-250)(b) 7,480 3,599 2,339 2.3
Japanese Wind (1-in-100) 1,293 708 460 0.5
Japanese Earthquake (1-in-250)(c) $ 942 $ 710 $ 462 0.5%
(a) The U.S. hurricane amount includes losses to property from hurricane hazards of wind and storm surge.
(b) U.S. earthquake loss estimates represent exposure to Property, Workers’ Compensation (U.S.) and A&H business lines.
(c) Japan Earthquake represents exposure to property and A&H business lines.
The OEP estimates provided above reflect our in-force portfolios at September 30, 2013, for U.S. exposures, and at
June 30, 2013 for Japan exposures. The catastrophe reinsurance program is as of January 1, 2014.
AIG Property Casualty natural catastrophe modeled losses relative to an industry benchmark over different return
periods are presented in the chart below. AIG Property Casualty natural catastrophe net modeled losses across all
Natural Catastrophe Risk
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AIG 2013 Form 10-K172
ITEM 7 / ENTERPRISE RISK MANAGEMENT
Net of 2014
At December 31, 2013 Net of 2014 Reinsurance, Percent of Total
(in millions) Gross Reinsurance After Tax Shareholder Equity
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