AIG 2015 Annual Report Download - page 183

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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See Risk Appetite, Limits, Identification, and Measurement – Risk Limits herein for further information on our three-tiered
hierarchy of limits
Non-Life Insurance Companies Key Insurance Risks
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, changes in underlying exposure, current
regulation and judicial decisions as well as proposed or anticipated regulatory changes.
For Non-Life Insurance Companies, insurance risks primarily include the following:
• Liability for Unpaid Losses and Loss Adjustment Expenses - The potential inadequacy of the liabilities we establish for
unpaid losses and loss adjustment expenses is a key risk faced by the Non-Life Insurance Companies. There is significant
uncertainty in factors that may drive the ultimate development of losses compared to our estimates of losses and loss
adjustment 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 Losses and Loss
Adjustment Expenses herein for further information.
• Underwriting - The potential inadequacy of premiums charged for future risk periods on risks underwritten in our portfolios
can impact the Non-Life Insurance Companies’ 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. This may be driven by
adverse economic conditions, unanticipated emergence of risks or increase in frequency of claims, worse than expected
prepayment of policies, investment results, or unexpected or increased costs or expenses.
• 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.
• Single Risk Loss Exposure – Our business is exposed to loss events that have the potential to generate losses from a
single insured client. Events such as fires or explosions can result in loss activity for our clients. The net risk to us is
managed to acceptable limits established by our GRC through a combination of internal underwriting standards and
external reinsurance. Furthermore, single risk loss exposure is managed and monitored on both a segregated and
aggregated basis.
• 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. The inability or
unwillingness to pay is considered credit risk and is monitored through our credit risk management framework.
Natural Catastrophe Risk
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 the traditional reinsurance 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