AIG 2006 Annual Report Download - page 143

American International Group, Inc. and Subsidiaries
Life Insurance & Retirement Services
The specific international RDS events do not necessarily corre-
spond to AIG’s international exposures. As a result, AIG runs its In Life Insurance & Retirement Services, the primary risks are
own simulations where statistical return period losses associated (i) underwriting, which represents the exposure to loss resulting
with the written exposure specific to AIG provide the basis for from the actual policy experience emerging adversely in compari-
monitoring risk. Based on these simulations, the 100-year return son to the assumptions made in the product pricing associated
period for Japanese Earthquake is $296 million gross, and with mortality, morbidity, termination and expenses; and
$120 million net, the 100-year return period for European (ii) investment risk which represents the exposure to loss resulting
Windstorm is $269 million gross, and $80 million net, and the from the cash flows from the invested assets being less than the
100-year return period for Japanese Typhoon is $306 million cash flows required to meet the obligations of the expected policy
gross, and $252 million net. and contract liabilities and the necessary return on investments.
ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY, AIG businesses manage these risks through exposure limitations
PERHAPS MATERIALLY, FROM THE MODELED SCENARIOS, AND and the active management of the asset-liability relationship in
THE OCCURRENCE OF ONE OR MORE SEVERE EVENTS COULD their operations. The emergence of significant adverse experience
HAVE A MATERIAL ADVERSE EFFECT ON AIG’S FINANCIAL CONDI- would require an adjustment to DAC and benefit reserves that
TION, RESULTS OF OPERATIONS AND LIQUIDITY. could have a material adverse effect on AIG’s consolidated results
of operations for a particular period.
Measures Implemented to Control Hurricane and Earthquake
AIG’s Foreign Life Insurance & Retirement Services companies
Catastrophic Risk
generally limit their maximum underwriting exposure on life
Catastrophic risk from the earthquake and hurricane perils is insurance of a single life to approximately $1.7 million of
proactively managed through reinsurance programs, and aggregate coverage. AIG’s Domestic Life Insurance & Retirement Services
accumulation monitoring. Catastrophe reinsurance is purchased by companies limit their maximum underwriting exposure on life
AIG from financially sound reinsurers. Recoveries under this insurance of a single life to $10 million of coverage in certain
program, along with other non-catastrophic reinsurance protec- circumstances by using yearly renewable term reinsurance. In Life
tions, are reflected in the net values provided in the tables above. Insurance & Retirement Services, the reinsurance programs
In addition to catastrophic reinsurance programs, hurricane and provide risk mitigation per policy, per individual life and group
earthquake exposures are controlled by periodically monitoring covers and for catastrophic risk events.
aggregate exposures. The aggregate exposures are calculated by
compiling total liability within AIG defined hurricane and earth- Pandemic Influenza
quake catastrophe risk zones and therefore represent the maxi-
mum that could be lost in any individual zone. These aggregate The potential for a pandemic influenza outbreak has received
accumulations are tracked over time in order to monitor both long much recent attention. While outbreaks of the Avian Flu continue
and short term trends. AIG’s major property writers, Lexington and to occur among poultry or wild birds in a number of countries in
AIG private client group, have also implemented catastrophe- Asia, Europe, including the U.K., and Africa, transmission to
related underwriting procedures and manage their books at an humans has been rare to date. If the virus mutates to a form that
account level. Lexington individually models most accounts prior to can be transmitted from human to human, it has the potential to
binding in order to specifically quantify catastrophic risk for each spread rapidly worldwide. If such an outbreak were to take place,
account. early quarantine and vaccination could be critical to containment.
The contagion and mortality rates of any mutated H5N1 virus
Terrorism that can be transmitted from human to human are highly
speculative. AIG continues to monitor the developing facts. A
Exposure to loss from terrorist attack is controlled by limiting the
significant global outbreak could have a material adverse effect on
aggregate accumulation of workers compensation and property
Life Insurance & Retirement Services operating results and
insurance that is underwritten within defined target locations.
liquidity from increased mortality and morbidity rates. AIG contin-
Modeling is used to provide projections of probable maximum loss
ues to analyze its exposure to this serious threat and has
by target location based upon the actual exposures of AIG
engaged an external risk management firm to model loss
policyholders.
scenarios associated with an outbreak of Avian Flu. Using a 1 in
Terrorism risk is monitored to manage AIG’s exposure. AIG
100-year return period, AIG estimates its after-tax net losses
shares its exposures to terrorism risks under the Terrorism Risk
under its life insurance policies due to Avian Flu at less than
Insurance Act (TRIA). During 2006, AIG’s deductible under TRIA
1 percent of consolidated shareholders’ equity as of Decem-
was approximately $3.3 billion, with a 10 percent share of
ber 31, 2006. This estimate was calculated over a 3-year period,
certified terrorism losses in excess of the deductible. As of
although the majority of the losses would be incurred in the first
January 1, 2007, the deductible increased to approximately
year. The modeled losses calculated were based on 2005 policy
$4.0 billion, with a 15 percent share of certified terrorism losses
data representing approximately 90 percent of AIG’s individual life,
in excess of the deductible. Without an extension by Congress,
group life and credit life books of business, net of reinsurance.
TRIA will sunset at December 31, 2007. Should TRIA not be
This estimate does not include claims that could be made under
renewed, AIG would expect to reassess and modify its underwrit-
other policies, such as business interruption or general liability
ing guidelines and retention levels as appropriate.
Form 10-K 2006 AIG 93