AIG 2007 Annual Report Download - page 174

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
AIG also monitors key international property risks utilizing actively monitors and controls its aggregate accumulated exposure
modeled statistical return period losses. Based on these simula- within the parameters of the protection provided by the TRIA.
tions, the 100-year return period loss for Japanese Earthquake is
$510 million gross, and $170 million net, the 100-year return Life Insurance & Retirement Services
period loss for European Windstorm is $448 million gross, and In Life Insurance & Retirement Services, the primary risks are the
$154 million net, and the 100-year return period loss for following:
Japanese Typhoon is $340 million gross, and $212 million net.
(underwriting, which represents the exposure to loss resulting
The losses provided above do not include Transatlantic and from the actual policy experience emerging adversely in
Ascot. The combined earthquake and tropical cyclone 100-year comparison to the assumptions made in the product pricing
return period modeled losses for Ascot and Transatlantic together associated with mortality, morbidity, termination and expenses;
are estimated to be $1.0 billion, on a gross basis, $749 million, and
net of reinsurance.
(investment risk which represents the exposure to loss resulting
ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY, from the cash flows from the invested assets being less than
PERHAPS MATERIALLY, FROM THE MODELED SCENARIOS, AND the cash flows required to meet the obligations of the expected
THE OCCURRENCE OF ONE OR MORE SEVERE EVENTS COULD policy and contract liabilities and the necessary return on
HAVE A MATERIAL ADVERSE EFFECT ON AIG’S FINANCIAL CONDI- investments.
TION, RESULTS OF OPERATIONS AND LIQUIDITY. AIG businesses manage these risks through exposure limita-
tions and the active management of the asset-liability relationship
Measures Implemented to Control Hurricane and Earthquake in their operations. The emergence of significant adverse experi-
Catastrophic Risk ence would require an adjustment to DAC and benefit reserves
Catastrophic risk from the earthquake and hurricane perils is that could have a material adverse effect on AIG’s consolidated
proactively managed through reinsurance programs, and aggregate results of operations for a particular period.
accumulation monitoring. Catastrophe reinsurance is purchased by AIG’s Foreign Life Insurance & Retirement Services companies
AIG from financially sound reinsurers. Recoveries under this generally limit their maximum underwriting exposure on life
program, along with other non-catastrophic reinsurance protec- insurance of a single life to approximately $1.7 million of
tions, are reflected in the net values provided in the tables above. coverage. AIG’s Domestic Life Insurance & Retirement Services
In addition to catastrophic reinsurance programs, hurricane and companies limit their maximum underwriting exposure on life
earthquake exposures are controlled by periodically monitoring insurance of a single life to $15 million of coverage in certain
aggregate exposures. The aggregate exposures are calculated by circumstances by using yearly renewable term reinsurance. In Life
compiling total liability within AIG defined hurricane and earth- Insurance & Retirement Services, the reinsurance programs
quake catastrophe risk zones and therefore represent the maxi- provide risk mitigation per policy, per individual life for life and
mum that could be lost in any individual zone. These aggregate group covers and for catastrophic risk events.
accumulations are tracked over time in order to monitor both long-
and short-term trends. AIG’s major property writers, Lexington and Pandemic Influenza
AIG Private Client Group, have also implemented catastrophe- The potential for a pandemic influenza outbreak has received
related underwriting procedures and manage their books at an much recent attention. While outbreaks of the Avian Flu continue
account level. Lexington individually models most accounts prior to to occur among poultry or wild birds in a number of countries in
binding in order to specifically quantify catastrophic risk for each Asia, Europe, including the U.K., and Africa, transmission to
account. humans has been rare to date. If the virus mutates to a form that
Terrorism can be transmitted from human to human, it has the potential to
spread rapidly worldwide. If such an outbreak were to take place,
Exposure to loss from terrorist attack is controlled by limiting the early quarantine and vaccination could be critical to containment.
aggregate accumulation of workers compensation and property The contagion and mortality rates of any mutated H5N1 virus
insurance that is underwritten within defined target locations. that can be transmitted from human to human are highly
Modeling is used to provide projections of probable maximum loss speculative. AIG continues to monitor the developing facts. A
by target location based upon the actual exposures of AIG significant global outbreak could have a material adverse effect on
policyholders. Life Insurance & Retirement Services operating results and
Terrorism risk is monitored to manage AIG’s exposure. AIG liquidity from increased mortality and morbidity rates. AIG contin-
shares its exposures to terrorism risks under the Terrorism Risk ues to analyze its exposure to this serious threat and has
Insurance Act, which was recently extended through December 31, engaged an external risk management firm to model loss
2014 by the Terrorism Risk Insurance Program Reauthorization Act scenarios associated with an outbreak of Avian Flu. For a ‘‘mild’’
of 2007 (TRIA). During 2007, AIG’s deductible under TRIA was scenario, AIG estimates its after-tax net losses under its life
approximately $4.0 billion, with a 15 percent share of certified insurance policies due to Avian Flu at approximately 2 percent of
terrorism losses in excess of the deductible. As of January 1, consolidated shareholders’ equity as of December 31, 2007. This
2008, the deductible increased to $4.2 billion, with a 15 percent estimate was calculated over a 3-year period, although the
share of certified terrorism losses in excess of the deductible. AIG
120 AIG 2007 Form 10-K