AIG 2008 Annual Report Download - page 185

Each business unit is responsible for implementing the components of the operational risk management
program to ensure that effective operational risk management practices are utilized throughout AIG. Business units
are currently in the process of enhancing their governance frameworks in order to perform more robust risk
assessments. In addition, business units involved in the disposition process will be engaged in the assessment of the
specific operational risks attendant to a separation from AIG.
Insurance Risk Management
Reinsurance
AIG uses reinsurance programs for its insurance risks as follows:
• Facultative agreements to cover large individual exposures;
• Quota share treaties to cover specific books of business;
• Excess-of-loss treaties to cover large losses;
• Excess or surplus automatic treaties to cover individual life risks in excess of stated per-life retention
limits; and
• Catastrophe treaties to cover specific catastrophes, including earthquake, windstorm and flood.
AIG monitors its exposures to natural catastrophes and takes corrective actions to limit its exposure with
respect to particular geographic areas, companies, or perils. During the fourth quarter of 2008, Lexington reduced
its exposure to natural catastrophes by approximately $900 million through facultative reinsurance placements.
AIG’s Reinsurance Security Department (RSD) conducts periodic detailed assessments of the financial status
and condition of current and potential reinsurers, both foreign and domestic. The RSD monitors both the nature of
the risks ceded to the reinsurers and the aggregation of total reinsurance recoverables ceded to reinsurers. Such
assessments may include, but are not limited to, identifying if a reinsurer is appropriately licensed and has sufficient
financial capacity and evaluating the local economic environment in which a foreign reinsurer operates.
The RSD reviews the nature of the risks ceded to reinsurers and the need for credit risk mitigants. For example,
in AIG’s treaty reinsurance contracts, AIG frequently includes provisions that require a reinsurer to post collateral
when a referenced event occurs. Furthermore, AIG limits its unsecured exposure to reinsurers through the use of
credit triggers which include but are not limited to, insurer financial strength rating downgrades, declines in
statutory surplus below pre-determined levels, decreases in NAIC risk-based capital (RBC) below certain levels, or
setting maximum limits for reinsurance recoverables. In addition, AIG’s CRC reviews all reinsurer exposures and
credit limits and approves most large reinsurer credit limits above pre-set limits that represent actual or potential
credit concentrations. AIG believes that no exposure to a single reinsurer represents an inappropriate concentration
of risk to AIG, nor is AIG’s business substantially dependent upon any single reinsurance contract.
AIG enters into intercompany reinsurance transactions for its General Insurance and Life Insurance &
Retirement Services operations. AIG enters into these transactions as a sound and prudent business practice in order
to maintain underwriting control and spread insurance risk among AIG’s various legal entities and to leverage
economies of scale with external reinsurers. When required for statutory recognition, AIG obtains letters of credit
from third-party financial institutions to collateralize these intercompany transactions. At December 31, 2008,
approximately $5.4 billion of letters of credit were outstanding to cover intercompany reinsurance transactions
among subsidiaries.
Although reinsurance arrangements do not relieve AIG subsidiaries from their direct obligations to insureds, an
efficient and effective reinsurance program substantially mitigates AIG’s exposure to potentially significant losses. AIG
continually evaluates the reinsurance markets and the relative attractiveness of various arrangements for coverage,
including structures such as catastrophe bonds, insurance risk securitizations, “sidecars” and similar vehicles.
AIG purchased U.S. property catastrophe coverage of approximately $1.35 billion and $1.1 billion in 2009 and
2008, respectively, in excess of a per occurrence deductible of $1.5 billion. In addition, AIG purchased over
$640 million in workers’ compensation catastrophe reinsurance that was not purchased in 2008. For Life
Insurance & Retirement Services, AIG’s 2008 catastrophe program covers losses of $250 million in excess of
AIG 2008 Form 10-K 179
American International Group, Inc., and Subsidiaries