AIG 2008 Annual Report Download - page 187

AIG maintains an allowance for estimated unrecoverable reinsurance of $425 million. At December 31, 2008,
AIG had no significant reinsurance recoverables due from any individual reinsurer that was financially troubled
(i.e., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction). In the
current environment of weaker economic conditions and strained financial markets, certain reinsurers are reporting
losses and could be subject to rating downgrades. AIG’s reinsurance recoverable exposures are primarily to the
regulated subsidiaries of such companies which are subject to minimum regulatory capital requirements. The RSD,
in conjunction with CRM, is reviewing these developments, is monitoring compliance with credit triggers that may
require the reinsurer to post collateral, and, as appropriate, will seek to use other means to mitigate any material
risks arising from these developments.
Segment Risk Management
Other than as described above, AIG manages its business risk oversight activities through its business
segments.
Insurance Operations
AIG’s multiple insurance businesses conducted on a global basis expose AIG to a wide variety of risks with
different time horizons. These risks are managed throughout the organization, both centrally and locally, through a
number of procedures, including:
• pre-launch approval of product design, development and distribution;
• underwriting approval processes and authorities;
• exposure limits with ongoing monitoring;
• modeling and reporting of aggregations and limit concentrations at multiple levels (policy, line of business,
product group, country, individual/group, correlation and catastrophic risk events);
• compliance with financial reporting and capital and solvency targets;
• extensive use of reinsurance, both internal and third-party; and
• review and establishment of reserves.
AIG closely manages insurance risk by overseeing and controlling the nature and geographic location of the
risks in each line of business underwritten, the terms and conditions of the underwriting and the premiums charged
for taking on the risk. Concentrations of risk are analyzed using various modeling techniques and include, but are
not limited to, wind, flood, earthquake, terrorism and accident.
AIG has two major categories of insurance risks as follows:
•General Insurance — risks covered include property, casualty, fidelity/surety, management liability and
mortgage insurance. Risks in the general insurance segment are managed through aggregations and
limitations of concentrations at multiple levels: policy, line of business, correlation and catastrophic risk
events.
•Life Insurance & Retirement Services — risks include mortality and morbidity in the insurance-oriented
products and insufficient cash flows to cover contract liabilities in the retirement savings-oriented products.
Risks are managed through product design, sound medical underwriting, external traditional reinsurance
programs and external catastrophe reinsurance programs.
AIG is a major purchaser of reinsurance for its insurance operations. The use of reinsurance facilitates
insurance risk management (retention, volatility, concentrations) and capital planning locally (branch and sub-
sidiary). AIG may purchase reinsurance on a pooling basis. Pooling of AIG’s reinsurance risks enables AIG to
purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and relationships and
manage global catastrophe risks, both for the General Insurance and Life Insurance & Retirement Services
businesses.
AIG 2008 Form 10-K 181
American International Group, Inc., and Subsidiaries