AIG 2008 Annual Report Download - page 188

General Insurance
In General Insurance, underwriting risks are managed through the application approval process, exposure
limitations as well as through exclusions, coverage limits and reinsurance. The risks covered by AIG are managed
through limits on delegated underwriting authority, the use of sound underwriting practices, pricing procedures and
the use of actuarial analysis as part of the determination of overall adequacy of provisions for insurance contract
liabilities.
A primary goal of AIG in managing its General Insurance operations is to achieve an underwriting profit. To
achieve this goal, AIG must be disciplined in its risk selection, and premiums must be adequate and terms and
conditions appropriate to cover the risk accepted.
Catastrophe Exposures
The nature of AIG’s business exposes it to various catastrophic events in which multiple losses across multiple
lines of business can occur in any calendar year. In order to control this exposure, AIG uses a combination of
techniques, including setting aggregate limits in key business units, monitoring and modeling accumulated
exposures, and purchasing catastrophe reinsurance to supplement its other reinsurance protections.
Natural disasters, such as hurricanes, earthquakes and other catastrophes have the potential to adversely affect
AIG’s operating results. Other risks, such as an outbreak of a pandemic disease, such as the Avian Influenza AVirus
(H5N1), could adversely affect AIG’s business and operating results to an extent that may be only partially offset by
reinsurance programs.
AIG evaluates catastrophic events and assesses the probability of occurrence and magnitude of catastrophic
events through the use of industry recognized models, among other techniques. AIG updates these models by
periodically monitoring the exposure risks of AIG’s worldwide General Insurance operations and adjusting such
models accordingly. Following is an overview of modeled losses associated with the more significant natural perils,
which includes exposures for Commercial Insurance Group, Personal Lines, Foreign General, HSB and 21st Cen-
tury Insurance (21st Century). Transatlantic utilizes a different model, and its results are presented separately below.
Significant Life and accident and health (A&H) exposures have been added to these results as well. The modeled
results assume that all reinsurers fulfill their obligations to AIG in accordance with their terms.
It is important to recognize that there is no standard methodology to project the possible losses from total
property and workers’ compensation exposures. Further, there are no industry standard assumptions to be utilized in
projecting these losses. The use of different methodologies and assumptions could materially change the projected
losses. Therefore, these modeled losses may not be comparable to estimates made by other companies. These
estimates are inherently uncertain and may not reflect AIG’s maximum exposures to these events. It is highly likely
that AIG’s losses will vary, perhaps significantly, from these estimates.
The modeled results provided in the table below were based on the aggregate exceedence probability (AEP)
losses, which represent total property, workers’ compensation, life, and A&H losses that may occur in any single
year from one or more natural events. The Life and A&H data include exposures for United States, Japan and
Taiwan earthquakes. These represent the largest share of Life and A&H exposures to earthquakes. A&H losses were
modeled using April 2008 data, and Life losses were modeled using May 2008 data for Japan and Taiwan and
February 2007 data for the United States. The property exposures for AIG’s largest property exposures, Lexington
commercial lines and Private Client Group, were modeled with data as of September 2008, and June 2008 data was
used for most other divisions. All reinsurance program structures, including both domestic and international
structures, reflect the reinsurance programs in place as of January 31, 2009. The values provided were based on
100-year return period losses, which have a one percent likelihood of being exceeded in any single year. Thus, the
model projects that there is a one percent probability that AIG could incur in any year losses in excess of the
182 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries