AIG 2008 Annual Report Download - page 190

ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY, PERHAPS MATERIALLY, FROM THE
MODELED SCENARIOS, AND THE OCCURRENCE OF ONE OR MORE SEVERE EVENTS COULD HAVE
A MATERIAL ADVERSE EFFECT ON AIG’S FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY.
Terrorism
Exposure to loss from terrorist attack is controlled by limiting the aggregate accumulation of workers’
compensation and property insurance that is underwritten within defined target locations. Modeling is used to
provide projections of probable maximum loss by target location based upon the actual exposures of AIG
policyholders.
Terrorism risk is monitored to manage AIG’s exposure. AIG shares its exposures to terrorism risks under the
Terrorism Risk Insurance Act (TRIA). During 2008, AIG’s deductible under TRIA was approximately $4.2 billion,
with a 15 percent share of certified terrorism losses in excess of the deductible. As of January 1, 2009, the deductible
decreased to approximately $3.8 billion, with a 15 percent share of certified terrorism losses in excess of the
deductible.
Life Insurance & Retirement Services
In Life Insurance & Retirement Services, the primary risks are the following:
• Pricing risk, which represents the potential exposure to loss resulting from actual policy experience
emerging adversely in comparison to the assumptions made in product pricing associated with mortality,
morbidity, termination and expenses; and
• Investment risk, which represents the exposure to loss resulting from the cash flows from the invested assets
being less than cash flows required to meet the obligations of the expected policy and contract liabilities and
the necessary return on investments.
AIG businesses manage these risks through product design, exposure limitations and the active management of
the asset-liability relationship in their operations. The emergence of significant adverse experience would require an
adjustment to DAC and benefit reserves that could have a material adverse effect on AIG’s consolidated results of
operations for a particular period. For a further discussion of this risk, see Item 1A. Risk Factors — Adjustments to
Life Insurance & Retirement Services Deferred Policy Acquisition Costs.
AIG’s Foreign Life Insurance & Retirement Services companies generally limit their maximum underwriting
exposure on life insurance of a single life to approximately $5 million of coverage in certain circumstances. AIG’s
Domestic Life Insurance and Domestic Retirement Services companies limit their maximum underwriting
exposure on life insurance of a single life to $15 million of coverage in certain circumstances by using yearly
renewable term reinsurance. In Life Insurance & Retirement Services, the reinsurance programs provide risk
mitigation per life for individual and group covers and for catastrophic risk events.
Pandemic Influenza
The potential for a pandemic influenza outbreak has received much attention. While outbreaks of the Avian Flu
continue to occur among poultry or wild birds in a number of countries in Asia, Europe, including the U.K., and
Africa, transmission to humans has been rare to date. If the virus mutates to a form that can be transmitted from
human to human, it has the potential to spread rapidly worldwide. If such an outbreak were to take place, early
quarantine and vaccination could be critical to containment.
The contagion and mortality rates of any mutated H5N1 virus that can be transmitted from human to human are
highly speculative. AIG continues to monitor the developing facts. A significant global outbreak could have a
material adverse effect on Life Insurance & Retirement Services operating results and liquidity from increased
mortality and morbidity rates.
Utilizing a scenario-based approach, AIG has analyzed its insurance risk associated with this peril. For a severe
event, considered to be a recurrence of the 1918 Pandemic Flu, the analysis indicates AIG could incur a pre-tax loss
of approximately $6.2 billion if this event were to recur. For a mild event, considered to be a recurrence of the 1968
184 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries