AIG 2009 Annual Report Download - page 188

American International Group, Inc., and Subsidiaries
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.
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 insurance company subsidiaries 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, 2009,
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 $4.22 billion and $1.5 billion in 2010 and 2009,
respectively, in excess of a per occurrence deductible of $2.0 billion. In addition, AIG purchased over $320 million in
workers’ compensation catastrophe reinsurance.
AIG 2009 Form 10-K 180