AIG 2009 Annual Report Download - page 191

American International Group, Inc., and Subsidiaries
analysis as part of the determination of overall adequacy of provisions for insurance contract liabilities. Underwriting
practices and pricing procedures are based on historical experience, current regulation and judicial decisions as well as
proposed or anticipated regulatory changes. Climate change and related regulatory initiatives may increase both the
frequency and severity of claims or the cost of defending such claims. General Insurance policies are primarily written
for periods of 12 months or less providing General Insurance with the ability to modify underwriting practices and
pricing procedures; limiting the financial impact to such increase in claims. Each line of business and many individual
policyholders may have different exposures to the effects of climate change. While it is not possible to precisely
quantify the impact of a policyholder’s operations on climate change, underwriters routinely evaluate the potential
effect on greenhouse gas emissions when considering policy renewals. Property and casualty insurance policies
typically exclude or significantly limit coverage for pollution and related environmental damage. While these pollution
exclusions have sustained judicial scrutiny and have not been overturned by judicial decisions, there can be no
assurance that future court decisions will uphold prior case law precedents.
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, premiums must be adequate, and terms and conditions
must be 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. The majority of policies exposed
to catastrophic events are one-year contracts allowing AIG to quickly adjust its exposure to catastrophic events in the
event climate changes increase the frequency or severity of such events.
Natural disasters, such as hurricanes, earthquakes and other catastrophes, have the potential to adversely affect
AIG’s operating results. Other risks, such as a pandemic disease, like the Swine Flu Influenza A Virus (H1N1), 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. Changing climate conditions have added to the unpredictability and frequency of natural disasters
(including, but not limited to, hurricanes, tornadoes, floods and fires) increasing the uncertainty as to future trends
and exposures. Following is an overview of modeled losses associated with the more significant natural perils, which
includes exposures for Commercial Insurance and Foreign General. Significant 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 A&H data include exposures for United States, Japan and Taiwan earthquakes.
These exposures represent the largest share of A&H exposures to earthquakes. A&H losses were modeled using April
2008 data. The property exposures for the divisions with AIG’s largest property exposures, Lexington commercial
lines and Private Client Group, were modeled with data as of August 2009, and June 2009 data was used for most
183 AIG 2009 Form 10-K