AIG 2009 Annual Report Download - page 193

American International Group, Inc., and Subsidiaries
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 Program Reauthorization Act of 2007 (TRIPRA). During 2009, AIG’s deductible under
TRIPRA was approximately $3.8 billion, with a 15 percent share of certified terrorism losses in excess of the
deductible. As of January 1, 2010, the deductible decreased to approximately $3.3 billion, with a 15 percent share of
certified terrorism losses in excess of the deductible.
Life Insurance & Retirement Services Companies
For AIG’s domestic and foreign life insurance & retirement services companies, 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.
• Interest rate risk due to the long duration of liabilities and the sensitivity to changes in interest rates.
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
Deferred Policy Acquisition Costs for Life Insurance and Retirement Services Companies.
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. AIG’s Domestic Life Insurance and
Domestic Retirement Services companies generally 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. For AIG’s
life insurance & retirement services companies, the reinsurance programs provide risk mitigation per life for
individual and group covers and for catastrophic risk events.
Pandemic Influenza
On June 11, 2009, the World Health Organization (WHO) raised its alert level to 6 and declared that the new
variant influenza H1N1 had reached pandemic alert status. Although AIG continues to monitor the developing facts,
current evidence suggests that a resulting pandemic will be of moderate severity with some chance that it could be
severe. To date, the virus has been mostly mild. The virus is occurring disproportionately in younger people and there
is some evidence that individuals over 60 may have some resistance to the virus due to pre-existing immunity.
Individuals infected generally recover fully after a few days and hospitalization rates have been low. However, it
should be noted that instances have been identified in which the H1N1 virus demonstrated a resistance to Tamiflu, the
preferred treatment for the virus. The emergence of this resistant virus, or the emergence of a more virulent virus
during the Northern Hemisphere flu season could result in a more severe pandemic.
185 AIG 2009 Form 10-K