AIG 2010 Annual Report Download - page 169

American International Group, Inc., and Subsidiaries
covered by AIG are managed through 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.
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. Chartis policies are primarily written for periods of 12 months, providing Chartis
with the ability to modify underwriting practices and pricing procedures; limiting the financial impact of 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 Chartis 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 if climate changes or other events increase the frequency or severity of catastrophes.
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 the extent they are 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 Chartis 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 Chartis U.S. and Chartis International. The modeled results assume that all
reinsurers fulfill their obligations to AIG in accordance with their terms.
Chartis utilizes industry recognized catastrophe models. 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, 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 2009 data. The property exposures were modeled with data as of September 2010. All
reinsurance program structures, domestic and international, reflect the reinsurance programs in place as of
January 1, 2011. The values provided were based on 100-year return period losses, which have a one percent
AIG 2010 Form 10-K 153