AIG 2012 Annual Report Download - page 184

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• – The potential inadequacy of premium charged for risks underwritten in our portfolios can impact
AIG Property Casualty’s ability to achieve an underwriting profit. We develop pricing based on our estimates of
losses and expenses, but factors such as market pressures and the inherent uncertainty and complexity in
estimating losses may result in premiums that are inadequate to generate underwriting profit.
• – Our business is exposed to various catastrophic events in which multiple losses can
occur and affect multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakes
and other catastrophes, have the potential to adversely affect our operating results. Other risks, such as a
man-made catastrophes or pandemic disease, could also adversely affect our business and operating results to the
extent they are covered by our insurance products.
• – Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsurance
including the unrecoverability of expected payments from reinsurers either due to an inability or unwillingness to
pay, contracts do not respond as we intended, or that actual reinsurance coverage is different than anticipated.
Catastrophe Exposures
To control catastrophe exposure, we use a combination of techniques, including setting key business unit limits
based on an aggregate PML, monitoring and modeling accumulated exposures, and purchasing catastrophe
reinsurance to supplement our other reinsurance protections. The majority of policies exposed to catastrophic events
are one-year contracts allowing us to quickly adjust our exposure to catastrophic events if climate changes or other
events increase the frequency or severity of catastrophes.
We use industry recognized models and other tools to evaluate catastrophic events and assess the probability and
magnitude of such events. We periodically monitor the exposure risks of our worldwide AIG Property Casualty
operations and adjust the models accordingly.
The following is an overview of modeled losses for AIG Property Casualty exposure associated with the more
significant natural perils. The modeled results assume that all reinsurers fulfill their obligations to AIG in accordance
with their terms.
AIG Property Casualty 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 our maximum
exposures to these events. It is highly likely that our losses will vary, perhaps significantly, from these estimates.
The modeled results provided in the table below were based on the Aggregate Exceedance 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 values provided were based on 100-year return period losses, which have a one percent
likelihood of being exceeded in any single year. The A&H data include exposures for United States and Japan
earthquakes. These exposures represent the largest share of A&H exposures to earthquakes. A&H losses were
modeled using April 2010 data. The property exposures were modeled with data as of September 2012. All
reinsurance program structures, domestic and international, reflect the reinsurance programs in place as of
January 1, 2013. Losses include loss adjustment expenses and the net values include reinstatement premiums.
Natural Peril:
Earthquake $ 5,884 $ 3,766 $ 2,448 2.48%
Tropical Cyclone*$ 6,190 $ 3,546 $ 2,305 2.34%
* Includes hurricanes, typhoons and European windstorms.
Gross earthquake and tropical cyclone modeled losses decreased $926 million and $2.3 billion, respectively,
compared to 2011, while net losses decreased $335 million and $1.7 billion, respectively, compared to 2011.
Changes in both gross and net losses are primarily due to underwriting decisions to actively manage catastrophe
exposure in the United States.
Underwriting
Catastrophe Exposure
Reinsurance
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AIG 2012 Form 10-K 167
Net of 2013
At December 31, 2012 Net of 2013 Reinsurance, Percent of
(in millions) Gross Reinsurance After Tax Total Equity
ITEM 7 / ENTERPRISE RISK MANAGEMENT