AIG 2014 Annual Report Download - page 187

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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Risk Identification
• Non-Life Insurance Companies — risks covered include property, casualty, fidelity/surety, accident and health, aviation,
management liability and mortgage insurance. We manage risks in the general insurance business through aggregations
and limitations of concentrations at multiple levels: policy, line of business, geography, industry and legal entity. We manage
risks in the mortgage insurance business through geographic classification, risk based pricing, premium adequacy
monitoring, and prudent credit policy and underwriting standards.
• Life Insurance Companies — risks include mortality and morbidity in the insurance-oriented products and insufficient cash
flows to cover contract liabilities and longevity risk in the retirement savings-oriented products. We manage risks through
product design, sound medical and non-medical underwriting, and external reinsurance programs.
We purchase reinsurance for our insurance operations. Reinsurance facilitates insurance risk management (retention,
volatility, concentrations) and capital planning. We may purchase reinsurance on a pooled basis. Pooling of our reinsurance
risks enables us to purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and
relationships and manage global catastrophe risks, both for the Non-Life Insurance Companies and the Life Insurance
Companies.
Governance
Insurance risks are managed at the business unit level within ERM through the business unit chief risk officers, who report
directly to the AIG CRO. Oversight is provided by the business unit chief risk officers. The business unit chief risk officers and
their teams work closely with management to manage insurance risks. The framework includes the following key components:
• written policies that define the rules for our insurance risk-taking activities;
• a limit framework focused on key insurance risks that aligns with our Board-approved Risk Appetite Statement; and
• clearly defined authorities for all individuals and committee roles and responsibilities related to insurance risk management.
Risk Measurement, Monitoring and Limits
We use a number of approaches to measure our insurance risk exposure, including:
Stochastic methods. Stochastic methods are used to measure and monitor risks including natural catastrophe, reserve
and premium risk. We develop probabilistic estimates of risk based on our exposures, historical observed volatility or
industry-recognized models in the case of catastrophe risk.
Scenario analysis. Scenario or deterministic analysis is used to measure and monitor risks such as terrorism or to
estimate losses due to man-made catastrophic scenarios.
In addition, we monitor concentrations of exposure through insurance limits aggregated along dimensions such as geography,
industry, or counterparty.
Non-Life Insurance Companies Key Insurance Risks
We manage insurance risks through risk review and selection processes, exposure limitations, exclusions, deductibles, self-
insured retentions, coverage limits, attachment points, and reinsurance. This management is supported by sound underwriting
practices, pricing procedures and the use of actuarial analysis to help determine overall adequacy of provisions for insurance.
Underwriting practices and pricing procedures incorporate historical experience, changes in underlying exposure, current
regulation and judicial decisions as well as proposed or anticipated regulatory changes.