AIG 2015 Annual Report Download - page 182

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 monitored at the business unit level within ERM and overseen by the business unit chief risk officer, who
reports directly to our CRO. 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.
The risk monitoring responsibilities of the business units include ensuring compliance with insurance risk limits and escalation
and remediation of limit breaches. Such activities are reported to management by the relevant business unit for informative
decision-making on a regular basis. This monitoring approach is aligned with our overall risk limits framework.
Risk limits have a consistent framework used across AIG, its business units, and legal entities. This includes escalation
thresholds in cases where measurement is particularly challenging.