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ITEM 7 / ENTERPRISE RISK MANAGEMENT.....................................................................................................................................................................................• exposure limits with ongoing monitoring;• modeling and reporting of aggregations and limit concentrations at multiple levels (policy, line of business, productgroup, country, individual/group, correlation and catastrophic risk events);• compliance with financial reporting and capital and solvency targets;• use of reinsurance, both internal and third-party; and• review and establishment of reserves.We closely manage insurance risk by monitoring and controlling the nature and geographic location of the risks ineach line of business underwritten, the terms and conditions of the underwriting and the premiums we charge fortaking on the risk. We analyze concentrations of risk using various modeling techniques, including both probabilitydistributions (stochastic) and single-point estimates (deterministic) approaches.Our major categories of insurance risks are:• Property and Casualty (AIG Property Casualty) – risks covered include property, casualty, fidelity/surety,accident and health, aviation and management liability. We manage risks in the general insurance segmentthrough aggregations and limitations of concentrations at multiple levels: policy, line of business, geography,industry and legal entity.• Domestic Life Insurance & Retirement Service (AIG Life and Retirement) – risks include mortality andmorbidity in the insurance-oriented products and insufficient cash flows to cover contract liabilities in the retirementsavings-oriented products. We manage risks through product design, sound medical underwriting, externaltraditional reinsurance programs and external catastrophe reinsurance programs.• Mortgage Guaranty (United Guaranty Corporation) – We manage risks in the mortgage insurance businessthrough geographic location of the insured properties, the relative economic conditions in the local housingmarkets, credit attributes of the borrowers, and the loan amount relative to the value of the respective collateral.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. Poolingof our reinsurance risks enables us to purchase reinsurance more efficiently at a consolidated level, manage globalcounterparty risk and relationships and manage global catastrophe risks, both for AIG Property Casualty and AIG Lifeand Retirement.AIG ..............................................................................................................................................................................................Property Casualty Key Insurance RisksA primary goal in managing our AIG Property Casualty operations is to achieve an acceptable return on equity. Toachieve this goal, we must be disciplined in risk selection, premium adequacy, and appropriate terms and conditionsto cover the risk accepted.We manage insurance risks through risk review and selection processes, exposure limitations, exclusions,deductibles, self-insured retentions, coverage limits and reinsurance. This management is supported by soundunderwriting practices, pricing procedures and the use of actuarial analysis to help determine overall adequacy ofprovisions for insurance. Underwriting practices and pricing procedures incorporate historical experience, currentregulation and judicial decisions as well as proposed or anticipated regulatory changes.For AIG Property Casualty, insurance risks primarily emanate from the following:• Unpaid Loss and Loss Expense Reserves – The potential inadequacy of the liabilities we establish for unpaidlosses and loss expenses is a key risk faced by AIG Property Casualty. There is significant uncertainty in factorsthat may drive the ultimate development of losses compared to the estimates of losses and loss expenses. Wemanage this uncertainty through internal controls and oversight of the loss reserve setting process, as well asreviews by external experts. See Item 1 Business – A review of Liability for unpaid claims and claims adjustmentexpense herein for further details...................................................................................................................................................................................................................................166 AIG 2012 Form 10-K