AIG 2011 Annual Report Download - page 174

AIG’s regulated subsidiaries in relation to its statutory capital needs under stress, as well as the risks inherent in
AIG’s unregulated subsidiaries.
To complement existing processes, in 2011 AIG implemented an enterprise-wide vulnerability identification
process (VID) to facilitate the escalation of potential new or emerging risks to senior management. AIG’s VID
process, on a quarterly basis, solicits this information from a broad range of senior managers across the
organization. Through VID, vulnerabilities not captured by other risk management practices are identified and
elevated to senior management on a regular basis.
AIG’s approach to evaluating and managing risk divides material risk topics as follows:
•Credit risk — the potential loss arising from an obligor’s inability or unwillingness to meet its obligations to
AIG.
•Market risk — the potential loss arising from adverse fluctuations in interest rates, foreign currencies, equity
and commodity prices, and their levels of volatility. Market risk includes credit spread risk, the potential loss
arising from adverse fluctuations in credit spreads of securities or counterparties.
•Operational risk — the potential loss resulting from inadequate or failed internal processes, people, and
systems, or from external events.
•Liquidity risk — the potential inability to meet all payment obligations when they become due.
•General insurance risk — the potential loss resulting from inadequate premiums, insufficient reserves and
catastrophic exposures.
•Life insurance risk — the potential loss resulting from experience deviating from expectations for mortality,
morbidity and termination rates in the insurance-oriented products and insufficient cash flows to cover
contract liabilities in the retirement savings products.
•Reputational risk — the risk of direct loss or loss in future business because of damage to AIG’s reputation.
Damage to the Company’s reputation can arise from a large number of issues, including potential conflicts
of interest, legal and regulatory requirements, ethical issues, and sales and trading practices.
AIG devotes considerable resources to managing its direct and indirect credit exposures, such as those arising
from fixed income investments, equity securities, deposits, reverse repurchase agreements and repurchase
agreements, commercial paper, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk
to derivatives activities, collateral extended to counterparties, cessions of insurance risk to customers, credit risk
assumed through credit derivatives written, financial guarantees and letters of credit. Credit risk is defined as the
risk that AIG’s customers or counterparties are unable or unwilling to repay their contractual obligations when
they become due. Credit risk may also be manifested: (i) through the downgrading of credit ratings of
counterparties whose credit instruments AIG may be holding, or, in some cases, insuring, causing the value of the
assets to decline or insured risks to rise; and (ii) as cross-border risk where a country (sovereign government risk)
or one or more non-sovereign obligors within a country are unable or unwilling to repay an obligation or are
unable or unwilling to provide foreign exchange to service a credit or equity exposure incurred by another AIG
business unit located outside that country.
AIG’s credit risks are managed at the corporate level within ERM, assisted by credit functions headed by
seasoned credit officers in all the business units, whose primary role is to assure appropriate credit risk
management in the context of the firm’s credit risk appetite. AIG’s Chief Credit Officer (CCO) and credit
executives are primarily responsible for the development and maintenance of credit risk policies and procedures.
Detailed responsibilities are as follows:
• develop and implement AIG-wide appropriate credit policies;
• approve delegated credit authorities to AIG credit executives;
160 AIG 2011 Form 10-K
CREDIT RISK MANAGEMENT