AIG 2013 Annual Report Download - page 184

These components facilitate the CMRO’s identification, measurement, monitoring, reporting and management of our
market risks.
Our market risk measurement framework was developed with the main objective of communicating the range and
scale of our market risk exposures. At the firm-wide level market risk is measured in a manner that is consistent with
AIG’s Risk Appetite Statement. This is designed to ensure that we remain within our stated risk tolerance levels and
can determine how much additional market risk taking capacity we have available within our framework. At the
market risk level, the framework measures our overall exposure to each systemic market risk change.
Our risk appetite is currently defined in terms of capital and liquidity levels under specified stress tests. In addition,
we continue to develop economic, U.S. GAAP accounting and statutory capital-based risk measures at the market
risk level, business-unit level and firm-wide levels. This process aims to ensure that we have a comprehensive view
of the impact of our market risk exposures.
We use a number of approaches to measure our market risk exposure, including:
Sensitivity analysis. Sensitivity analysis measures the impact from a unit change in a market risk input.
Examples of such sensitivities include a one basis point increase in yield on fixed maturity securities, a one basis
point increase in credit spreads on fixed maturity securities, and a one percent increase in price on equity
securities.
Scenario analysis. Scenario analysis uses historical, hypothetical, or forward-looking macroeconomic scenarios
to assess and report exposures. Examples of hypothetical scenarios include a 100 basis point parallel shift in the
yield curve or a 20 percent immediate and simultaneous decrease in world-wide equity markets.
Stress testing. Stress testing is a special form of scenario analysis in which the scenarios are designed to lead
to a material adverse outcome. Examples of such scenarios include the stock market crash of October 1987 or
the widening of yields or spread of RMBS or CMBS during 2008.
Risk Measurement
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AIG 2013 Form 10-K166
ITEM 7 / ENTERPRISE RISK MANAGEMENT
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