AIG 2013 Annual Report Download - page 187

regulators and rating agencies. All limits are reviewed by the FRG and GRC on a periodic basis and revisions, if
applicable, are proposed by our CRO and the CMRO for approval by those committees.
The individual product lines and business units are initially responsible for complying with all market risk limits. The
ERM teams and chief risk officers within each business unit monitor such compliance and coordinate with the CMRO
to provide regular, timely reporting to our senior management and risk committees. Limit breaches are required to be
reported in a timely manner and are documented and escalated in accordance with their level of severity or
materiality. Responsibility for addressing and/or remediating any breach rests with individual or individuals within the
specific unit that experienced the breach, who must report regularly on their progress to the ERM market risk team.
Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived
inability to meet our short-term cash, collateral or other financial obligations.
The failure to appropriately manage liquidity risk can result in reduced operating flexibility, increased costs, and
reputational harm. Because liquidity is critically important, our liquidity governance includes a number of liquidity and
funding policies and monitoring tools to address both AIG-specific, broader industry and market related liquidity
events.
Sources of Liquidity risk can include, but are not limited to:
• financial market movements — significant changes in interest rates can provide incentives for policyholders to
surrender their policies. Changes in markets can impact collateral posting requirements or limit our ability to sell
assets at reasonable values to meet liquidity needs due to unfavorable market conditions, inadequate market
depth, or other investors seeking to sell the same or similar assets;
• potential reputational events or credit downgrade — changes can have an impact on policyholder cancellations and
withdrawals or impact collateral posting requirements; and
• catastrophic events, including natural and man-made disasters, that can increase policyholder claims.
The principal objective of our liquidity risk framework is to protect our liquidity position and identify a diversity of
funding sources available to meet actual and contingent liabilities during both normal and stress periods. This
framework is guided by the liquidity risk tolerance. AIG Parent liquidity risk tolerance levels are established for base
and stress scenarios over a time horizon covering a period greater than one year. We maintain a liquidity buffer
designed to ensure that funding needs are met under varying market conditions. If we project that we will breach the
tolerance, we will assess and determine appropriate liquidity management actions. However, the market conditions in
effect at that time may not permit us to achieve an increase in liquidity sources or a reduction in liquidity
requirements.
We strive to manage our liquidity prudently at a legal entity level across AIG Parent and the operating companies.
Key components of the framework include effective corporate governance and policy, maintaining diversified sources
of liquidity, contingency funding plans, and regular review of liquidity metrics in both normal and stress conditions.
We view each component of the framework together to achieve our goal of sound liquidity risk management.
Operational risk is defined as the risk of loss, or other adverse consequences, resulting from inadequate or failed
internal processes, people, systems, or from external events. Operational risk includes legal risk, but excludes
business and strategy risks.
Operational risk is inherent in each of our business units and corporate functions. Operational risks may lead to the
following impacts: unintended economic losses or gains, reputational harm due to negative publicity, censure from
supervisory agencies, operational and business disruptions, and/or damage to customer relationships.
Our ORM function, which supports our ORC, has the responsibility to provide an aggregate view of our operational
risk profile. Our ORM function oversees the Operational Risk policy and framework, which includes risk identification,
assessment, monitoring and measurement.
Liquidity Risk Management
Operational Risk Management
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AIG 2013 Form 10-K 169
ITEM 7 / ENTERPRISE RISK MANAGEMENT
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