AIG 2014 Annual Report Download - page 180

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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• developing methodologies for quantification and assessment of credit risks, including the establishment and maintenance of
our internal risk rating process;
• managing a system of credit and program limits, as well as the approval process for credit transactions, above limit
exposures, and concentrations of risk that may exist or be incurred;
• evaluating, monitoring, reviewing and reporting of credit risks and concentrations regularly with senior management; and
• approving appropriate credit reserves, credit-related other-than-temporary impairments and corresponding methodologies in
all credit portfolios.
We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk
accumulations, whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require
mitigants, such as third-party guarantees, reinsurance or collateral, including commercial bank-issued letters of credit and trust
collateral accounts. We treat these guarantees, reinsurance recoverables, letters of credit and trust collateral accounts as
credit exposure and include them in our risk concentration exposure data.
See Investments – Available for Sale Investments herein for further information on our credit concentrations and credit
exposures.
Market Risk Management
Market risk is defined as the risk of adverse impact due to systemic movements in one or more of the following market risk
drivers: equity and commodity prices, residential and commercial real estate values, interest rates, credit spreads, foreign
exchange, inflation, and their levels of volatility.
We are engaged in a variety of insurance, investment and other financial services businesses that generate market risk,
directly and indirectly. We are exposed to market risks primarily within our insurance and capital markets businesses, on both
the asset and liability side of our balance sheet through on and off-balance sheet exposures. The chief risk officer within each
business is responsible for properly identifying these risks, then ensuring that they are appropriately measured, monitored and
managed in accordance with the risk governance framework established by the Chief Market Risk Officer (CMRO).
The scope and magnitude of our market risk exposures is managed under a robust framework that contains documented risk-
taking authorities, defined risk limits and minimum standards for managing market risk in a manner consistent with our Risk
Appetite Statement. Our market risk management framework focuses on quantifying the financial repercussions of changes in
these broad market observables, distinct from the idiosyncratic risks associated with individual assets that are addressed
through our credit risk management function.
Risk Identification
Market risk focuses on quantifying the financial repercussions of changes in broad, external, predominantly market observable
risks. Financial repercussions can include an adverse impact on results of operations, financial conditions, liquidity and capital.
Each of the following systemic risks is considered a market risk:
Equity prices. We are exposed to changes in equity market prices affecting a variety of instruments. Changes in equity prices
can affect the valuation of publicly-traded equity shares, investments in private equity, hedge funds and mutual funds,
exchange-traded funds (ETFs), and other equity-linked capital market instruments as well as equity-linked insurance products,
including but not limited to index annuities, variable annuities, universal life insurance and variable universal life insurance.
Residential and commercial real estate values. Our investment portfolios are exposed to the risk of changing values in a
variety of residential and commercial real estate investments. Changes in residential/commercial real estate prices can affect
the valuation of residential/commercial mortgages, residential/commercial mortgage-backed securities and other structured
securities with underlying assets that include residential/commercial mortgages: trusts that include residential/commercial real
estate and/or mortgages (REITs), and residential mortgage insurance contracts and commercial real estate investments.