AIG 2006 Annual Report Download - page 139

American International Group, Inc. and Subsidiaries
The following table presents the year-end, average, high and low VaRs on a diversified basis and of each component of market risk
for each of AIG’s non-trading investments as of December 31, 2006 and 2005. The diversified VaR is usually smaller than the sum of
its components due to correlation effects.
For the Year Ended For the Year Ended
December 31, 2006 December 31, 2005
(in millions) As of December 31 Average High Low As of December 31 Average High Low
Total AIG Non-Trading Market
risk:
Diversified $5,073 $5,209 $5,783 $4,852 $5,186 $5,353 $5,543 $5,186
Interest rate 4,577 4,962 5,765 4,498 4,869 4,963 5,223 4,707
Currency 686 641 707 509 667 622 667 532
Equity 1,873 1,754 1,873 1,650 1,650 2,113 2,358 1,650
General Insurance:
Market risk:
Diversified $1,717 $1,697 $1,776 $1,617 $1,617 $1,585 $1,672 $1,396
Interest rate 1,541 1,635 1,717 1,541 1,717 1,746 1,931 1,563
Currency 212 162 212 119 130 125 139 111
Equity 573 551 573 535 535 651 727 535
Life Insurance & Retirement
Services:
Market risk: Diversified $4,574 $4,672 $5,224 $4,307 $4,307 $4,710 $5,088 $4,307
Interest rate 4,471 4,563 5,060 4,229 4,277 4,425 4,715 4,277
Currency 568 538 592 459 538 515 556 441
Equity 1,293 1,228 1,299 1,133 1,133 1,396 1,559 1,133
Non-Trading
Financial Services:
Market risk:
Diversified $ 125 $ 165 $ 252 $ 125 $ 252 $ 161 $ 252 $ 85
Interest rate 127 166 249 127 249 165 249 85
Currency 11 8 11 7 10 7 10 4
Equity 1121 2221
Asset Management:
Market risk:
Combined $ 64 $ 144 $ 190 $ 64 $ 186 $ 148 $ 186 $ 113
Interest rate 63 145 192 63 189 137 189 101
Currency 3473 4242
Equity 8 9 13 8 13 75 178 13
AIG’s total VaR declined from $5.2 billion at the end of 2005 guidelines for operational risk management. This framework also
to $5.1 billion at the end of 2006, even as the diversified VaR in utilizes the risk management efforts of AIG’s compliance, legal
each of the Insurance segments grew modestly. Two factors and regulatory and internal audit functions. ORM also manages
contributed to the decline in total VaR. A reduction in interest rate compliance with the requirements of the Sarbanes-Oxley Act of
volatility in many currencies moderated AIG’s interest rate risk 2002.
profile, and higher correlations between the long asset duration Each business is responsible for implementing the components
exposure in U.S. fixed income and long liability duration exposures of AIG’s operational risk management program to ensure that
in many emerging markets provided a greater diversification effective operational risk management practices are utilized
benefit during 2006. Lower VaR figures in both the Financial throughout AIG. These components include governance, risk and
Services and Asset Management segments during 2006 were the control self assessment, risk event data analysis, and key risk
result of a combination of closer duration matching and a indicators. The program currently incorporates the following:
reduction of interest rate volatility. (Governance
Strong governance sets the appropriate tone to enable effec-
tive management of the risks inherent in each of AIG’s busi-
Operational Risk Management
nesses, as well as aid in the management of reputational risk.
AIG has established a corporate-level Operational Risk Manage- Each AIG business is responsible for maintaining appropriate
ment Department (ORM) to oversee AIG’s operational risk man- governance over its management of operational risk. This respon-
agement practices. The Director of ORM reports to the CRO. ORM
is responsible for establishing the framework, principles and
Form 10-K 2006 AIG 89