AIG 2008 Annual Report Download - page 179

• reduction of regulatory capital charges and volatility of earnings by selling certain equity and alternative
investments, including common stock, mutual funds and real estate investments.
However, the continuation of such market turmoil and associated price declines and limited liquidity have
severely constrained AIG’s ability to utilize techniques for mitigating its exposure to credit, market and liquidity
risks.
AIG has been reassessing its risk management control environment and its enterprise risk management
functions, both in its individual businesses as well as at the corporate level, in light of AIG’s current situation. AIG
continues to invest in risk management systems and processes where those investments are consistent with AIG’s
current liquidity, capital and disposition plans.
The major risks to which AIG is exposed include the following:
•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.
AIG is also exposed to reputational risk, which is defined as 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. In addition, reputational risk can be both the cause of or result from the major risks outlined above.
The primary responsibility for risk management lies with the business executives within AIG’s segments. The
business executives are responsible for establishing and maintaining risk management processes in their areas of
activity under the risk management framework established by AIG senior management, and responding to their
specific business needs and issues, including risk concentrations within their respective businesses. The primary
focus of corporate risk management is to provide oversight of these processes in the businesses and to assess the risk
of AIG incurring economic losses from concentrations of risk in the risk categories outlined above.
Corporate Risk Governance
AIG’s major risks are addressed at the corporate level through Enterprise Risk Management (ERM), which is
headed by AIG’s Chief Risk Officer (CRO). ERM reports to the Chief Executive Officer and is responsible for
assisting AIG’s business leaders, executive management and Board of Directors to identify, assess, quantify,
manage and mitigate the risks incurred by AIG.
An important goal of ERM is to ensure that, after appropriate governance, authorities, procedures and policies
have been established, aggregated risks do not result in inappropriate concentrations. Senior management defines
the policies and has established general operating parameters for its global businesses and various oversight
committees to monitor the risks attendant to its businesses. These committees include the Credit Risk Committee
(CRC), Liquidity Risk Committee (LRC), Catastrophic & Emerging Risks Committee (CERC), Complex Struc-
tured Finance Transaction Committee (CSFTC) and Global and Regional Pricing Committees.
AIG 2008 Form 10-K 173
American International Group, Inc., and Subsidiaries