AIG 2009 Annual Report Download - page 181

American International Group, Inc., and Subsidiaries
fashion at senior levels of the company. In addition, two steering committees were formed to oversee the wind-down
of the real estate (Global Real Estate Steering Committee) and financial products (AIGFP Steering Committee)
portfolios. At the business level, the asset/liability committees and sub-committees have become increasingly active in
the management of their assets and liabilities and their inherent risks.
AIG continues to explore process improvements and risk mitigation strategies, both at the corporate and business
levels in an effort to minimize the capital and liquidity needs of AIG’s local legal entities. However, limited liquidity in
the markets and a limitation in the number of counterparties willing to transact with AIG continue to constrain AIG’s
ability to utilize techniques for mitigating its exposure to credit, market and liquidity risks.
During 2009, AIG continued to build on its scenario-related stress testing for purposes of its asset-liability and
liquidity management processes. AIG’s de-risking strategies have resulted in the following:
• reduction of certain foreign exchange exposures at the local entity level by selling or hedging investments
denominated in non-local currencies;
• reduction of certain foreign exchange exposures at the AIG level by hedging non-U.S. dollar exposures; and
• 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.
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. See
Item 1A Risk Factors — Reputational Harm.
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
173 AIG 2009 Form 10-K