AIG 2010 Annual Report Download - page 162

American International Group, Inc., and Subsidiaries
The stress testing framework allows AIG to aggregate exposures comprehensively across the organization and
takes into consideration statutory and rating agency capital and legal entity fungibility constraints. Its enhanced
stress testing process also allowed AIG to develop a parental liquidity framework that is tailored to business-unit
specific risks and embedded in day-to-day risk management. In 2011, AIG plans to roll out an organization-wide
vulnerability identification process to facilitate the escalation of potential new or emerging risks to management by
employees.
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 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.
Credit Risk Management
AIG devotes considerable resources to managing its direct and indirect credit exposures, such as those arising
from fixed income investments, deposits, corporate and consumer loans, leases, reinsurance recoverables,
counterparty risk in derivatives activities, cessions of insurance risk to reinsurers and customers, credit risk
assumed through credit derivatives written, financial guarantees and letters of credit. Credit risk is defined as the
risk that AIG’s customers or counterparties are unable or unwilling to repay their contractual obligations when
they become due. Credit risk may also be manifested: (i) through the downgrading of credit ratings of
counterparties whose credit instruments AIG may be holding, or, in some cases, insuring, causing the value of the
assets to decline or insured risks to rise; and (ii) as cross-border risk where a country (sovereign government risk)
or one or more non-sovereign obligors within a country are unable or unwilling to repay an obligation or are
unable or unwilling to provide foreign exchange to service a credit or equity exposure incurred by another AIG
business unit located outside that country.
AIG’s credit risks are managed at the corporate level by the AIG Credit Risk Management (CRM) department
whose primary role is to support and supplement the work of the businesses and the CRC. CRM is headed by
AIG’s Chief Credit Officer (CCO), who reports to AIG’s CRO. AIG’s CCO is primarily responsible for the
development and maintenance of credit risk policies and procedures approved by the CRC. In discharging this
function CRM has the following responsibilities:
• approve delegated credit authorities to CRM credit executives and business unit credit officers;
• manage the approval process for all requests for credit limits, program limits and credit transactions above
delegated authorities;
146 AIG 2010 Form 10-K