AIG 2013 Annual Report Download - page 183

Market risk quantifies the adverse impact on us due to broad, systemic movements in one or more of the following
market risk drivers:
Equity market prices. We are exposed to equity market prices affecting a variety of instruments. These include
direct investments in publicly-traded shares, investments in private equity, hedge funds and mutual funds, exchange-
traded funds and other equity-linked capital market instruments as well as other equity-linked insurance products,
including but not limited to equity-indexed 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. Residential investments include residential
mortgages, residential mortgage-backed securities and other structured securities with underlying assets that include
residential mortgages: trusts that include real estate and/or mortgages (REITs), and mortgage insurance contracts.
Commercial exposures include mortgage loans, commercial mortgage backed securities and other structured
securities with underlying assets that include commercial mortgages: trusts, REITs, and other investments.
Interest rates. Interest rate risk can arise from a mismatch in the interest rate exposure of assets versus liabilities.
Low interest rates mean less investment income and potentially less attractive insurance products. Conversely,
higher interest rates are typically beneficial for the opposite reasons. However, when rates rise quickly, there can be
a temporary asymmetric GAAP accounting effect where the existing securities lose market value, which is reported in
Other comprehensive income, and the offsetting decrease in the value of related liabilities may not be recognized.
Credit spread or risk premium. Credit spreads measure an instrument’s risk premium or yield relative to that of
a comparable duration, default-free instrument. Much like higher interest rates, wider credit spreads mean more
investment income in the long-term. In the short term, quickly rising spreads will cause a loss in the value of existing
securities, which is reported in Other comprehensive income. A precipitous rise in credit spreads may also signal a
fundamental weakness in the credit-worthiness of bond obligors, potentially resulting in default losses.
Foreign currency exchange rates. We are a globally diversified enterprise with significant income, assets and
liabilities denominated in, and significant capital deployed in, a variety of currencies.
Commodity Prices. Changes in the value of commodities can affect the valuation of publicly-traded commodities,
commodity indices and derivatives.
Inflation. Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt
obligations, linked to inflation index returns, derivatives on inflation indices, and insurance contracts where the claims
are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or wage levels in our primary
casualty business.
Market risk is managed at the corporate level within ERM through the CMRO, which reports directly to the AIG CRO.
The CMRO is supported by a dedicated team of professionals within ERM who work in partnership with the senior
management of our finance, treasury and investment management corporate functions. The CMRO is primarily
responsible for the development and maintenance of a risk management framework that includes the following key
components:
• written policies, standards and procedures that define the rules for our market risk-taking activities and provide
clear guidance regarding their execution and management;
• a limit framework that aligns with our Board-approved Risk Appetite Statement;
• independent measurement, monitoring and reporting for line of business, business unit and enterprise-wide market
risks; and
• clearly defined authorities for all individuals and committee roles and responsibilities related to market risk
management.
Risk Identification
Governance
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AIG 2013 Form 10-K 165
ITEM 7 / ENTERPRISE RISK MANAGEMENT
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