AIG 2014 Annual Report Download - page 179

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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down to the product-line level. These processes are used as a critical input to enhance and develop our analytics for
measuring and assessing risks across the organization.
We employ various approaches to measure, monitor, and manage risk exposures, including the utilization of a variety of
metrics and early warning indicators. We use a proprietary stress testing framework to measure our quantifiable risks. This
framework is built on our existing ERM stress testing methodology for both insurance and non-insurance operations. The
framework measures risk over multiple time horizons and under different levels of stress. We develop a range of stress
scenarios based both on internal experience and regulatory guidance. The stress tests are intended to ensure that sufficient
resources for our insurance company subsidiaries and the consolidated company are available under both idiosyncratic and
systemic market stress conditions.
The stress testing framework assesses our aggregate exposure to our most significant financial and insurance risks, including
the risk in each of our key insurance company subsidiaries in relation to its statutory capital needs under stress, risks inherent
in our non-insurance company subsidiaries, and risks to AIG consolidated capital. Using our stress testing methodology, we
evaluate the capital and earnings impact of potential stresses in relation to the relevant capital constraint of each business
operation. We use this information to determine the resources needed at the AIG Parent level to support our subsidiaries and
capital resources required to maintain consolidated company target capitalization levels.
We evaluate and manage risk in material topics as shown below. These topics are discussed in more
detail in the following pages:
• Credit Risk Management • Liquidity Risk Management • Insurance Operations Risks
• Market Risk Management • Operational Risk Management • Other Operations Risks
Credit Risk Management
Overview
Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay their contractual
obligations when they become due. Credit risk may also result from a downgrade of a counterparty’s credit ratings or a
widening of its credit spreads.
We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arise from, but
are not limited to fixed income investments, equity securities, deposits, commercial paper investments, reverse repurchase
agreements and repurchase agreements, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk
arising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties, financial
guarantees and letters of credit.
Governance
Our credit risks are overseen and managed by ERM. ERM is assisted by credit functions headed by highly experienced credit
professionals that take and manage our credit risk. Their primary role is to assure appropriate credit risk management in
accordance with our credit policies and procedures relative to our credit risk parameters. Our Chief Credit Officer (CCO) and
credit executives are primarily responsible for the development, implementation and maintenance of a risk management
framework, which includes the following elements related to our credit risks:
• developing and implementing our company-wide credit policies and procedures;
• approving delegated credit authorities to our credit executives;