AIG 2014 Annual Report Download - page 184

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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Risk Monitoring and Limits
The risk monitoring responsibilities, owned by the business units, include ensuring compliance with market risk limits and
escalation and remediation of limit breaches. Such activities must be reported to the ERM Market Risk team by the relevant
business unit. This monitoring approach is aligned with our overall risk limits framework.
To control our exposure to market risk, we rely on a three-tiered hierarchy of limits that the CMRO closely monitors and reports
to our CRO, senior management and risk committees.
See Risk Appetite, Limits, Identification, and Measurement – Risk Limits herein for further information on our three-tiered
hierarchy of limits.
Liquidity Risk Management
Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to
meet our short-term cash, collateral or other financial obligations. Failure to appropriately manage liquidity risk can result in
insolvency, reduced operating flexibility, increased costs, reputational harm and regulatory action.
AIG and its legal entities seek to maintain sufficient liquidity during both the normal course of business and under defined
liquidity stress scenarios to ensure that sufficient cash can be generated to meet the obligations as they come due.
AIG Parent liquidity risk tolerance levels are established for base and stress scenarios over a time horizon covering a period of
up to one year. We maintain a liquidity buffer designed to ensure that funding needs are met under varying market conditions.
If we project that we will breach the tolerance, we will assess and determine appropriate liquidity management actions.
However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity sources or a
reduction in liquidity requirements.
Risk Identification
The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they
come due.
• Market/Monetization Risk: Assets cannot be readily transformed into cash due to unfavorable market conditions. Market
liquidity risk may limit our ability to sell assets at reasonable values to meet liquidity needs.
• Cash Flow Mismatch Risk: Discrete and cumulative cash flow mismatches or gaps over short-term horizons under both
expected and adverse business conditions may create future liquidity shortfalls.
• Event Funding Risk: Additional funding is required as the result of a trigger event. Event funding risk comes in many forms
and may result from a downgrade in credit ratings, a market event, or some other event that created a funding obligation
or limits existing funding options.
• Financing Risk: We are unable to raise additional cash on a secured or unsecured basis due to unfavorable market
conditions, AIG-specific issues, or any other issue that impedes access to additional funding.
Governance
Liquidity risk is managed at the corporate level within ERM through the CMRO, who reports directly to the AIG CRO. The AIG
CRO has responsibility for the oversight of the Liquidity Risk Management Framework and delegates day-to-day
implementation of this framework to the AIG Treasurer, with ERM oversight.
The Liquidity Risk Management Framework is guided by the liquidity risk tolerance as set forth in the Board-approved Risk
Appetite Statement. The principal objective of this framework is to establish minimum liquidity requirements that protect our