AIG 2015 Annual Report Download - page 173

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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are required to be reported in a timely manner and are documented and escalated in accordance with their level of severity or
materiality.
Risk Identification and Measurement
One tool we use to inform our Risk Appetite Framework is risk identification. We conduct risk identification through a number
of processes at the business unit and corporate level focused on capturing our material risks and key areas of focus for follow-
up risk management actions. A key initiative is our integrated bottom-up risk identification and assessment process 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 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 capital needs under stress, risks inherent in our
non-insurance company subsidiaries, and risks to AIG consolidated capital. 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 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.