AIG 2015 Annual Report Download - page 176

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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investment management corporate functions, collectively, and in partnership with ERM. The CMRO is primarily responsible for
the development and maintenance of a risk management framework that includes the following key components:
• written policies 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.
These components facilitate the CMRO’s identification, measurement, monitoring, reporting and management of our market
risks.
Risk Measurement
Our market risk measurement framework was developed with the main objective of communicating the range and scale of our
market risk exposures. At the firm-wide level market risk is measured in a manner that is consistent with AIG’s Risk Appetite
Statement. This is designed to ensure that we remain within our stated risk tolerance levels and can determine how much
additional market risk taking capacity is available within our framework. Our risk appetite is currently defined in terms of capital
and liquidity levels. At the market risk level, the framework measures our overall exposure to each systemic market risk change
on an economic basis.
In addition, we continue to use enhanced economic, U.S. GAAP accounting and statutory capital-based risk measures at the
market risk level, business-unit level and firm-wide levels. This process aims to ensure that we have a comprehensive view of
the impact of our market risk exposures.
We use a number of approaches to measure our market risk exposure, including:
Sensitivity analysis. Sensitivity analysis measures the impact from a unit change in a market risk input. Examples of
such sensitivities include a one basis point increase in yield on fixed maturity securities, a one basis point increase in
credit spreads of fixed maturity securities, and a one percent increase in prices of equity securities.
Scenario analysis. Scenario analysis uses historical, hypothetical, or forward-looking macroeconomic scenarios to
assess and report exposures. Examples of hypothetical scenarios include a 100 basis point parallel shift in the yield curve
or a 20 percent immediate and simultaneous decrease in world-wide equity markets. Scenarios may also utilize a
stochastic framework to arrive at a probability distribution of losses.
Stress testing. Stress testing is a special form of scenario analysis in which the scenarios are designed to lead to a
material adverse outcome. Examples of such scenarios include the stock market crash of October 1987 or the widening of
yields or spreads of RMBS or CMBS during 2008.