AIG 2015 Annual Report Download - page 179

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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AIG Parent liquidity risk tolerance levels allow it to meet its obligations over a twelve month horizon consistent with its risk
appetite. We maintain a target range for required liquidity and minimum coverage ratios designed to ensure that funding needs
are met under varying market conditions. If we project that we will breach these tolerances, 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 creates 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 overseen 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 the day-to-day
implementation of this framework to the AIG Treasurer. Our corporate treasury function manages liquidity risk, subject to ERM
oversight and various control processes.
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
long-term viability and ability to fund our ongoing business, and to meet short-term financial obligations in a timely manner in
both normal and stressed conditions.
Our Liquidity Risk Management Framework includes a number of liquidity and funding policies and monitoring tools to address
AIG-specific, broader industry and market related liquidity events.
Risk Measurement
Comprehensive cash flow projections under normal conditions are the primary component for identifying and measuring
liquidity risk. We produce comprehensive liquidity projections over varying time horizons that incorporate all relevant liquidity
sources and uses and include known and likely cash inflows and outflows. In addition, we perform stress testing by identifying
liquidity stress scenarios and assessing the effects of these scenarios on our cash flow and liquidity.