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ITEM 7 / ENTERPRISE RISK MANAGEMENT.....................................................................................................................................................................................We employ various approaches to measure, monitor, and manage risk exposures, including the utilization of a varietyof metrics and early warning indicators. We use a proprietary stress testing framework to measure our quantifiablerisks. This framework is built on our existing ERM stress testing methodology for both insurance and non-insuranceoperations. The framework measures risk over multiple time horizons and under different levels of stress. Wedevelop a range of stress scenarios based both on internal experience and regulatory guidance. The stress tests areintended to ensure that sufficient resources for our regulated subsidiaries and the consolidated company areavailable 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 regulated subsidiaries in relation to its statutory capital needs under stress, risksinherent in our unregulated 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 eachbusiness operation. We use this information to determine the liquidity resources AIG Parent needs to supportinsurance operations, contingent liquidity required from AIG Parent under stressed scenarios for non-insuranceoperations, and capital resources required to maintain consolidated company target capitalization levels.To complement our risk policies and governance framework, we also employ an enterprise-wide vulnerabilityidentification (VID) process. The process is designed to ensure that potential new or emerging risks are brought tothe attention of senior management. On a bi-annual basis, our VID process solicits this information from a broadrange of senior managers across the organization. This process enables vulnerabilities that are not captured by otherrisk management practices to be identified and reported to senior management on a regular basis.We evaluate and manage risk in material topics as shown below. These topics are discussed in more detail in thefollowing pages:• Credit Risk • Liquidity Risk • Insurance Operations Risks• Market Risk • Operational Risk • Global Capital Markets RisksCredit Risk Management..............................................................................................................................................................................................Overview ..............................................................................................................................................................................................Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay theircontractual obligations when they become due. Credit risk may also result from a downgrade of counterparty’s creditratings.We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arisefrom fixed income investments, equity securities, deposits, reverse repurchase agreements and repurchaseagreements, commercial paper, corporate and consumer loans, leases, reinsurance recoverables, counterparty riskarising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties,financial guarantees and letters of credit.Our credit risks are managed at the corporate level within ERM. ERM is assisted by credit functions headed byseasoned credit officers in all the business units, whose primary role is to assure appropriate credit risk managementrelative to our credit risk parameters. Our Chief Credit Officer (CCO) and credit executives are primarily responsiblefor the development and maintenance of credit risk policies and procedures.Responsibilities of the CCO and credit executives include:• developing and implementing our company-wide credit policies;• approving delegated credit authorities to our credit executives;• managing the approval process for requests for credit limits, program limits and credit transactions aboveauthorities or where concentrations of risk may exist or be incurred;• aggregating globally all credit exposure data by counterparty, country, sector and industry and reporting riskconcentrations regularly to and reviewing with senior management;• administering regular portfolio credit reviews of investment, derivative and credit-incurring business units andrecommending corrective actions where required;• conducting credit research on countries, sectors and asset classes where risk concentrations may exist;..................................................................................................................................................................................................................................AIG 2012 Form 10-K 157