Catastrophe Risk reduction Measures

1. Catastrophe Risk reduction Measures Presentation to the NABE Corporate Planning Roundtable Teleconference Ardavan Mobasheri Head of AIG Global Economics

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3. Summary • Understanding the “Catastrophe” in Catastrophe Risk • Holistic Approach • Stress Testing • Business/Capital Planning • Introducing “Macroeconomic” Catastrophe

4. Understanding the “Catastrophe” in Catastrophe Risk We are all too familiar with this and this and this

5. Understanding the “Catastrophe” in Catastrophe Risk But what about this? and this? or what about this?

6. Holistic Approach • “Enterprise” wide approach needed to assess the “true” corporate risks of a catastrophic event. Enterprise wide risks include but are not limited to: • Operating Risks • Market Risks • Credit Risks • Legal Risks • Capital/Liquidity Risk • Human Resource Risk

7. Holistic Approach • Traditionally the approach centered around the catastrophic event being a natural and/or man made event at the operating level or impacting corporate operations and analyzing the impacts on other segments. • However a complete holistic approach would include analysis of catastrophic events that can and do impact non-operations/revenue generating divisions and assessing the impact on the enterprise as a whole.

8. Stress Testing • Catastrophic events happen rarely but cost significantly. Understanding the ultimate enterprise wide impact is as important as understanding the frequency of the event. • Stress testing to the extreme would be necessary to understand ultimate exposure. But how extreme? A 1 in a 10 year event? A 1 in a 100 year event? A 1 in a 1000 year event? An end of the world event?

9. Business/Capital Planning • Strategic business planning and capital management must take into consideration: • Periodic stress test results • Multiple event results • The influence of non operating events • Capital constraints: • Liquidity risks • Regulatory risks

10. Introducing “Macroeconomic” Catastrophe • Business leaders not only need to ask: “Is our business sensitive to the macroeconomy?” But also: “How sensitive is the macroeconomy to our business/sector?” • And more importantly doing something about it when they do get the answer • But what do you do? What is the “So what?” of knowing the sensitivity of a business to the macroeconomy? • Answer: Understand and quantify the risks to the corporation of stressful economic outcomes or of “Macroeconomic Catastrophes”.

11. Macroeconomic Catastrophe • Recessions are almost as American as Apple Pie • The amount of economic damage done during a the recessionary phase is disproportionately large relative to the expansionary phase • Significant number of jobs are lost, many never to return • Significant number of corporations large and small do not survive a recession

12. Macroeconomic Catastrophe • Yet of all the macroeconomic variables and/or events that professional economists could forecast including growth, inflation, unemployment, … they rarely if ever predict an economic downturn despite the fact that it is the most important of them all.

13. The Great Misses of the Great Recession of ’07-’09 S.& P. Cuts Rating for Mortgage Bonds October 2007 Bank (of America) Agrees to Buy Troubled Loan Giant (Countrywide) for $4 Billion January 11, 2008 Bear Stearns to Sell Itself to JPMorgan for $2 a Share March 16, 2008 In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans September 7, 2008 Lehman Files for Bankruptcy; Merrill Is Sold September 14, 2008 Fed to Offer Bridge Loan to A.I.G. and Take Control of Firm September 16, 2008

14. Macroeconomic Catastrophe-Analysis • Multiple scenario generation based on realistic macroeconomic assumptions • Upside and downside scenarios need not and should not be symmetrical • Liberal use of backward (historical) and forward looking perspectives • Stress testing at the enterprise level based on the above assumptions • Used in combination or independent of other catastrophic scenarios • Regular and periodic updating of scenarios and analysis/testing • Consideration for geopolitically driven/influenced scenarios