Presentation to the NABE Corporate Planning Roundtable Teleconference

Ardavan MobasheriHead of AIG Global Economics

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Understanding the “Catastrophe” in Catastrophe Risk

Holistic Approach Stress Testing Business/Capital Planning Introducing “Macroeconomic”

Catastrophe

We are all too familiar

with this

and this

and this

But what about this?

and this?

or what about this?

“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

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.

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?

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

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”.

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

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.

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

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