American International Group, Inc. Minimizing Credit Risk

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Table of Contents

Introduction
Overview
Problem Definition
Recommendations
Conclusion
References

Introduction

The business environment is characterised by various risks that may handicap an organization. Organizations extending credit to its clients expose themselves to credit risks. Such clients (especially the first timers) may not make the necessary repayments and this would count as losses to the company.

Therefore, organizations need to have information about the ability of their clients to make repayments. AIG saw the opportunity to provide insurance services by covering for credit risks, identity theft and other risks (Oz, 2008).

Overview

The American International Group, Inc. (AIG) saw an opportunity to make business by providing companies with the opportunity to minimize credit risks. The company understood the risks involved in extending credit to clients. Clients who use the company’s services for the first time are strangers to the company.

Therefore, these companies may not be certain that the clients would make repayments after seeking service. Therefore, AIG decided to provide insurance and financial services to organizations that were seeking to reduce the risks involved in doing business.

With its website, one can receive real-time financial information about companies seeking to purchase commodities and services from the organization’s subscribers. The company’s clients only need to log in and follow up on potential customers. They may monitor their purchase power and repayment capabilities in order to make wise decisions while doing business with them.

This way, the clients covered by AIG can be aware of the financial standing of various corporations around the world. Clients of AIG also get additional services in that they can assess risk variables as they relate to specific countries. Each country has specific and unique risk factors.

One example includes the constitutional changes that may alter trade laws. This may affect the sustainability of certain companies. Another factor includes political instability, which may greatly affect the financial standing of businesses.

AIG’s system was initially made in-house. However, it later proved expensive and time-consuming since various changes had to be made as soon as algorithms changed. Programmers spent a lot of time making these changes in order to adapt to the different countries since each country had different parameters.

One of the managers of the company, Paul Narayanan, saw the need for a solution to this issue in order to help reduce the hassle involved while making these important changes. Therefore, the company resorted to purchasing a financial risk DSS from an external firm. The DSS was referred to as Blaze Advisor. This system proved more effective and did not require the intervention of programmers.

Problem Definition

The business environment is very unpredictable for companies. Companies that need to extend credit to their customers may not be certain of whether the customers would make repayments. This is especially riskiest if the clients involved have not done business with the company in the past.

Not having previous experience with a client is risky since the company would not be guaranteed of payment. This, in turn, exposes the company to unforeseen losses and possibility of being bankrupt.

Other large corporations that attempt to make their own risk assessment using experts and other external consultants do this using many of their resources. Outsourcing such procedures to consultants may be very costly to the company. This explain why medium-sized corporations find it difficult assessing the risk involved in growing their business at a global range.

Therefore, a solution for reducing exposure to credit risk, identity theft, internet security threats and various other risks is required by such companies.

In addition to this, the cost of assessing risk should be reasonable enough for the business since businesses are there to make profits and make business sustainable. Organizations usually like to know their customers and understand their ability to pay for the commodities and services provided.

Recommendations

Fabozzi (2010) argued that companies and investors face various types of risks. One of the major risks mentioned was credit risk. One of the forms of these risks was whereby the clients failed to oblige with respect to the making repayments in time. Therefore, financial companies relied on the clients’ credit ratings while gauging their potentials.

According to Fabozzi, rating agencies (such as AIG) were responsible for providing credit default risk. These are the risks that are faced when investing in a particular venture of debt security. Other forms of this risk, as proposed by Fabozzi, include the downgrade risks and credit spread risks.

Fabozzi suggested that organizations should assess the creditworthiness of borrowers (clients). This could be done by assessing the quality of the borrowers and their ability to make the necessary repayments. One way of doing this is by analyzing the client’s financial statement.

AIG did exactly this by providing information about the payment history of the company involved. Shimko (2008) also explained the importance of using credit insurance and other forms of financial protection agencies to receive financial risk mitigation.

Conclusion

In an attempt to minimize credit risks, companies have resorted to insurance companies such as AIG. They seek to understand their clients more so that they may be able to venture in the global arena as they grow their businesses.

AIG provides information about the customer’s payment histories and financial standing so that its client may make wise business decisions. AIG’s services are helpful and have been endorsed by the U.S. Chambers of Commerce (Oz, 2008).

References

Fabozzi, F. (2010). Minimizing credit risk. QFINANCE, 1-5.

Oz, E. (2008). Management Information Systems (6th ed.). New York: Course Technology Ptr.

Shimko, D. (2008). Managing counterparty credit risk. QFINANCE, 1-5.

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