Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright (c) 2006 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. Enterprise Risk Management for Insurers: Standard & Poor’s Views Lotfi Elbarhdadi Director, EMEA Insurance Ratings Standard & Poor’s Douala, March 15, 2010

2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Agenda What is ERM? ERM and Ratings Findings so Far for EMEA Insurers/Reinsurers Efficiency of an ERM Programme in a Financial and Economic Downturn: a « Real World » Test African Insurers in the Context

3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. What is ERM?

4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. The Value of Good Risk Management The purpose of Risk Management is to… 1)Identify and monitor significant risks 2)Set risk limits for each risk to reflect the company’s risk tolerances, competencies and resources 3)Design program to measure all risks consistently with fundamental objectives of the enterprise. 4)Execute the risk management programs to limit losses to within the company’s risk tolerances The product of Good Risk Management is a controlled risk taking environment

5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. What Is the Difference Between Risk Management and ERM? -Across ALL of the significant risks of the Enterprise -Consistently across the risks -Consistently with the fundamental objectives of the enterprise An ERM Program reflects risk capital in: - Strategic decision making -Product design and pricing -Strategic and tactical investment selection -Financial performance evaluation An ERM Program comprehensively applies Risk Management: The product of a fully-realized ERM Program is the optimization of enterprise risk adjusted return

6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. ERM and Ratings

7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Liquidity Earnings Financial Flexibility Management Strategy Enterprise Risk Management Capital Adequacy Market Position ERM Evaluation Investments ERM Evaluation in the Ratings Process

8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. ERM & Ratings ERM Quality Evaluation is based on the risks of the company Importance of ERM in the company rating is based on: -Capacity to absorb losses -Complexity of risks A insurer with tight capital and complex risks -ERM is very important A insurer with excess capital and ordinary risks -ERM is not as important

9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. ERM Quality Classifications Excellent  Advanced capabilities to identify, measure, manage all risk exposures within tolerances  Advanced implementation, development and execution of ERM parameters  Consistently optimizes risk adjusted returns throughout the organization Strong  Clear vision of risk tolerance and overall risk profile  Risk Control exceeds adequate for most major risks  Has robust processes to identify and prepare for emerging risks  Incorporates risk management and decision making to optimize risk adjusted returns Adequate  Has fully functioning control systems in place for all of their major risks  May lack a robust process for identifying and preparing for emerging risks  Performing good classical “silo” based risk management  Not fully developed process to optimize risk adjusted returns Weak  Incomplete control process for one or more major risks  Inconsistent or limited capabilities to identify, measure or manage major risk exposures

10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. ERM Evaluation Components Risk Management Culture Risk Control Processes Emerging Risks Mgmt Risk & Economic Capital Models Strategic Risk Management

11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Risk Management Culture Staffing and organizational structure of risk-management function Governance structure suggests high degree of influence on decision- making by risk-management staff Communication of risk and risk management Clarity, quality and speed of reporting risk positions Clear Risk Tolerances tied to Risk Limits Standard & Poor’s Ratings Criteria: Risk and risk management are considerations in everyday corporate decision-making Risk Management Culture

12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Risk Control Processes Identify Risks Evaluate/Quantity/Measures Risk Monitor Risks Diversity Risks Limit, Avoid Risks and Offset Risks Exploit Retained Risks Transfer Risks New Product Risk and Risk Control Review Primary Components: Objective: To keep risks & losses to within Insurer Risk Tolerance Risk Control Processes

13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Risk Control Applies to:

14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Emerging Risks Management Primary Components: Environmental Scanning – To provide advance signals of potential Crisis developments Process for Anticipating Emerging Risks – Development of Emerging Risk Scenarios Process for Envisioning Significance of Emerging Risks – Stress Testing & Liquidity Risk Analysis Process for Preparing Response to Emerging Risk Solutions – Contingency Planning Execution of Company in Emerging Risk Solutions – Changes to company business and risk management practices Company learning process from Emerging Risk Situation Objective: To anticipate the next big risk Emerging Risks Management

15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Risk and Economic Capital Models Type of Risks Modeled Modeling methodologies used for each risk Modeling of Risk mitigation Risk dependencies and aggregation Risk measures Assumptions Data feeding Model integrity Validation and Documentation Primary Components: Objective: To Provide the information on Insurer Risks to Support other ERM Processes Risk & Economic Capital Models

16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Focus on ECM Risk Management Culture Risk Control Processes Emerging Risks Mgmt Risk & Economic Capital Models Strategic Risk Management ECM as risk measure when optimizing risk/returns ECM to define risk tolerance ECM to define risk limits ECM part of our ERM review

17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Strategic Risk Management Consistent view across all risks Capability to assess trade-offs between different risk types Assessment of risk adjusted returns Capital budgeting Strategic investment allocation Standard & Poor’s Ratings Criteria: Objective: To Optimize Risk-adjusted Returns Strategic Risk Management

18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Strategic Risk Management Practices Impact of Strategic Decisions on risk profile and risk appetite is key part of the strategic decision making process. –Risk Limits that are tied back to risk appetite & risk tolerance Optimize the risk-reward result from a very quantitative approach. –Activities with lower risk adjusted returns are regularly reviewed to either increase returns (or reduce risk) Strategic Asset Allocation – performed not just with regard to risk reward choices among investments but also reflecting the entire risk profile of the insurer, especially the aspects of the insurance liabilities that have a high correlation to capital Risk-adjusted product pricing including market consistent pricing of features that can be replicated by market traded instruments. Capital budgeting that is incorporates information about risk reward choices –Also includes decisions on dividends/stock buy-backs and other capital raising and distributing activities Performance recognition and incentive compensation linked to risk- adjusted financial results

19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Strategic Risk Management Why are we making SRM so important?  There are some companies with Superior Risk Management that we don’t consider having Strong ERM: –Companies with Superior Risk Management (Controls) will have volatility of earnings and incidence of losses within their tolerances –Companies with Strong/Excellent ERM will have low volatility of earnings, low incidence of losses AND will maximize their risk/return relationship!  Strategic Risk Management is the UPSIDE of Risk Management

20. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Findings so Far for EMEA Insurers/Reinsurers

21. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Findings for EMEA Insurers

22. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Conclusion: the Evolution of ERM and the Role of ECM Link with strategy High Low Medium Risk controlBalance sheet protection Risk/return optimization Value creation Industry standard in the last 5-10 years Industry standard in the next 5-10 years Compliance Loss minimization Risk management Risk measurement Strategic integration Return optimization Today Risk models: Economic capital models Other models

23. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Efficiency of an ERM Programme in a Financial and Economic Downturn: a « Real World » Test

24. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Efficiency of an ERM Programme An efficient ERM programme is expected to limit the sensitivity of the insurer’s net assets in severe market conditions The financial and economic downturn witnessed by the global economy since 2007 is a « real world » test to the robustness of ERM programmes Processes to protect all areas of the balance sheet and the profit and loss account were tested or are to be tested in the coming months –Investments –Liquidity –Claims reserving and management –Earning growth

25. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Impact of the Economic and Financial Downturn on Insurers Investments –As institutional investors, insurers have been hit by declining investment values –Most asset classes impacted: equities, fixed income, real estate… –Credit crunch  Most insurers impacted indirectly as investors through widening credit spreads leading to declining value of bonds  Some impacted directly as credit risk protection providers –Mark-to-market losses and investments had a substantial impact on the net assets and earnings in 2008

26. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Impact of the Economic and Financial Downturn on Insurers Liquidity –Owing to the insurers’s business model, liquidity risk is less important for a traditional insurance player compared to banks and credit protection providers  Generally positive cash flows from premium collections  Investment mostly in liquid assets –However asset liability mismatches could lead to liquidity issues  Life insurers could be impacted if policyholders lapses increase as a result of lack of confidence or competition from other forms of saving.  Few players experienced severe lapses leading to liquidity issues  The risk depends also on the « marketability » of investments if the company needs to sell investments to pay claims –Insurers who faced severe liquidity issues are those specialized in or providing credit protections, which is not a core business at traditional insurers

27. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Impact of the Economic and Financial Downturn on Insurers Claims experience –Property/Casualty and Accident and Health claims inflation –In benign market conditions, insurers increasingly retain more risks in their balance sheets –Ability to implement risk adjusted pricing Business implications –Insurable volumes growth tends to decelerate in economic downturns (lower trade exchanges, lower productions) –Corporates generally review their insurance budgets –Savings potential reduces Trade-off between risk management considerations and business implications

28. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. African Insurers in the Context

29. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. African Insurance in the Context of the Downturn Less impacted than the global players –Relatively small scale of the insurance market –Low exposure to European or US investment markets –Lower reliance of economies on the financial institutions sector Global players present in Africa are mostly global reinsurers –Global reinsurers were less negatively impacted by the financial downturn compared to direct insurers No negative rating action so far on Africa-based insurers/reinsurers

30. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Insurance and Risk Management Potentials In general, the local insurance industries lack the scale required to provide capacity and expertise commensurate to the continent’s needs (e.g. providing oil industries’ insurance) –Premiums volumes written still relatively small compared to the continent’s potential (estimated at 0.95% share of the world premiums) Non-continental carriers playing a substantial role –Level of capital held at local companies, insufficient expertise in underwriting –Legacy of public sector monopolies –Still fragmented regulatory supervision approaches

31. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Insurance and Risk Management Potentials More risk retention in the local markets may be increasingly favored by local laws, …but a commensurate improvement in risk management abilities is key factor to build a sound local insurance market

32. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Rated Insurers and ERM Assessments in Africa

33. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Questions & Answers