ERM 1 Creating Value through ERM ERM Symposium – April 26, 2004 Session: CS 6A Donald Watson Vice President of Enterprise Risk ACE Group

ERM 2 Agenda Review ERM Role and Structure Identify Key Risk Factors How ERM Adds Value to an Organization

ERM 3 ACE Limited Assets of $49 billion P&C combined ratio: 91.1% Gross premiums written FY 2003: $14.6 billion Net Income FY 2003: $1.4 billion or $4.93 per share Bermuda-based insurance and reinsurance company Approximately 9,000 employees worldwide, located in 50 countries/territories Financial strength ratings of A+ from each of Standard & Poor’s and A.M. Best Company.

ERM 4 ERM Structure Executive Management Enterprise Risk Operating Unit Risk Officers Global Function Coordinators Compile reports Implement Strategies Recommend strategies Communicate guidelines Risk Analysis & Reporting Approve strategies and guidelines to manage risk Make policy and risk tolerance decisions Risk Owners Audit Committee of the Board

ERM 5 Global Functions Actuarial Audit Investments Treasury Legal Claims Disaster Recovery Human Resources Systems Risk Owners A&H Financial Guaranty / Credit Financial Solutions (ART) Liability Marine Political Risk Power / Energy Professional Lines Property Satellite and Aviation Specialty P&C Reinsurance Workers’ Comp Product Lines Insurance Operations – North America – Europe – Latin America – Asia Pacific – Far East Reinsurance Operations Financial Services Operating Segments

ERM 6 Enterprise Risk Management Seeks to: Identify those risk factors that could impair the financial condition of ACE Assemble corporate resources to mitigate or otherwise manage those risk exposures Provide a comprehensive view to the Board through regular reporting on company-wide risks

ERM 7 Risk Factors in an Organization Enterprise Risk Property Catastrophe Reinsurance Recoverables Investment Risk Corporate Credit Risk Casualty Clash Sovereign Risk Premium Growth Risks to Capital Operations Risks Legislative / Regulatory Action Rating / Reputation Decline Risks to Earnings

ERM 8 Operations Risk Sarbanes Reg Key Controls and Processes Internal Audit tests compliance and adequacy of controls Enterprise Risk Manager prioritizes remediation efforts Corporate Governance / Reputation Risk to earnings Risk to shareholder value and capital Ability to recover shareholder value after the event

ERM 9 Credit Risk Management Direct Risk – Invested Assets – CDO’s – Reinsurance Recoverables – Premiums Receivable Indirect Risk – Financial Lines – D&O, E&O, Surety – Captives, Fronting – Trade Credit – Sovereign Risk – Workers Comp

ERM 10 Ceded Reinsurance Guidelines Maximum Limit Operating Cap

ERM 11 Political Risk – PML Guidelines Maximum Limit Operating Cap

ERM 12 Risk Guidelines Operating Cap Maximum Limit

ERM 13 Identify risk concentrations by company, industry sector and geographical location Develop plausible disaster scenarios and all lines of business affected Clash Risk Source: Insurance Information Institute Losses valued at Sept. 2002

ERM 14 Value to an Organization Instill risk awareness across the organization and encourage best practices Provide an objective framework to consistently measure and aggregate risk across operating units Identify significant risks and report on emerging risk issues Facilitate group-wide discussions of industry issues (TRIA)

ERM 15 Develop Risk Guidelines by Operating Unit, Division and Group Product Line Develop Risk Adjusted Return on Capital measurement by product line across the group Tangible Value to an Organization

ERM 16 Return on Equity & Volatility Source: Insurance Information Institute CV = Coefficient of Variation = Std Dev. / Mean P/C Industry CV:.52Comm. Banks CV:.17 All US Industries CV:.16

ERM 17 Creating Value through ERM Donald Watson Vice President of Enterprise Risk ACE Group