Enterprise Risk Management Case Study: Improved Modeling Ernst & Young LLP Enterprise Risk Management Case Study: Improved Modeling Ernst & Young LLP

Enterprise Risk Management for Health Entities Slide 2 External Capital Expanding the Dialogue – Linkages BalanceSheet SurplusSolvencyInvestmentViability Benefits Expenses Taxes Premium Contribution to Surplus Investment Income Service Improvement

Enterprise Risk Management for Health Entities Slide 3 Premium Investment Income Benefits Capital Costs Admin Expenses Taxes Linking the Pieces SurplusRegulatoryInvestmentViability Budgeting Contribution to Surplus Capital Budget Capital Budget Strategic Plan Strategic Plan Capital Allocation Capital Allocation RBC “ + ” RAROCRAROC

Enterprise Risk Management for Health Entities Slide 4 Stochastic Health Models Rate Increases TrendTrend Renewal Distribution

Enterprise Risk Management for Health Entities Slide 5 Stochastic Health Models TrendTrend Provider Contracting Benefit Buy-Down

Enterprise Risk Management for Health Entities Slide 6 Process as Important as the Model Forces logical thought processForces logical thought process Broaden the types of assumptionsBroaden the types of assumptions –Financial –Business –Range of assumptions – beyond point assumptions OutcomesOutcomes –Range of potential results –Ranges show sensitivity to specific assumptions/variables Management dialogManagement dialog Forces logical thought processForces logical thought process Broaden the types of assumptionsBroaden the types of assumptions –Financial –Business –Range of assumptions – beyond point assumptions OutcomesOutcomes –Range of potential results –Ranges show sensitivity to specific assumptions/variables Management dialogManagement dialog

Enterprise Risk Management for Health Entities Slide 7 AssumptionsAssumptions Revenue Premium Increases Target Loss Ratios Renewal Distribution Investment Return Revenue Premium Increases Target Loss Ratios Renewal Distribution Investment Return Claims Current Loss Ratio Trend Provider Contracting Claims Liabilities Claims Current Loss Ratio Trend Provider Contracting Claims Liabilities Exposure New Business Lapses Exposure New Business Lapses Expenses New Business Administration Capital Expenditure Expenses New Business Administration Capital Expenditure Net Income Targeted Surplus Aggregate Outcomes Net Income Targeted Surplus Aggregate Outcomes c c c c c c c c c c c c c c c c c c

Enterprise Risk Management for Health Entities Slide 8 Assumptions and Linkages Revenue Premium Increases Target Loss Ratios Renewal Distribution Investment Return Revenue Premium Increases Target Loss Ratios Renewal Distribution Investment Return Claims Current Loss Ratio Trend Provider Contracting Claims Liabilities Claims Current Loss Ratio Trend Provider Contracting Claims Liabilities Exposure New Business Lapses Exposure New Business Lapses Expenses New Business Administration Capital Expenditure Expenses New Business Administration Capital Expenditure Net Income Targeted Surplus Aggregate Outcomes Net Income Targeted Surplus Aggregate Outcomes Interactions Renewals: Shock Lapse Antiselection Expense Recovery Benefit Buy-Down Providers: New Business Lapses Trend Interactions Renewals: Shock Lapse Antiselection Expense Recovery Benefit Buy-Down Providers: New Business Lapses Trend

Enterprise Risk Management for Health Entities Slide 9 Stochastic Health Models Ending Surplus Assumption probabilities Monte Carlo Simulation

Enterprise Risk Management for Health Entities Slide 10 Easy Step to Risk-Adjusted Returns Itemization of risk assumptionsItemization of risk assumptions –Process provides structure for addressing rate factors –Construction of assumptions includes variability –Easily accommodates capital expenditures Assumptions are typically LOB-specificAssumptions are typically LOB-specific –Many have LOB-specific risks and outcomes –Include items like likelihood of obtaining needed rate increases Range of outcomesRange of outcomes –Variability is linked to risk spread –Surplus targets can be set based on risk/reward outcomes on risk/reward outcomes Itemization of risk assumptionsItemization of risk assumptions –Process provides structure for addressing rate factors –Construction of assumptions includes variability –Easily accommodates capital expenditures Assumptions are typically LOB-specificAssumptions are typically LOB-specific –Many have LOB-specific risks and outcomes –Include items like likelihood of obtaining needed rate increases Range of outcomesRange of outcomes –Variability is linked to risk spread –Surplus targets can be set based on risk/reward outcomes on risk/reward outcomes Probability of loss Earnings Uniform risk (e.g., 99.75%)