International Insurance Society Conference Management Strategies in Multi-Year Enterprise Risk Management Remarks Prepared By Joan Lamm-Tennant, PhD Global Chief Economist & Risk Strategist Guy Carpenter, LLC Adjunct Professor Wharton School, University of Pennsylvania

2 Overview  Alternative model design  Relevance of multi year assessment coupled with scenario testing  What problem are we trying to solve by allocating capital? Management Strategies in Multi-Year Enterprise Risk Management

3 Strategy for “measuring” and “financing” risk Model design Asset class proxies Duration/ maturity credit Correlated loss events Frequency and severity distributions Reinsurance default Credit ratings recoveries Reserve adjustments Severity distributions Catastrophe event tables Aggregated losses Operational risk event tables Aggregated losses Earnings Economiccapital

4 Mean Probability of Surplus over 5 Years All Scenarios  If planned results are achieved and no shocks are experienced, the company remains healthy in all scenarios  Growth is the more detrimental situation, magnified by deteriorating results  Subtracting Surplus has a proportional impact on results

5 99% (1 in 100) Probability of Surplus over 5 Years All Scenarios  The 2010 loss of Surplus is relatively high – Greater than 60% loss in even the Base Case  Rapid growth with deteriorating results is the worst-case for the timeframe  Removing $1B creates a 1 in 100 chance of insolvency in 2011

6 What Problem Are We Trying To Solve By Allocating Capital? Financial markets Cost of capital Accept investments, but are we receiving enough return for the risk? Reject investments, but the return compensates well for the risk and would lower the cost of capital

7 Benefits of aligning risk management with financial management Improves operational and financial decision making  Supports profitable growth – Identify each business segment’s contribution to enterprise risk – Riskier business units consume more economic capital (more risk – more capital) – Benchmark performance relative to capital consumed  Risk-adjusted returns  Drives capital efficiencies – Optimizes the deployment of capital  Framework for hedging/reinsurance

8 2% Prob. Net 2% Prob. Gross Aligning risk management with financial management Example of hedging strategy Gross Economic Capital Gross Expectation Income $0 Hedging reduces volatility By giving up some upside and expected profit (cost of hedging) In exchange for downside protection Net Economic Capital Net Expectation Freeing up capital