1. Solvency Surveillance: What Is Working What Is Not Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

2. Hindsight: Yes, always 20 /20 But, must learn from the past!

3. Pennsylvania Experience PIC Reliance PHICO Legion ?

4. Pennsylvania Experience PIC: Medical malpractice writer Discounted reserves Reserve deficiencies Downgraded Doctor’s did not care Speed Up in Court Decisions (Liquidity!) RBC caught them!

5. Pennsylvania Experience Reliance Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Heavily leveraged by holding company debt

6. Pennsylvania Experience Reliance (continued) Unicover Reserve deficiencies Downgraded Liquidity, liquidity, liquidity

7. Pennsylvania Experience PHICO Medical malpractice writer Rapid expansion into new markets Reserve deficiencies Downgraded Doctors did not care Liquidity not a problem

8. Pennsylvania Experience Legion Multi-line writer Business is rating sensitive Heavily leveraged by reinsurance Downgraded Reserves? Liquidity, liquidity, liquidity

9. Pennsylvania Experience Common Themes: Reserve deficiencies Ratings downgrades Reinsurance Liquidity

10. P&C Industry Asset Distribution for 2001

11. P&C Industry Invested Asset Distribution for 2001

12. Reinsurance Leverage

13. Add rating sensitive business Mix in a downgrade $1,000,000,000 or more in Statutory Deposits $500,000,000 in one Stock Liquidity?

14. Reinsurance Leverage

15. Let’s define two ratios: Premium Leverage = Gross Premium Written / Net Premium Written Reserve Leverage = Gross Loss & LAE Reserves / Net Loss & LAE Reserves

16. Premium Leverage

17. Reserve Leverage

18. Risk Based Capital

23. IRIS Ratio 1: Gross Premium to Policyholders’ Surplus Usual Range < 900%

24. IRIS Ratio 3: Surplus Aid to Policyholders’ Surplus Usual Range < 15% Focus on Ceded Commissions

25. IRIS Ratio 7: Liabilities to Liquid Assets Usual Range < 105% Focus on Net not Gross Leverage

26. Conclusions? Risk Based Capital tends to be Balance Sheet centered Risk Based Capital does not measure reinsurance leverage and liquidity IRIS also tends to be Balance Sheet centered (7 of 11 ratios) IRIS also does not adequately measure reinsurance leverage and liquidity

27. Graph Theory and The Latest Crisis

28. The Actuarial Profession’s Response: Take the initiative to identify risks and recommend solutions Greater diligence in reserve reviews and ASOP’s Move beyond the balance sheet

29. Conclusion: Regulation is at a crossroad We face a challenge and an opportunity We must be proactive and move beyond the balance sheet Must learn from each crisis