1. © 2010 The Actuarial Profession  www.actuaries.org.uk Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only GIRO conference and exhibition 2010 Joseph Lo, Aspen Insurance UK Limited Reverse Stress Testing 12-15 October 2010

2. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only Workshop Objectives By the end of the workshop, … … we shall be able to discuss current issues … … surrounding reverse stress testing … … in the context of a general insurance company. 1 © 2010 The Actuarial Profession  www.actuaries.org.uk

3. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only Contents Case Study Context Regulator’s views RST v1.0 RST v2.0 Capital Model Open Discussion 2 © 2010 The Actuarial Profession  www.actuaries.org.uk

4. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only Context: Aspen Bermuda domiciled Specialty Insurer and Reinsurer London Market (a UK company and Syndicate 4711) Bermudan company and US companies Branches Listed on the NYSE Common equity, hybrids and debt Insurance classes of business include: Property, Casualty, Marine and Aviation, Financial and Professional Lines 3 © 2010 The Actuarial Profession  www.actuaries.org.uk

5. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only Regulator’s views FSA’s Policy Statement PS09/20 Complements stress and scenario testing (SST) Risk management tool Assess vulnerability of business model –Market losing confidence in the firm –Scenarios most likely to cause failure of business model Decisions regarding risk mitigations / triggers for future actions Qualitative & quantitative 4 © 2010 The Actuarial Profession  www.actuaries.org.uk

6. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v1.0 Background Early 2009 Subprime Crisis / Credit Crunch / Financial Meltdown FSA’s CP 08/24 Internal stochastic model 5 © 2010 The Actuarial Profession  www.actuaries.org.uk

7. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v1.0 Analysis Steps Ruled out events that are less likely than the “most likely” ones Considered causes of actual illiquidity in a reverse manner Considered feared illiquidity such as inability to renew banking facilities Capital considerations – from BCAR’s perspective Assuming loss of confidence from a P&L event and unable to raise capital Used internal model to consider drivers of these P&L events 6 © 2010 The Actuarial Profession  www.actuaries.org.uk

8. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v1.0 Outcomes Example outcomes Some drivers were deemed important to control: –Catastrophe risk with retrocession placement –Clash risk with a company-wide assessment of clash potential between classes Some were seen as unlikely, and no further action was recommended: –Actual illiquidity without a P&L event 7 © 2010 The Actuarial Profession  www.actuaries.org.uk

9. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v1.0 Some lessons Granularity of internal model Framework for testing how risk sources interact Although the framework is biased towards the downward paths Framework for communicating risk sources Giving a sense of cause and effect Group level exercise 8 © 2010 The Actuarial Profession  www.actuaries.org.uk

10. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v2.0 Background 2010 Enhanced Stress and Scenario Testing FSA PS 09/20 More intensive Solvency 2 work Internal working party – chaired by UK CRO, together with underwriters, actuaries, cat modellers, risk managers, a financial modeller; entity CROs Analysis performed in v1.0 9 © 2010 The Actuarial Profession  www.actuaries.org.uk

11. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v2.0 Stress and Scenario Testing SST is a main tool 40+ scenarios –Insurance risk (clash, reserve deteriorations, catastrophes) –Market risk (adverse economic scenarios) –Operational risk –Credit risk (failure of reinsurers or brokers) –Group risk (failure of individual companies within Aspen) Support role of the internal model Various severities and probabilities Documentation of narratives, discussions and assumptions 10 © 2010 The Actuarial Profession  www.actuaries.org.uk

12. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v2.0 Broadening the Definition of Failure Failure is broader than Regulatory Insolvency Loss of confidence –Investors, rating agencies, policyholders Actual lack of liquidity Large share price falls A failure can happen much earlier than “destruction” 11 © 2010 The Actuarial Profession  www.actuaries.org.uk VaR 99.5 Failure can happen here

13. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v2.0 Chain of Events Adverse Consequences “Unfortunate” Coincidences Most likely 12 © 2010 The Actuarial Profession  www.actuaries.org.uk

14. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v2.0 Example following major catastrophe event 13 © 2010 The Actuarial Profession  www.actuaries.org.uk Three large Windstorms Large market loss Model underestimating results 1 in 250 AEP Posting Collaterals Trigger of net worth covenants re banking facility Illiquidity Forced asset sale Major reinsurers default Company specific issue(s) Inability to raise capital Inability to pay claims on time … Loss of credit rating … Other possible unfortunate coincidences: Adverse forex General 1 in 20 non cat P&L or Loss of investor confidence

15. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only RST v2.0 Another Potential RST Candidate Downgrade of Major Sovereign Fiscal consolidation credibility compromised Market loses confidence in sovereign Collapse of values of sovereign’s bonds held by company Feared illiquidity of the company Possible high levels of insurance losses from financial lines As much about thought process and qualitative input as quantitative assumptions 14 © 2010 The Actuarial Profession  www.actuaries.org.uk

16. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only Appendix Linkages with Internal Capital Model 15 © 2010 The Actuarial Profession  www.actuaries.org.uk SST / RST Capital Model Use opportunities: Quantification: probabilities and severities – especially with modelled P&L events E.g. catastrophe losses, reserve deteriorations, investment losses Validation opportunities: E.g. Do we see implied economic scenarios in the ESG? E.g. Are unmodelled clash events adequately represented by the copulas?

17. Colour palette for PowerPoint presentations Actuarial Bright Green R148 G166 B31 Actuarial Slate R32 G44 B52 * Secondary Olive Green R120 G162 B47 Secondary colour palette Primary colour palette Secondary Bottle Green R0 G147 B127 Secondary Turquoise R0 G138 B176 Secondary Aqua Blue R26 G160 B170 Secondary Pastel Green R126 G205 B195 Secondary Light Purple R123 G149 B174* Secondary Purple R97 G107 B156 Secondary Ecru R186 G163 B171 Secondary Yellow R215 G176 B18 Secondary Orange R213 G135 B43 Secondary Red R238 G52 B36 Secondary Rubine Red R226 G1 B119 *This colour reference is for screen presentations only Open Discussion Possible Topics What other issues do you see? Concepts of business failures “Most likely” scenarios Quantification difficulties Implementation challenges Links with Solvency 2 Non London Market companies 16 © 2010 The Actuarial Profession  www.actuaries.org.uk