1. ERM Roundtable Where Are We? CAS Spring Meeting May 8, 2006 John Kollar, ISO Dave Ingram, S&P Steve Lowe, Tillinghast Don Mango, Guy Carpenter

2. CAS ERM Definition Process  Assess  Control  Exploit  Finance  Monitor risk Holistic treatment of risk Senior management function Upside and downside

3. ERM “Drivers” Improved corporate governance Consolidation Financial services convergence Globalization  Intl. Assoc. of Insurance Supervisors (IAIS)  Basel II/Solvency II  Intl. Accounting Standards Board (IASB) Risk management evolution

4. Underwriting Risk Model (URM) Experience “Missionary work”  Why change? Senior management commitment  Priority item  Clear objectives  Adequate resources  Start small

5. Underwriting Risk Model (URM) Experience Availability & quality of data  Less is easier Coordination of functions Risk integration ERM  A lot of potential  Long way to go

6. Value Statement Pricing Risk Analysis Risk Parameters Economic Capital Risk Allocation Reinsurance Combined Ratios Interest Rate Risk URM

7. ERM

8. ERM Evaluations Insurance Sector David Ingram Director Enterprise Risk Management Financial Services Ratings CAS Spring Meeting May 2005

9. 9 6/2/2015 S&P’s Evaluation of ERM Risk Management Culture Strategic Risk Management Risk Control Processes Extreme Events Management Risk & Economic Capital Models

10. 10 6/2/2015

11. 11 6/2/2015 ERM within the S&P Rating Profile Stronger ERM Investments Competitive Position Management & Corporate Strategy Operating Performance Capitalization Liquidity Financial Flexibility

12. 12 6/2/2015 Financial Flexibility Investments Liquidity Capitalization Operating Performance Management & Corporate Strategy Competitive Position ERM within the S&P Rating Profile Stronger ERM

13. 13 6/2/2015 Financial Flexibility Investments Liquidity Capitalization Operating Performance Management & Corporate Strategy Competitive Position ERM within the S&P Rating Profile Stronger ERM

14. 1.ERM is a new organizing concept –For looking at a collection of issues we have always covered 2.ERM will apply to all insurers globally 3.ERM evaluation will be tailored to the risks of each insurer 4.ERM will recognize all the risk management of the insurer even if the company does not do “ERM”!!! 5.ERM will be reflected in insurer ratings Importance of ERM will vary among companies – just as every other factor does 6.ERM will be a new section in the ratings report 7.ERM is not a new Capital Model ERM is not primarily concerned with looking at an insurer’s Economic Capital Model ERM – Key Points

15. ERM

16. © 2006 Towers Perrin ERM Value Framework How much capital do I need? What type of capital do I need? Risk and Capital Management Value Management Capital Costs Return on Risk Risk Structure Capital Structure Capital Adequacy Portfolio of Capital Resources Portfolio of Enterprise Risks Economic Capital Value Creation Maximize value by relating a firm’s decisions on the risks it takes to the decisions on the capital it uses to finance its business Reconciles actuarial and corporate finance perspectives

17. © 2006 Towers Perrin Value creation can come from optimizing the structure of the risk portfolio Capacity-based pricing of catastrophe exposure Marginal return on marginal capital Asset allocation strategy Is risk minimized by matching bond maturities to the expected cash flows of Workers Compensation claims? Is risk minimized by matching the assets by currency to liabilities by currency?

18. © 2006 Towers Perrin Value creation can come from optimizing the capital structure of the firm Reinsurance optimization

19. ERM

20. ERM in Reinsurance Industry Hold-to-maturity, levered portfolio of long- dated, illiquid, OTC derivatives on untraded underlyings Less transparency than primaries (one layer removed) More volatility (we take the tails) Global platforms, Diversified offerings  Complex organizations Significant model and parameter risk

21. ERM in Reinsurance Industry Munich Re, Swiss Re, Allianz, Zurich, Hartford have large risk organizations with significant actuarial leadership –But they probably need large risk organizations! “Franchise” of a reinsurer = non-public information purchased @ UW results, stored in minable format, used to build proprietary forecast models –Appalling data quality and no data transfer standards Compare with banking and lending –See www.fpml.comwww.fpml.com

22. Threats to Reinsurance Industry Business: –Mega cat ($100B) –Concentration of risk (~mercury at the top of the food chain) Structural: –Underwriter incentive comp plans –Ease of entry, undifferentiated product –Optimism and overconfidence (Morton Lane: the perfume of the premium overwhelms the stink of the risk)

23. ERM

24. Where is the CAS Today? Centennial Goal ERM Symposium Risk Management Section New VP position ERM Vision ERM Institute International (ERM-II)

25. Where Should the CAS be Going?