1. 1 Roundtable discussions re: EPIC Philippine Insurers & Reinsurers Association Wednesday 22 nd & Thursday 23 rd January 2014

2. 2 2 Introduction ► NMG was appointed by the ADB to provide technical assistance in structuring of Earthquake Protection Insurance Company (‘EPIC’)  Business plan model development and calibration  Insurance cover structures and premium rating “Structuring a Public-Private Earthquake Insurance Entity in the Philippines for Middle Class residential properties and Small to Medium Enterprises”

3. 3 3 Different Types of Capital Types of Capital for insurance companies Regulatory Capital What level of risk can society accept? What happens to the company if its capital falls below this level? Purpose of Capital in insurance companies ► Meet policyholder’s obligations when premiums have proved insufficient ► Confidence in a company ► Meet the regulator’s requirements Management/ Economic Capital What is the Risk Appetite of the Company’s Management? Rating Agency Capital What is the external perspective of the riskiness of the company?

4. 4 4 Introduction – Approach ► The Philippines introduced RBC to all non-life insurance companies in 2006 ► Still one of the lowest capital requirements within the region ► Understood that there are plans underway by the Insurance Commission to strengthen the RBC rules and improve capitalisation of companies ► Increasingly more onerous requirements being imposed in other jurisdictions Approach to determining the capital requirements for EPIC based on the A M Best approach to security rating

5. 5 5 Methodology – The A M Best approach ► A M Best determine insurance company ratings based on the level B-CAR ► B-CAR represents an integrated view of an insurance company’s underwriting, financial and asset leverage to calculate the capital requirements to support the financial risks of the company ► Where, Adjusted Surplus = Net Assets Available – Net PML ► And, Net Required Capital = BCAR = Adjusted Surplus Net Required Capital X 100 Fixed Interest Risk Charge 2 + Equities Risk Charge 2 + Interest Rate Risk Charge 2 + (50%*Credit Risk Charge 2 ) + (50%*Credit Risk Charge + Claim Reserves Risk Charge) 2 +NWP Risk Charge 2 + Off Balance Sheet Items

6. 6 6 Methodology – The A M Best approach ► Risk Charges are applied to the relevant asset and liability items according to NMG’s understanding of the A M Best rating methodology ► The target B-CAR has been set as 200% in our modelling BCAR Hurdle Rate AAA 200% AA175% A145% BBB115% BB90% B70% CCC50% C40% Source: A M Best Methodology – Understanding BCAR for Property/Casualty Insurers published 25 March 2013

7. 7 7 The Business Plan Model - Introduction ► MS Excel based financial projection model over a 5-year projection period ► Flexible model that has the functionality to vary input parameters Exposure Assumptions Average Property Size Mix of Domestic / Commercial business Concentration by city Business Plan Assumptions Exchange RateNumber of policies Inflation RatePayment pattern Attachment of XOL layerExpense assumptions Limit of XOL LayerMix of investments Reinsurance Combined RatioDividend Pay-out Premium RateStarting capital Commission RateTax rate Annual loss amount Avg. return and duration of investments

8. 8 8 The Business Plan Model – Overview ► INPUT: Requires the user to input data parameters ► MODELLING: -Insurance Liabilities: Projects the claim and premium liability of the EQ policies on a gross and net basis -Expenses: Projects the expenses required to run EPIC over the 5-year projection period ► FINANCIAL STATEMENTS: Computes the relevant information in relation to the Balance Sheet, Cashflow and Profit & Loss accounts ► RESULTS: Contains B-CAR and other high-level statistics

9. 9 9 ► Approach – the model: -Illustrates the risks of the insurance company -Derives future capital requirements over specified timeframes and specified levels of confidence ► EQ business is capital intensive, in the event of a major earthquake, EPIC needs to have sufficient capital available to ensure the sustainability of the Company ► The business plan will be sensitive to the parameters selected and interactions between the parameters need to be considered The Business Plan Model – Observations

10. 10 The Business Plan Model – Iterations Volume of business Premium rates Reinsurance Optimisation Assets & Liabilities Modelling Volume of business Premium rates Reinsurance Optimisation Assets & Liabilities Modelling Business Plan Portfolio Optimisation Different time horizon and probability of survival Portfolio Optimisation Different time horizon and probability of survival Risk Appetite Capital required Target return Capital required Target return Capital Implications Cashflow forecasting Aggregate modelling Cashflow forecasting Aggregate modelling Capital Model

11. 11 Thank you For more information please contact: Roshan Perera Principal Consultant, NMG Actuarial Tel: +603 2283 6466 Roshan.Perera@NMG-Group.com