1. !@# RISK MEASUREMENT AND CAPITAL MANAGEMENT SEMINAR 1 European Perspective on DFA Casualty Actuarial Society Risk and Capital Management Seminar Washington, DC Jean-Pierre Berliet

2. 2 Perspective on Risk and Capital Management in Europe  Leading European insurers have begun to develop group risk models  Development of risk models has accelerated in anticipation of regulatory mandates: FSA European Commission  Group risk models in Europe are designed to address comparatively complex situations Multi-currency / Multi-national Multi-entity Multi-line Banc-assurance

3. 3 Large Insurers and Reinsurers with Risk Models ING*Swiss Re*RSA AXA*IF-Sampo (P/C)*Aegon Allianz*Tapiola Mutual*ZFS Munich Re*Suomi Life*etc… CGNU*Nordea* * Surveyed by European Commission

4. 4 Characteristics of Risk Models of Large Insurers and Reinsurers  Virtually all models are aggregate models  Degree of completion of the models varies from draft/prototype to “operational”  Companies are taking a continuous improvement approach to model development  The sophistication of risk measurement varies significantly Formulaic (S&P / RBC factors) Statistical simulation DFA  There are as many approaches as there are companies

5. 5 One Large Group is Building its Model on DFA Infrastructure  Effort initiated several years ago Life and P/C activities Multi-entity Multi-currency Multi-year time horizon for new business  More entities are included each year in DFA analysis  Extension to performance measurement is planned

6. 6 Most European Companies Have Not Built DFA Risk Models  Efficient DFA tools were not available when the pioneers developed the first models  Many companies have chosen to develop simpler statistical models Less costly More transparent Easier to use and maintain Well established in banking Less onerous data requirements  As a result, existing risk model cannot measure risk created by dynamic links across risk factors

7. 7 Impact of Regulatory Developments on Risk Models of European Insurers  Larger Insurers will be required to have “risk models”  Regulators will leave considerable discretion to insurers about: Model architecture Methodology Tools  Regulatory changes appear “DFA blind”  Best practices will continue to evolve rapidly

8. 8 Other Applications of DFA in Europe  DFA is gaining ground for decision analysis in Europe Capital adequacy ALM/Asset allocation Reinsurance analysis Product development/Pricing Planning support  Insurers are building in house capabilities and using external providers (consultants, brokers, asset managers, etc…)

9. 9 Emerging DFA Applications  Determination of the impact of risk on financial statements  DFA extensions of statistical risk models can help manage the volatility of reported financial results  DFA Insights are important for the evaluation of risk management strategies ALM/Asset allocation Reinsurance Capital structure Product development

10. 10 What does the European Experience Suggest?  DFA usage will grow because: Simpler statistical risk models cannot provide some of the answers that management needs New regulations will provide a capital requirement advantage to companies that have robust risk models  Key DFA growth areas are likely to be: Linkage of statistical risk models and financial statements Financial evaluation of alternative strategies

11. 11 Thank You Jean-Pierre Berliet jean-pierre.berliet@ey.com