2. Casualty Actuaries in Reinsurance June 8, 1999 Baltimore, Maryland “Actuaries as Underwriters” June 8, 1999 Baltimore, Maryland “Actuaries as Underwriters” David Spiegler, FCAS, MAAA Senior Vice President American Re-Insurance Company Chief Underwriting Officer American Re Financial Products

3. “ Who am I, and what am I doing here?” - Admiral Stockdale

4. “Actuaries as Underwriters” Actuaries as Actuaries Actuaries as Non-Actuaries Actuaries as Underwriters Actuaries as Actuaries Actuaries as Non-Actuaries Actuaries as Underwriters

5. “Actuaries as Actuaries” American Re Actuarial Demographics : FCAS 21 ACAS 16 FSA 2 ASA 2 Other Credentialed 3 Students 22 Total 66 American Re Actuarial Demographics : FCAS 21 ACAS 16 FSA 2 ASA 2 Other Credentialed 3 Students 22 Total 66

6. “Actuaries as Actuaries” More Actuarial Demographics : Reserving 10 Pricing 41 Consulting 4 Total 55 More Actuarial Demographics : Reserving 10 Pricing 41 Consulting 4 Total 55

7. “Actuaries as Actuaries” More Actuarial Demographics : Chief Pricing Actuary 1 Traditional Markets 15 Alternative Markets 15 Financial Products 6 Healthcare 2 Research & Development 2 Total 41 More Actuarial Demographics : Chief Pricing Actuary 1 Traditional Markets 15 Alternative Markets 15 Financial Products 6 Healthcare 2 Research & Development 2 Total 41

8. “Actuaries as Actuaries” More Actuarial Demographics : Princeton 55 Ramsey, NJ 2 New York 1 Chicago 1 San Francisco 1 Los Angeles 2 Bermuda 1 Australia 1 Brussels 1 Bogota 1 Total 66 More Actuarial Demographics : Princeton 55 Ramsey, NJ 2 New York 1 Chicago 1 San Francisco 1 Los Angeles 2 Bermuda 1 Australia 1 Brussels 1 Bogota 1 Total 66

9. “Actuaries as Non-Actuaries” Traditional Markets 2 Alternative Markets 4 Financial Products 1 Healthcare 2 Risk Management 2 Total 11 Traditional Markets 2 Alternative Markets 4 Financial Products 1 Healthcare 2 Risk Management 2 Total 11

10. “Actuaries as Non-Actuaries” Member of the Board of Management Divisional President Divisional Chief Underwriting Officer Divisional Executive Management Senior Underwriters Junior Underwriters Financial Analysts Member of the Board of Management Divisional President Divisional Chief Underwriting Officer Divisional Executive Management Senior Underwriters Junior Underwriters Financial Analysts

11. Being an actuary is like staying at the Hotel California : “ You can check out any time you like, but you can never leave” - The Eagles

12. “Actuaries as Underwriters” Underwriting Encompasses : Evaluation of exposures (qualitative and quantitative) Program structuring Assessing risk/reward tradeoff Negotiating contract terms/conditions Decision making (with accountability) Processing the business Monitoring Evaluation of exposures (qualitative and quantitative) Program structuring Assessing risk/reward tradeoff Negotiating contract terms/conditions Decision making (with accountability) Processing the business Monitoring

13. “Actuaries as Underwriters” Actuarial Strengths : Quantitative evaluation of exposures Evaluation of program structure Assessing risk/reward tradeoff Monitoring results Quantitative evaluation of exposures Evaluation of program structure Assessing risk/reward tradeoff Monitoring results

14. “Actuarial Strengths” Quantification of risk : Interpretation of model results Evaluation of independent actuarial reports Sensitivity of underlying assumptions Pricing for risk/meeting return targets What can go wrong? Interpretation of model results Evaluation of independent actuarial reports Sensitivity of underlying assumptions Pricing for risk/meeting return targets What can go wrong?

15. “The age of the universe is 12 billion years, younger than previously thought, NASA astronomers said Hubble space telescope observations show. But at least one prominent scientist contends it is older.” - The Wall Street Journal (5/26/99)

16. An actuary, knowing that all models are at best estimates, would only cover NASA for 4 billion years part of 5 billion years excess of 15 billion years

17. “Actuaries as Underwriters” Actuarial Gaps : Qualitative evaluation of exposures Negotiating contract terms and conditions Decision making/Accountability Processing the business Qualitative evaluation of exposures Negotiating contract terms and conditions Decision making/Accountability Processing the business

18. “Actuaries as Underwriters” Financial Products : Types of Financial Products : Traditional Finite Risk Covers Credit Insurance/Reinsurance Integrated Risk Covers Derivatives Securitized Products Types of Financial Products : Traditional Finite Risk Covers Credit Insurance/Reinsurance Integrated Risk Covers Derivatives Securitized Products

19. Example, $1 billion capital raising

20. Example (continued) : An SPC is formed, capitalized by $250 million in equity and a $750 million bond issuance A monoline guarantor wraps the entire $750 million, giving the bond a AAA rating The monoline guarantor obtains reinsurance for the $250 million subordinated tranche Cheaper for the sponsor because the insurance premium is less than the spread between a wrapped and unwrapped bond. An SPC is formed, capitalized by $250 million in equity and a $750 million bond issuance A monoline guarantor wraps the entire $750 million, giving the bond a AAA rating The monoline guarantor obtains reinsurance for the $250 million subordinated tranche Cheaper for the sponsor because the insurance premium is less than the spread between a wrapped and unwrapped bond.

21. “Actuaries as Underwriters” Financial Products : Additional Risks to Consider : Interest Rates Foreign Exchange Commodity Prices Credit Risk Additional Risks to Consider : Interest Rates Foreign Exchange Commodity Prices Credit Risk

22. Actuaries as Underwriters? “Just do it!” - Nike - Mrs. Spiegler (circa 1970)