Actuarial Bloopers and other interesting challenges John Wylie

Actuarial Bloopers and other interesting challenges…… John Wylie CEO, ING Life Taiwan

Synopsis Actuaries are intelligent but do they have common sense? This presentation talks about some “actuarial bloopers”. It asks the question: “Who was to blame? ” Was it the Actuary? The CEO perhaps. The Board must surely take some responsibility. Right? Where was the regulator? Risks are created or inherited? How do we better prevent creation of outrageous risks? How do we manage the inherited ones? And what about the rest of the company? Do they manage risks? This presentation makes reference to mistakes in Poland, USA, Europe, Australia and uses mistakes made in Taiwan as detailed examples. Actuaries in most countries have made big risk mistakes. Some have cost several hundred million dollars! Management of big risks is explored from a non-technical, practical perspective. ING Life Taiwan – Market Research 2

The Presenter – John Wylie • John - an actuary (Macquarie 1970, FIA 1974); worked in most areas of life insurance; worked in funds management, financial planning; was director of non-life co, bank, pension fund; with ING since 1992 – GM Life, Australia, 1992 -97; CEO, Poland, 97 -00; MD Australia, 00 -03; Regional GM, Hong Kong, 03 -06; CEO, Taiwan, 06 -? ? Biggest challenges: singing before 2200 as Elvis in Seoul w Alex Du; and in Beijing before 2700 w Fei-Fei. General Management is easy! ING Life Taiwan – Market Research 3

Blooper no 1: Europe: Annuities: Mortality • Pension schemes in Europe generous • Lifetime (indexed) annuities common • Annuities often insured. • Too little allowance for mortality improvement • Cost: probably EUR Billions • Problem: How do you balance being prudent, being too conservative, being fair to customers, being market driven; being too aggressive? ING Life Taiwan – Market Research 4

Blooper no 2: USA: Disability Policies: Claims • USA wrote large volumes of guaranteed premium, guaranteed benefit disability policies in 1980 s and early 1990 s. • All but one co made losses. • Increasing claims incidence: • • portfolio aged mortality improved recession in 1990 s fraud increased • Cost? Billions $$$$ ? ? ? • How do you avoid these problems? How is it good for customers? • Are HIH and FAI relevant here? ING Life Taiwan – Market Research 5

Blooper no 3: Poland: Endowment: Interest • 1997 5 year bond rate 23%pa • Long term endowment guarantee 5%pa. • In Spain rates plummeted • In Poland blooper limited by reducing guarantee to 3. 5% • By 2000 rates down to 13%pa for 10 year bonds • 2006 rates were 4%pa. • Cost? Probably not too great because of early action. • What are the interest rate issues for long term guaranteed policies? ING Life Taiwan – Market Research 6

Blooper no 4: Australia: Guarantees: Mismatch • 1980 s – investment policies issued • Capital plus declared interest guaranteed. • Assets invested in bonds, shares and real estate. • 1987 crash – assets fell but liabilities remained • Liabilities short; assets long • Cost? City Mutual (est. 1878) absorbed by MLC. • How could the policies have been issued AND the companies protected? ING Life Taiwan – Market Research 7

Blooper no 5: GM, Ford et al: Pensions • Actuaries have advised on pension funds for decades • Fund deficits in some cases $$billions. • How has this been allowed to happen? • What is the role and responsibility of the actuary? • What is the responsibility of SEC? And NYSE? • What about the auditors? • Note: Alaska suing Mercers for $1. 8 bn for part of pension deficit. ING Life Taiwan – Market Research 8

Blooper no 6: High interest guarantees • Japan, Korea, China, Taiwan • Whole life with guarantees (way) above current interest rate levels • • Japan solution: government allowed reduction in guarantees. Korea: high margin business allowed for a period of years. China: government bailouts Taiwan: ? • Cost to industry? Many billions $$$ • How valuable is actuarial advice? • What are the issues for the companies, for the policyholders, for the government and the community in the “Japan solution”, the Korea solution”, the “China solution”? What other solutions could there be? ING Life Taiwan – Market Research 9

Taiwan: High Lifetime Guarantees • Interest rates falling in late 1990 s. Around 6 -7% • Whole life guaranteed rates 6. 5%, 8%, 10% • How did this happen? • What are the two key problems? ING Life Taiwan – Market Research 10

How do you manage these problems? • P&L management • Reduce the yield gap • Invest more in shares • Invest more in real estate • Invest in foreign bonds and do not hedge the currency risk • Balance sheet management • Reduce the risk • • Invest in foreign bonds for duration and hedge back to TWD Inverse floaters (pay more interest when rates fall and less when rise) Strips or zero coupon bonds Swaps to convert floating rate mortgages How big the to fixed. problem is depends • Reinsurance on your point of • Claims management view • Active conversion programmes ING Life Taiwan – Market Research 11

Where does everyone stand? • Local companies managing P&L • Equities investments • Real estate • Foreign investments unhedged • High volumes of profitable but higher risk new business. • ING managing risk • Long bonds (at low local rates) • Foreign bonds fully hedged • Other investments to lengthen duration • Regulator? • Concerned about both. ING Life Taiwan – Market Research 12

Solvency II and IFRS • European cos have to move toward S 2 and use IFRS • US companies moving toward these • Taiwan regulator has announced move to S 2 and IFRS. • Current Taiwan accounting is similar to US GAAP • What are the likely consequences of moving to S 2 and IFRS? ING Life Taiwan – Market Research 13

Local/US GAAP Accounting Issue ING Life Taiwan – Market Research 14

Current Industry Losses and Equity ING Life Taiwan – Market Research 15

S 2 = New Understanding of Risk • With understanding comes capital requirement • How much? Taiwan RBC =100 Minimum =200 Safe =250 How predictable is business? Market base ~ 300 EU Min =400 EU Minimum “safe”=600 [Please note – very rough guesses] ING Life Taiwan – Market Research 16

Taiwan and Health Insurance • Many countries – not just Taiwan • 1990 s and early 2000 s guaranteed premiums and benefits • Limited premium term generally 20 years – lifetime benefits • What are the risks? • • • Increasing morbidity Fraud Poor NHS claims management Interest rates Culture of paying all claims ING Life Taiwan – Market Research Is health care affordable? 17

Where will the additional capital come from? • Foreign acquisitions and injections? • Bank injections and acquisitions? • Profitable business margins • Government • Everyone must understand the problem first. • What are other possible solutions other than more capital? Can you correct the problem? ING Life Taiwan – Market Research 18

Risk Profile under EC Actuarial RM 整體風險模型 (Overall Risk Profile) 市場風險 信用風險 流動性風險 保險風險 作業風險 (Market Risk) (Credit Risk) (Liquidity Risk) (Insurance Risk) (Operational Risk) 利率 預設溢價對象 資產 - 負債風險 死亡率 保單銷售 (Interest Rate) 有價證券 (Default Spreads Counterparty) … (Asset-Liability Risk) 避險 具 (Mortality) 失效 (Distributions) 系統 (Lapses) 準備金 (Systems) 人員 (Reserves) … (People) … (Equities) 不動產 (Real Estate) … (Hedging Programs) … 必備的經濟資本 = 在一個設定的風險容忍程度內準備足夠的資本以涵蓋潛在的損失 Required Economic Capital = sufficient surplus capital to cover potential losses at a given risk tolerance level. ING Life Taiwan – Market Research 19

Risk in the rest of the business • Operational risk • IT risk • FEC risk • Compliance risk • Reputation risk • HR risk Risk can occur everywhere. • Regulatory risk • Who manages these? ING Life Taiwan – Market Research 20

E&Y’s Risk Management Model ING Life Taiwan – Market Research 21

ING’s 3 Lines of Defence Adopting Three Lines of Defence Model 1 st Line of Defence 2 nd Line of Defence 3 rd Line of Defence ING’s Governance Framework Control & Finance Operational Risk Management Insurance Risk Management Information Risk Management ING Life Taiwan – Market Research 22 Regulator Market Risk Management Corporate Audit Services Business Lines Management control activities Credit Risk Management External Auditor Legal & Compliance

Change Management • Clear understanding of corporate direction and goals • Clear roles and responsibility • Key is clarity and understanding • Simple and frequent communication • Good project management • Alignment of interests through remuneration and goals • Encourage and reward cross function teamwork to break silos. • Create an environment in which everyone can excel • Ensure everyone has fun! 1 SIMPLE COMMUNICATION 2 3 ING Life Taiwan – Market Research 23

Bonuses • 3 simple corporate goals • 3 individual goals • Excludes things out of management control • Alignment with strategy and priorities • Alignment with communication • Weighted by input possibilities ING Life Taiwan – Market Research 24

What can be achieved? ING Life Taiwan • New premium growth 2002 -2007 in TWD • Total premium 2002 -2007 in TWD • VNB 2002 -2007 in TWD • Operational expenses 2002 -2007 in TWD ING Life Taiwan – Market Research 25

ING Life Taiwan: And communication is working WPC results “Effective risk management is a key differentiator of ING” “Value-based, results driven leadership at ING is encouraged and developed at all levels. ” F= 84%; U= 2% “ING’s goals are clear and aligned at all levels” F=80%; U=6% “I can see a clear link between my work and ING’s objectives” “ING is making the changes necessary to compete effectively” “ING’s costs are managed to maximise value creation at all levels” F=83%; U=3% ING Life Taiwan – Market Research 26 F=78%; U=4% F= 86%; U= 3% F= 74%; U= 6% One of the biggest risks is always people risk.

The Ultimate in Protection? ING Life Taiwan – Market Research 27

Summary : Managing Business Risks • Think – about downside when designing products • Be cautious about giving long term guarantees • Really understand risk problems –use your head more than your computer! • Manage both sides of balance sheet • Use every avenue available • Set priorities – and all agree them • Set targets • “Risk Management is everyone’s responsibility” – culture. • If a major problem arises (or is inherited or acquired) think carefully about how to overcome the problem – sell it, reinsure it, manage the assets, manage the liabilities, grow out of it…… ING Life Taiwan – Market Research 28

Questions? ? ? Sometimes risk management requires simple lateral thinking When someone tells you there is no risk – be suspicious Never think you are important! ING Life Taiwan – Market Research 29

Thank you! If you want a job in Asia please contact ING! Charlene Stenton Dozey Charlene. Stenton. Dozey@ap. ing. com If you want a job in Taiwan contact me; John Wylie, John. Wylie@ing. com. tw or Stacy Liu, Stacy. Liu@ing. com. tw ING Life Taiwan – Market Research 30

USA: Disability Policies: Claims ING Life Taiwan – Market Research 31

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• Headiness re Pension Deficit ING Life Taiwan – Market Research 33

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Increase TSR 5 VNB growth 3. Increase agent retention 1. Understand our customers EV growth 6. Reduce expense ratios 4. Develop strategic bancassurance 2. Increase relationships agent Expense reduction productivity TSR = f{ VNB, EV EC } Managing business risk in all we do: • Ops/IT, Finance, Marketing, Product Development • Compliance, ORM, SOX, CAS ING Life Taiwan – Market Research 39

Change • Change is not optional • Pro-active or Re-active? • We need to undergo certain changes … • … ahead of the changing environment … … to gain competitive advantage We can control change … … or change will control us ING Life Taiwan – Market Research 40

Alignment • Everyone knows and understands – • Vision • Strategy • MTP • Everyone is headed in the same direction, and there are no “anchors” ING Life Taiwan – Market Research 41