ERM 1 Basic ERM Primer for Reserving Actuaries

Speakers Michael Angelina Chief Actuary & Chief Risk Officer Endurance Specialty Holdings, Ltd. Al Schulman Vice President, Enterprise Risk Management Nationwide Insurance Company Steve Hazelbaker Vice President, Director of Corporate Enterprise Risk Management State Auto Insurance Companies © 2008 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 1

Economic views of capital adequacy n Global shift toward “principles-based” solvency monitoring n S&P has begun reviewing insurer’s internal capital models n A. M. Best expects “ratings pressure” on highly rated firms that lack strong ERM and EC capabilities n NAIC - Solvency Modernization Work Plan © 2008 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 2

Economic Capital is the Foundation of ERM Why is Economic Capital so important? Capital management/Financial strength ratings n Conservatively calibrated existing models (e. g. , RBC, BCAR) n Ratings credit for well founded internal models is coming Business planning/Risk appetite n Enhanced risk/return decision-making, examples include: n Product mix n Reinsurance program design n Strategic asset allocation n EC as a springboard to economic performance measurement © 2008 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 3

Economic capital in risk appetite statements As expected, large insurers are leading adopters of EC. * 2008 Towers Perrin ERM Survey Worldwide Life & P/C Results © 2008 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 4

Internal Models must be integrated into an ERM Framework Economic Capital Model Policy risk strategy, risk appetite Governance accountability, committees Annual activity Strategic planning, target setting, budgeting Risk Monitoring and Reporting Day-to-day activity Risk mitigation, e. g reinsurance Strategic, e. g. product pricing, acquisitions External Factors Market movements, competitive environment © 2008 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 5

Thank You Thomas S. Mc. Intyre, FCAS, MAAA Principal Towers Perrin 175 Powder Forest Drive Weatogue, CT 06089 Direct: 860. 843. 7084 Mobile: 860. 841. 5959 E-mail: tom. mcintyre@towersperrin. com © 2008 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 6