Insurance and Actuarial Advisory Services Actuaries in Financial

Insurance and Actuarial Advisory Services !@# Actuaries in Financial Markets Click to edit Master title style Thomas Le Casualty Actuarial Society 2007 Annual Meeting – Chicago, Illinois November 11 – 14, 2007 www. ey. com/us/actuarial

Actuaries in Financial Markets – Panelists § § Thomas Le Phil Kane Larry Marcus Scott Swanay 1 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Agenda § Non-Traditional Roles – Securitization – Catastrophe (CAT) Bonds and Sidecars – Structured Solutions/Products – Weather Derivative Products – Credit Risks – Mergers and Acquisitions Support – Regulatory – Other 2 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Non-Traditional Roles § Application of traditional pricing and reserving methods in new venues § Development of new estimation methods § Fundamentally similar roles – “How do I use my crystal ball to predict the future? ” 3 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Securitization is the process through which an insurer or reinsurer accesses the capital markets through the issue of asset-backed securities that are backed by cash flows from a defined block of insurance contracts 4 © 2007 Ernst & Young LLP

Overview of Life Insurance Securitizations Insurer or Reinsurer Coinsurance Premium Claims Captive Reinsurer Return for Investors Notes Issuing Proceeds from Company (SPV*) Sale of Notes Investment Income Pledged to Secure Reinsurance Credit * Special Purpose Vehicle (SPV) 5 © 2007 Ernst & Young LLP Proceeds from Sale of Notes Regulation 114 Trust Fee for Guarantee Financial Guarantor (Optional) Return for Investors Proceeds from Sale of Notes

Securitization Process is transaction-specific, but generally will include most of the following steps Identify Need Enhance Actuarial Modeling Systems Determine Structure Assess Economics External Assistance Financial Guarantor Assessment Regulatory Involvement Independent External Assistance Rating Agency Assessment Offering Circular Sale of Securities to Investors 6 © 2007 Ernst & Young LLP Independent External Assistance

Actuaries in Financial Markets – Securitization § Law of large numbers § Pooling of individual policies § Broken up into tranches by credit quality (risk/reward trade-off) § Has been used for mortgages, life insurance, and other assets 7 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Catastrophe Bonds and § Subset of securitization Sidecars § Setting up a Special Purpose Vehicle (SPV) as a conduit § Trigger for loss can include – Industry loss – Portfolio loss (collection of policies) – Parametric trigger § Sidecars – Specific definition of loss trigger – Highly structured 8 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Structured Solutions/Products § Financial risks are quantified and limited § Payment commensurate with risk assumed § Credit enhancement, surplus notes, and other 9 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Weather Derivative Products § Different body of historical data § Measured by – Number of hot/cold days – Amount of precipitation § Purchaser assumes basis risk 10 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Credit Risks § § Modeling of default risk Cash flow testing Curve fitting With enough data, might be possible to use traditional methods – Development method 11 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Mergers and Acquisitions Support § Merger and acquisition valuation methods § Identifying and quantifying key risk areas § Can be qualitative 12 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Regulatory Roles § Determining ratings is a blend of art and science § Different capital adequacy models § Subjective elements play a big role 13 © 2007 Ernst & Young LLP

Actuaries in Financial Markets – Other § Sports statistician § Litigation support 14 © 2007 Ernst & Young LLP