Internal Model Best Practices for Insurer Risk Assessment & Capital Requirement

1. Use this cover page for external presentations Client logo should go no higher than this guide Client logo should be aligned bottom with this guide Date shouldbe aligned topwith this guide March 13, 2007 Title shouldbe aligned topwith this guide Internal Model Best Practices for Insurer Risk Assessment & Capital Requirement Alkis Tsimaratos Solvency Sub Committee (SSC)

2. Background (1/3) The IAA and the Solvency Sub Committee • Founded in 1985 the IAA has amongst other objective to • Represent profession with international bodies • Promote high standards of professionalism • The SSC is part of the Insurance Regulation Committee • Coordinates the work on Solvency and risk assessment of Insurers • Point of contact with the IAIS (International Association of Insurance Supervisors) • Coordinate related projects with Actuarial associations • 30 active members, 2 committee meetings a year, monthly/bimonthly conference calls

3. Background (2/3)An increasing use of “Internal Models” • Greater use of Enterprise Risk Management (ERM) • Embed risk management within the whole organization is a high priority (71%) • Improve risk measurement and quantification process is a high priority (77%) (source : The 2006 Tillimghast ERM survey ) • Jurisdictions considering or using Internal Models • Europe (Solvency II, UK - ICA, Germany - BaFin) • Australia (APRA risk management standards) • Swiss (Swiss Solvency Test) • Canada (Segregated Funds) • USA (C3 phase II)  SSC has recognized a wider use of Internal Models in the Industry

4. Background (3/3)The “Internal Models” best practice project • Timeline : project started in 2005 in conjunction with the IAIS • 2005 : Launch of the project • May 2006 : target content framework approved by the IAA Board during the Paris Congress • May 2007 : discussion of the first draft in the board and committee meetings in Mexico • End 2007 : release of the final version • Current deadline • 31 march : feedback from Associations on the first draft • Target scope for the use of Internal Models • Be used and understood across the Insurance companies – the use test • Be transparent to third parties • Reflect company risks and risk management • Be validated to insurer experience & calibrated to financial markets • Use reliable experience studies for developing assumptions • Be subject to suitable approvals, controls, internal audit and periodic independent review

5. Internal Models draft review (1/6)Section 1 - Introduction • The Introduction sets the rationale and scope of an Internal Models best practices • Role of Internal models • Insurance Industry ERM trend • Regulators trend in use of Internal models# • List of guidance areas • Is there anything missing ?

6. Internal Models draft review (2/6)Section 2 – Purpose • This section sets • The purpose of the paper (guidance) • A definition of what is referred to as an Internal Model • A target audience : • Regulators • Actuaries • Auditors • Senior management • Board of directors • Investors, market analysts  Do you consider the purpose, scope and audience appropriate ?

7. Internal Models draft review (3/6)Section 3– Model Fundamentals • This section articulates the fundamentals components of an Internal Model • The structure of a model : separate components • Level of complexity of the components • Reference to appropriate theory or practice • Appropriateness of use • Selection assumptions • Test, audit, controls and storage • Use of experts  Does this general framework correspond to your current practices ?

8. Internal Models draft review (4/6)Section 4 – Model specifics • This section details the best modeling practices • On data • corporate assumptions, industry data, experience • On structure • complexity, completeness, stochastic/deterministic, period, time horizon • On frequently used modeling techniques • ESG, ALM, Life modelling, Collective risk model (non life) • On identified specific issues • real world vs risk neutral, key results, tax treatment • Is the level of detail on this section adequate ? • Are there missing items ?

9. Internal Models draft review (5/6)Section 5– Results and communication • This section sets the practices for communicating results • Identifying the stakeholders and their requirements • Internal management communication needs • Examiner communication needs • Public communication needs  Should communication be part of best practices – should it be further developed?

10. Internal Models draft review (6/6)Section 6– Governance best practices • This section sets the practices for governance over • Roles, responsibilities and resources • Framework, targets and process • Documentation and controls • Data and reports • Results and analysis • Independence, information management, use test, senior management involvement Does this correspond to your current practices / is there anything missing?

11. Internal Models draft Current developments • The draft is under review by all Actuarial associations – 31 march • The SSC drafting team is already revising this first document with the comments already received • Add missing components and avoid overlapping • Adjust level of details • Simplify tone and improve articulation of key ideas • Ensure consistency with similar references (Canadian, UK)

12. Conclusion : Reviewing the best practices Role of the actuaries • Actuaries are actively involved in setting up and running Internal models • They are working within all industry stakeholder on this topic: • Insurance groups • Consultancies partners • Insurance associations • Supervisors  We have to bring our best knowledge, experience and vision to the service of the Industry – your feedback on the draft is welcome

13. Use this cover page for external presentations Client logo should go no higher than this guide Client logo should be aligned bottom with this guide Date shouldbe aligned topwith this guide March 13, 2007 Title shouldbe aligned topwith this guide Internal Model Best Practices for Insurer Risk Assessment & Capital Requirement Alkis Tsimaratos Solvency Sub Committee (SSC)