INTERNATIONAL ISSUES IN ENTERPRISE RISK MANAGEMENT (American Company Perspective)

1. INTERNATIONAL ISSUES IN ENTERPRISE RISK MANAGEMENT (American Company Perspective) Joel Aronchick Chubb Group of Insurance Companies

2. History of ERM at Chubb • Established as U.S. Manager for Sun Insurance Company Ltd. (now RSA) • Conservative company rooted in matrix management and specialized • underwriting culture • European license 1970’s; Brazil 1960’s; Canada 1920’s; Australia 1975 • Senior Underwriting Officer position set risk tolerances • Acceleration of non-U.S. growth under quasi-separate structure 1989 • Creation of Strategic Business Unit concept 1999 • Enron-WTC et al. validates need for ERM • Dis-establishment of Senior Underwriting Officer position 2002 • Sarbanes - Oxley enacted • Chief Risk Officer position established Dec. 2003

3. Expansion Opportunities Envisioned Overseas • Growing Industrial and Wealth Base • Increased sophistication of markets • Increased interest in asset protection • Evolving Tort Patterns • Increased shareholder activism - sensitivity to “wrongful” acts • Commercial/personal injury • Uncorrelated Risk • Geographical balancing - exposure spread • De-regulated pricing • Non-uniformity of cycle timing • Product diversity • GDP diversity

4. Outside U.S. Risk - Operating Lessons • Diversion of investment from U.S. to non-U.S. needs • Financial models of foreign carriers proved to be mis-match to • required hurdle rates • versus risk adjusted rates of return overseas • versus American shareholder expectations • M&A risk versus organic approach • Undifferentiated underwriting - marketing models • Uncertain reserve strength • Expensive multiples to book values • Execution fundamentals • Infrastructure • Internal governance structure • Strategy(ies) • Capital plan

5. Global Enterprise Risk Challenges • Variable balance sheet and accounting issues • Licenses } • Branches } • Effects of FX or hyperinflation • Ability to create accurate - timely information and reporting • mechanisms across multiple geographies and multiple disciplines • Actuarial Discipline • Strategic Positioning • Execution standards-uniformity over decentralized span of global • operations and business unit “autonomy” • Alignment of internal governance structure Assets and Liabilities

6. Changes Made • Objective criteria for market entry - exit decisions against risk adjusted return models • Local balance sheets reloaded - all operating units move to capital ownership model • Extensive restructuring • 20% of overseas branch offices closed (incl. country exits) • Divestiture or runoff of underperforming-unprofitable products • Headcount reduced by 20% over 2 year period • Joint ventures fixed or eliminated • Significant repositioning • Nat Cat PML’s justified or heavily reduced • Developing markets investment curtailed to cause profit acceleration in core markets • Unprofitable producers eliminated (25% of the plant) • Management performance incentives severely differentiated • Savings and monies diverted to management information systems • Pricing controls - tracking • Exposure management • Quality assessment • Actuarial pricing analyses

7. Influence of the CRO Today • Prioritization of markets/products around well defined risk-reward analyses • Global management information systems design for data gathering/analysis • Uniform operating standards across all business units • Global organizational alignment • - Capital allocation and return analyses • - Risk tolerances defined, quantified and monitored • - Compliance rigor around underwriting - credit - asset events • Single shock • Systemic • - P & L and capital forecasting to drive the business plan • - Portfolio protection utilization approval • - Advance planning for “emerging hazards”