ORSA Requirements & Economic Capital

1. ORSA Requirements & Economic Capital Carolyn Covington, FSA, CERA, MAAA Vice President Miller & Newberg, Inc

2. US ORSA Summary Report Section 1 – Description of Insurer’s Risk Management Framework Section 2 – Insurer Assessment of Risk Exposures Section 3 – Group Assessment of Risk Capital and Prospective Solvency Assessment

3. Section 1:Description of Risk Management Framework 5 Key Principles of ERM Framework: Risk Culture & Governance Risk Identification & Prioritization Risk Appetite, Tolerances & Limits Risk Management & Controls Risk Reporting & Communication

4. Section 2: Insurer’s Assessment of Risk Exposure Description of material and relevant risks including: How the risks are assessed Possible adverse outcomes Key assumptions Model validation and calibration Quantitative and/or qualitative assessment of risk Relationships between risks Risk tolerance statements and how they are determined

5. Section 3: Group Assessment of Risk Capital and Prospective Solvency Assessment Aggregating risk capital at the company and group level Defining standards Diversification considerations Other adjustments Prospective Solvency Assessment What are the expected future solvency positions? How do plans for growth impact future solvency? What are prospective risks and how do they impact solvency?

6. Economic Capital Defined Economic capital is defined as sufficient surplus that would be needed to cover potential losses at a given risk tolerance, over a specified time horizon. Risk Capital = Available Capital stressed scenario – Available Capital base scenario Economic Capital = Σ Risk Capital – Diversification Benefit – Tax Absorption

7. Regulatory vs Economic Capital Regulatory capital is based on a prescribed formulaic approach Economic capital is based on an insurer’s individual risks The balance sheet will change under ORSA: Current Balance Sheet ORSA Balance Sheet

8. Risks Commonly Modeled Market: interest rates, equity, exchange rate, real estate Credit: default, spread, counterparty, reinsurer Concentration Liquidity Insurance: mortality, morbidity, lapse, expense, catastrophe Operational risk: business, strategic, technology, people, reputation, contagion, regulatory & political

9. Example

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11. How to build an EC Model for ORSA Start with Asset Adequacy model Remove any pads for adverse deviation Validate the model Determine baseline available capital under the normal scenario

12. How to build an EC Model for ORSA Determine material risks Based on ORSA results Define stresses for material risks Stochastic vs deterministic Develop Correlation No correlation, matrix correlation, “big bang” Tax implications Aggregate results at holding company level Identify and remove any double counting

13. Other Modeling Considerations How many years to project? Until remaining liability is no longer material Balancing granularity with usability EC model needs to be robust enough to be accurate but simple enough to be useful as a risk management tool Define methodology and reporting standards and use consistently

14. Questions? Carolyn Covington, FSA, CERA, MAAAVice PresidentMiller & Newberg, Inccarolyn.covington@miller-newberg.com

15. MWA Fixed Income PortfolioRatings Migration at Enterprise Risk Management at Modern Woodmen of America Mel Rambo FSA, MAAA, MBA, LLIF Chief Risk Officer MWA June 5, 2014

16. Governance Structure • Chief Risk Officer- Fall 2011 • Board of Directors- Spring 2012 • Management-Summer 2012 • Strategies Team-Fall 2012 • Committees/Project Management Office-Spring 2013 • Enterprise Risk Management Committee- January 2014

17. Risk Assessment Process • As just discussed, our risk assessment process has been on an annual basis • Department Level in 2012 • Management Level in 2013 • Enterprise Risk Management Committee –more dynamic, meets monthly. Currently in the process of assessing risks for 2014

18. Our Overview of Risk Management • More global view for the Board, ERM Committee and Managers • A ‘road-map’ assists all stakeholders in having a visual of what is happening from a risk perspective

19. CORPORATE PLAN & ERM Navigation Guide Goals Objectives Strategies Corporate Plan Target Risk Capacity Actual Risk Profile Risk Tolerance ---------- Risk Appetite --------

20. Relationship between ERM & the Corporate Plan ERM Risk Capacity RiskTolerance Unmitigated Threats Risk Appetite Opportunities Not Pursued Corporate Plan Goals Strategies Objectives Risk Limits Identified Threats Risk Profile Identified Opportunities Unidentified Opportunities Future Environment Emerging Risks Unidentified Threats

21. Risk Appetite Document • Parallels the Corporate Plan • The risk appetite document establishes broad metrics • The risk appetite document is the responsibility of the ERM Committee to update • Coordinates the document with our ten member Strategy Team- meets on a weekly basis and is responsible for developing the Corporate Plan • Our Strategic process throughout the year is best depicted by looking at the annual cycle we follow:

22. The Annual Process • During the Board Meetings

23. Corporate Planning Cycle with ERM Built into Process

24. Unique for Modern Woodmen is… • We own a bank-regulated by the Office of Controller of the Currency (OCC). Self-risk assessment quarterly following OCC guidelines. • This makes MWA a Thrift Holding Company. So we are under Federal Reserve regulations as well. Stress testing this year based on three scenarios they prescribe. • We own a Broker Dealer. So they comply with: • Security and Exchange Commissions rules (SEC) • Financial Industry Regulatory Authority (FINRA) • Municipal Security Rulemaking Board (MSRB) • Department of Labor (DOL)

25. Preparing for ORSA • Started to build models last summer • Asset Adequacy Model is our foundation-from prior year end • Added new business and surplus • Choose eight deterministic interest rate scenarios • We will continue to build on this approach • My goal is to have the first draft of ORSA completed by December 31, 2014 • Monitor state approvals throughout the year-Illinois • File first ORSA report on or about December 15, 2015

26. Questions and or clarifications?

27. ERMSmaller Company Approach& State Review Dean Stiller, FSA, MAAA Actuary Sons of Norway June 5, 2014

28. State ERM Approaches • In those states which have adopted the NAIC model requirement for ERM, state regulators regularly include ERM criteria in their financial and market conduct examinations. • Currently, 38 states have adopted or plan to adopt the NAIC model regulation.

29. Non NAIC ERM Approaches • Minnesota requires ERM assessments as part of their normal periodic financial examination. • Minnesota has been implementing ERM since 2008 • All domiciled insurance companies have gone through the process at least once and many have gone through twice

30. Non NAIC ERM Approaches • New York has its own ERM approach which is part of their normal periodic financial examination. • ERM is currently a separate process but will be integrated into the normal financial examination process over time. • Approximately half of all NY domicled companies have participated. • An outside consultant has conducted the majority of ERM examinations.

31. Minnesota ERM – Risk Perspective • Credit Risk Reputational Risk • Market Risk Pricing/Underwriting • Liquidity Risk Reserving • Operational Risk Strategic Risk • Legal Risk

32. Minnesota ERM – Documentation • Risk Definition • Control Response • Analysis • Impact • Probability • Control Strength • Residual Risk

33. Questions?