Traditional Actuarial Roles – Putting It All Together in an ERM (and EOM ) Framework

1. Traditional Actuarial Roles – Putting It All Together in an ERM (and EOM) Framework CAS Spring Meeting June 18, 2007 John Kollar, Russ Bingham, Hartford Financial Services Gene Connell, Erie Insurance

2. CAS Centennial Goal (Refreshed) • Advance their expertise in • pricing • reserving • capital modeling • Leverage their skills in risk analysis • Become recognized as experts in the evaluation of enterprise risk

3. Are you part of the “Big Picture?”orAre you “silo bound?”

4. How do you • Estimate reserves • Model risk & capital • Make rates Without seeing the “big picture?”

5. (New?) ERM Reserving Questions • Risk allocation?

6. (New?) ERM Reserving Questions • Risk allocation? • Reinsurance?

7. (New?) ERM Reserving Questions • Risk allocation? • Reinsurance? • Ratemaking assumptions?

8. (New?) ERM Reserving Questions • Risk allocation? • Reinsurance? • Ratemaking assumptions? • Marketing program?

9. (New?) ERM Reserving Questions • Risk allocation? • Reinsurance? • Ratemaking assumptions? • Marketing program? • Underwriting guidelines?

10. (New?) ERM Reserving Questions • Risk allocation? • Reinsurance? • Ratemaking assumptions? • Marketing program? • Underwriting guidelines? • Predictive modeling?

11. (New?) ERM Reserving Questions • Risk allocation? • Reinsurance? • Ratemaking assumptions? • Marketing program? • Underwriting guidelines? • Predictive modeling? • Underwriting cycle position?

12. Loss Reserve (Unpaid Claim) Estimates • New Approaches • Stochastic methods • Bayesian estimates • Benchmarking • Confidence intervals • Fair Value Accounting • Discounted reserves • Market Value Margin • Convergence of FASB to IASB

13. (New?) ERM Capital Modeling Questions • Loss reserve adequacy?

14. (New?) ERM Capital Modeling Questions • Loss reserve adequacy? • Risk allocation? • Reinsurance? • Ratemaking assumptions? • Marketing program? • Underwriting guidelines? • Predictive modeling? • Underwriting cycle position?

15. Aggregate Loss Distribution& Implied Capital Value at Risk TVaR

16. Risk Measurement & (Cost of) Capital Allocation by Line, etc.

17. Optimize Mix of Capital and Reinsurance Relative Costs Net Cost of Reinsurance Cost of Capital Income Tax Deduction Investment Income

18. (New?) ERM Ratemaking Questions • Capital allocation?

19. (New?) ERM Ratemaking Questions • Capital allocation? • Cost of capital?

20. (New?) ERM Ratemaking Questions • Capital allocation? • Cost of capital? • Reinsurance? • Loss reserve adequacy? • Marketing program? • Underwriting guidelines? • Underwriting cycle position? • Predictive modeling?

21. Underwriting Cycle PositionPricing Risk • Competitors’ actions • Changes in terms and conditions • Coverage provisions • Exposure measurement • Limits • Deductibles • Prices • Policyholder selection

22. Confidence Interval Around the Target Combined Ratio

23. Marketing/Underwriting StrategyReflect Risk in Planning Change

24. Predictive Modeling • Use of other information (beyond rating variables) to more accurately rate a policy • Increased profits • Reduced risk • Lower capital • Inability to select better policies and compete with other insurers results in adverse selection • Losses or reduced profits • Increased downside risk • Higher capital

25. Common ERM Issues (Questions) • Loss reserve adequacy • Capital adequacy and cost • Risk/capital allocation • Reinsurance • Ratemaking assumptions • Marketing program • Underwriting guidelines • Predictive modeling • Underwriting cycle

26. “Standard” ERM Issues • Communication • Clear & complete • Responsibility/authority • Objectives & resources • Data Quality • Accuracy, credibility, variability • Quantification • Model building & parameterization

27. Robust Analysis of an Enterprise’s Risks (ERM) is Essential to Sound: • Ratemaking • Loss Reserving • Capital Modeling

28. WhatisERM?

29. ERMis the“Big Picture”

30. Are You Part of the “Big Picture?”orDo You Want to bePart of the“Big Picture?”