2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

1. Séance TR-4 : Le nouveau domaine de la gestion du risque pour les rentes variables et les fonds distincts Session PD-4: The New World of Risk Management for Variable Annuities and Segregated Funds 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Frank Zhang, CFA, FRM, FSA, MAAA, PRM Executive Director VA Financial Risk Management and Hedging Advisory Practice Leader Ernst & Young LLP, New York

2. Events since 2008 Capital market disruptions Segregated fund/variable annuity losses New areas of focus Robust hedging program Advanced financial modeling Integrated financial risk management and pricing Hedging strategy best practices 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 Agenda 1

3. Capital market disruptions What has happened since 2008: Normality — what’s normal? Liquidity — what liquidity? Volatility — what volatility? Could this happen again? Market fall another 50%? 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 2

4. Segregated fund and VA losses Segregated fund and VA losses: Capital squeeze from general account investment losses Tracking errors — what errors? Marked-to-market losses — short-term or real? Trading losses — buy high and sell low? Effectiveness of risk management: Hedged and unhedged Market and actuarial Is it clear who is responsible for everything? 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 3

5. Events since 2008 Capital market disruptions Segregated fund/VA losses New areas of focus Robust hedging program Advanced financial modeling Integrated financial risk management and pricing Hedging strategy best practices Agenda 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 4

6. New areas of focus Robust hedging program Advanced financial modeling Integrated financial risk management and pricing Hedging strategy best practices 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 5

7. Robust hedging program Gold standard operation/process controls and risk management framework: Banks versus insurers Hedging performance is now a critical component of a company’s financials: New Board-level concerns Is your program (or product) too complex for the CEO to understand? Robust hedging P/L performance attribution: Know why, so problem areas can be fixed Reporting and transparency 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 6

8. Advanced financial modeling Gold standard modeling tools Continued improvements in research Principles-based valuations/reporting Nested stochastic simulations Watch out for garbage in/garbage out 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 7

9. Integrated risk management and pricing Gold standard pricing methodology Start with the fundamental — pricing Focus on underlying funds first Integrate capital market inputs in pricing Apply robust risk management techniques 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 8

10. Hedging strategy best practices Gold standard of risk management strategies Greeks based versus the new mix of new metrics Determine trade-offs between: Earnings volatility and capital optimization Marked-to-market P/L (forward-looking implied or expected volatility) and trading P/L (realized volatility) Identify implied risky bets Link pricing with hedging Know your options: Before you need them When things are normal 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 9