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Remarks Prepared By Joan Lamm-Tennant, PhD

International Insurance Society Conference Management Strategies in Multi-Year Enterprise Risk Management. Remarks Prepared By Joan Lamm-Tennant, PhD Global Chief Economist & Risk Strategist Guy Carpenter, LLC Adjunct Professor Wharton School, University of Pennsylvania. Overview.

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Remarks Prepared By Joan Lamm-Tennant, PhD

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  1. International Insurance Society ConferenceManagement Strategies in Multi-Year Enterprise Risk Management Remarks Prepared By Joan Lamm-Tennant, PhD Global Chief Economist & Risk StrategistGuy Carpenter, LLC Adjunct Professor Wharton School, University of Pennsylvania

  2. Overview Management Strategies in Multi-Year Enterprise Risk Management • Alternative model design • Relevance of multi year assessment coupled with scenario testing • What problem are we trying to solve by allocating capital?

  3. Asset class proxies Duration/ maturity credit Earnings Correlated loss events Frequency and severity distributions Reserve adjustments Severity distributions Economic capital Reinsurance default Credit ratings recoveries Aggregated losses Catastrophe event tables Operational risk event tables Aggregated losses Strategy for “measuring” and “financing” riskModel design

  4. Mean Probability of Surplus over 5 YearsAll Scenarios • If planned results are achieved and no shocks are experienced, the company remains healthy in all scenarios • Growth is the more detrimental situation, magnified by deteriorating results • Subtracting Surplus has a proportional impact on results

  5. 99% (1 in 100) Probability of Surplus over 5 YearsAll Scenarios • The 2010 loss of Surplus is relatively high • Greater than 60% loss in even the Base Case • Rapid growth with deteriorating results is the worst-case for the timeframe • Removing $1B creates a 1 in 100 chance of insolvency in 2011

  6. Accept investments, but are we receiving enough return for the risk? Reject investments, but the return compensates well for the risk and would lower the cost of capital What Problem Are We Trying To Solve By Allocating Capital? Financial markets Cost of capital

  7. Benefits of aligning risk management with financial managementImproves operational and financial decision making • Supports profitable growth • Identify each business segment’s contribution to enterprise risk • Riskier business units consume more economic capital (more risk – more capital) • Benchmark performance relative to capital consumed • Risk-adjusted returns • Drives capital efficiencies • Optimizes the deployment of capital • Framework for hedging/reinsurance

  8. Aligning risk management with financial managementExample of hedging strategy Hedging reduces volatility By giving up some upside and expected profit (cost of hedging) In exchange for downside protection 2% Prob. Gross 2% Prob. Net Freeing up capital Net Expectation Gross Expectation Income $0 Gross Economic Capital Net Economic Capital

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