1. Enterprise Risk Management Framework For Small to Mid-Sized Property & Casualty Insurance Companies Presented by Joseph F. Morris CPA, MBA jmorris@pcicStrategies.com 215-901-0334 Business and financial services for property & casualty insurance companies

2. Learning Goals  Recent Regulatory Developments  2013 Holding Company Registration Statement on Governance and Internal Controls  2014 Form F (Enterprise Risk Management Report)  2015 Own Risk Solvency Assessment  2016 Corporate Governance Annual Filing (Proposed)  Expectations of Rating Agencies  Definition and Benefits of ERM Framework Business and Financial Services for Property and Casualty Insurance Companies 2

3. Learning Goals (continued)  Creating a Risk-Aware Culture  Setting Tone at the Top  Defining Risk Profile, Risk Appetite and Risk Tolerance Levels  Roles and Responsibilities  Reporting and Monitoring  Determining Key Risk Factors  Five Categories of Risk  Risk Tolerance Parameters  Controls or Monitoring Activities  Issues for Remediation  Risk Factor Dashboard Business and Financial Services for Property and Casualty Insurance Companies 3

4. ERM – Regulatory Developments  NAIC’s Solvency Modernization Initiative and Risk-Focused Financial Examinations  2013 Annual Registration Statement Includes: –“the insurer’s board of directors oversees corporate governance and internal controls and that the insurer’s officers or senior management have approved, implemented and continue to maintain and monitor corporate governance and internal control procedures.”  2014 Form F (Enterprise Risk Management Report)  2015 Own Risk Solvency Assessment (ORSA)  2016 Corporate Governance Annual Filing (Proposed) 4 Business and Financial Services for Property and Casualty Insurance Companies

5. ERM – Regulatory Developments (continued) 2014 Form F (Enterprise Risk Management Report)  Filed annually by ultimate controlling person  No size exemption  “Enterprise Risk in ten areas  “Enterprise Risk” is defined as: “Any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system…”  If no response, must indicate “To the best of its knowledge and belief, Registrant has not identified enterprise risk subject to this disclosure.” 5 Business and Financial Services for Property and Casualty Insurance Companies

6. ERM – Regulatory Developments (continued) 2014 Form F (Enterprise Risk Management Report)  Material developments regarding strategy, internal audit findings, compliance or risk management;  Acquisition or disposal of insurance entities;  Changes of shareholders exceeding 10% or more of voting securities;  Developments in investigations, regulatory activities or litigation;  Business plan and summarized strategies for next 12 months;  Identification of material concerns raised by supervisory college;  Identification of capital resources and material distribution patterns;  Identification of any negative movement with rating agencies;  Information on corporate or parental guarantees;  Identification of any material development that could adversely affect the company. 6 Business and Financial Services for Property and Casualty Insurance Companies

7. ERM – Regulatory Developments (continued) 2015 Own Risk and Solvency Assessment Model Law  Insurers with less than $500 million in gross written premium and insurance groups with less than $1 billion in gross written premium are exempt;  Requires insurers to maintain a risk management framework and complete an ORSA Summary Report;  ORSA Summary Report:  Section 1 – Description of the Insurer’s Risk Management Framework  Section 2 – Insurer’s Assessment of Risk Exposure  Section 3 – Group Assessment of Risk Capital and Prospective Solvency Assessment  Additional Information – organization chart, basis of accounting, signature of chief risk officer 7 Business and Financial Services for Property and Casualty Insurance Companies

8. ERM – Regulatory Developments (continued) 2016 Corporate Governance Annual Filing Model Law  Provide a summary of an insurer’s corporate governance structure, policies and practices  No size exemption  Annual Filing:  Section 1 – Description of Corporate Governance Framework  Section 2 – Description of Board of Directors; and Committee Policies and Practices  Section 3 – Description of Management Policies and Practices  Section 4 – Description of Management and Oversight of Critical Risk Areas 8 Business and Financial Services for Property and Casualty Insurance Companies

9. A.M. Best: ERM in the Rating Evaluation Process Business Profile Operating Performance Balance Sheet Strength Enterprise Risk Management is the common thread that links balance sheet strength, operating performance, and business profile Source: A. M. Best Company 9

10. A.M. Best ERM Expectations  All insurers need to establish an ERM framework  ERM capabilities should be proportionate to risk profile of insurer  Insurers need to establish firm-wide risk tolerance metrics  Insurers need to have their own view of capital adequacy  A low risk profile and high ERM capability will produce a ratings “lift”  Leading insurers are utilizing stochastic-based capital modeling to better support risk-reward decisions Source: A. M. Best Company 10 Business and Financial Services for Property and Casualty Insurance Companies

11. What is an ERM Framework? Enterprise Risk Management Framework A disciplined process to systematically identify measure and manage various types of risk Establish Risk-Aware Culture Identify Measure Manage & Mitigate Risks Measure Enterprise Risk and Risk Correlation Source: A. M. Best Company Business and Financial Services for Property and Casualty Insurance Companies 11

12. Benefits of Enterprise Risk Management Framework  Maximize value to the organization’s various stakeholders  Manage exposure to earnings and capital volatility  Ensures future capital levels exceed required regulatory capital  Create a risk-aware culture that encourages risk-taking  Develop consistent metrics to measure risk and to establish risk tolerance levels  Assign roles and responsibilities to board, Sr. management and others  Maintain excellent rating from rating agencies 12 Business and Financial Services for Property and Casualty Insurance Companies

13. Enterprise Risk Management Risk-Aware Culture

14. ERM – Risk Aware Culture ERM Tone Established by Board of Directors and Senior Management  ERM roles and responsibilities clearly defined  Define risk profile, risk appetite and risk tolerance parameters  Mission, Strategic Planning and ERM documents shared with all employees  Executive compensation includes achievement of risk management objectives  Financial results and risk management initiatives reviewed with employees 14 Business and Financial Services for Property and Casualty Insurance Companies

15. ERM – Risk Aware Culture (continued) ERM Roles and Responsibilities  Board establishes Risk Committee as oversight function  Senior Management is responsible for identification, measurement, monitoring and communication of risk goals, metrics and activities  Chief Risk Officer is responsible for leading ERM activities within company Reporting of Enterprise Risk Management Activities  Quarterly reporting of ERM metrics and activities to Risk Committee of Board of Directors via ERM Dashboard 15 Business and Financial Services for Property and Casualty Insurance Companies

16. ERM Terminology What is Risk Profile? A narrative description of the parameters for executing the company’s business strategy 16 Business and Financial Services for Property and Casualty Insurance Companies

17. ERM Terminology What is Risk Appetite? The boundary level of uncertainty a company is willing to assume given the corresponding reward associated with the risk 17 Business and Financial Services for Property and Casualty Insurance Companies

18. Risk Profile and Risk Appetite Examples  External Environment Regulatory Legal/Judicial Economic Industry Competition  Capital Management Financial Ratings Access to Capital Debt and Holding Company Structure Capital Adequacy  Balance Sheet Loss Reserves Investment Portfolio 18 Business and Financial Services for Property and Casualty Insurance Companies  Written Premium Profile Line of Business, Geographic, Product, Class of Business, Agency Concentration Limits of Liability Coverage  Reinsurance Profile Reinsurance Credit Quality CAT Exposure Per Risk Retentions  Operational Profile Underwriting & Claim Practices IT Performance, Data Quality & Business Continuity and Recovery

19. ERM Terminology What is Risk Tolerance Level? The financial metrics that establish thresholds for levels of risk that the company is willing to accept in order to accomplish its strategic objectives. 19 Business and Financial Services for Property and Casualty Insurance Companies

20. Risk Tolerance Level Examples Enterprise-Wide Risk tolerance Levels  Economic Capital Model: Probability of Ruin at 99.5% VaR, One- Year Out  Best Capital Adequacy Ratio, One Year Out to Achieve/Maintain A- Rating  NAIC Risk Based Capital Greater Than 300  Net Written Premium to Surplus ratio of Less than 1.5 to1  No Greater Than a 10% Loss of Capital From all Risk Factors in Any One Year  Holding Company Debt to Total Capitalization Ratio 20 Business and Financial Services for Property and Casualty Insurance Companies

21. Risk Tolerance Level Examples Individual Risk Tolerance Levels  Net of Reinsurance Underwriting per Risk Retention Equal to 5% or Less of Capital (net of tax).  Loss and LAE Reserves Set at or Above Mid-Point of Actuarial Range of Estimates  No Greater than a 5% Loss of Capital in Any One Year Due to a 100 Basis Change in Interest Rates 21 Business and Financial Services for Property and Casualty Insurance Companies

22. Identification, Measuring and Monitoring Key Risk Factors

23. Primary Causes of Financial Impairment 23 Business and Financial Services for Property and Casualty Insurance Companies

24. Key Risk Factor Categories - Definitions  Credit - exposure from all potential creditors including agents, reinsurers, bond issuers and insureds  Market – exposure to liquidity events, asset/liability mismatches and risks in investment portfolios due to changes in interest rates, equity prices and exchange rates Underwriting – exposure from underwriting insurance products including: product development, regulation, loss reserves, pricing metrics and catastrophic events Operational – exposure to management change, business interruption, fraud, data capture and security, claim handling and employee retention and other operating activities Strategic – exposure to economic downturn, industry competition, rating agencies and availability of capital 24 Business and Financial Services for Property and Casualty Insurance Companies

25. Categories of Key Risk Factors CreditMarket  Bond Issuer Default/Downgrade  Agency/policyholder credit risk  Reinsurer default  Sovereign  Currency  Liquidity events  Asset / Liability Matching  Interest Rate Risk  Common Stock Market Price  Reinvestment UnderwritingOperational  Product Development  Regulatory  Catastrophic Event  Loss Reserve  Loss Experience  Pricing  Data Capture/Data Security  Agency Automation  Management Change/Employee Turnover  Fraud/Financial Controls  Claim Handling  Delegation of Underwriting Authority  Financial Reporting Strategic  A. M. Best Downgrade  Industry Competition  Economic Downturn  Reputational  Capital Availability  Competitor technology Advances 25 Business and Financial Services for Property and Casualty Insurance Companies

26. Frequent Probable Often Occasional Possible Remote < 1%1 – 5%5 – 10%10 – 15%15 – 20%>20% Low Severity of Event (% of Surplus) High 12 11 9 8 6 7 45 2 3 10 1 Low Probability High ERM Key Risk Factors – Heat Map Business and Financial Services for Property and Casualty Insurance Companies 26

27. ERM – #1 Risk Factor: Pricing Dashboard 27 Business and Financial Services for Property and Casualty Insurance Companies Will be Included in Live Presentation

28. Is Your Company Capable of Managing Key Risks? 28 Business and Financial Services for Property and Casualty Insurance Companies Industry Operating PracticesBest Operating Practices Pricing - No price monitoring reports New business and renewal price monitoring reports track manual and discretionary price changes Loss Reserves - Calendar Year Loss Ratio/Loss Reserve Adequacy Reviewed Annually by Outside Actuary Accident Year Loss Ratios/ Loss Reserve Adequacy Reviewed Quarterly Internally and Annually by Outside Actuary CAT Management - Determined annually by reinsurance broker Property Values Managed Monthly in Concentrated Territories Claims Best Practices - No written claims best practices and no claim audit process Written Claims Best Practices and Claim Files Audited Monthly Investment Portfolio - Risk Metrics not calculated Investment Manager Monitors Risk Metrics of Investment Portfolio and Meets with Board Investment Committee Quarterly Financial Forecasts – one-year budgets are created for operating statements only Three-Year Financial Forecasts prepared including operating statements, balance sheets and RBC and BCAR ratios

29. Enterprise Risk Management Framework Integrate ERM Process into Standard Operating Practices of Company 29 Business and Financial Services for Property and Casualty Insurance Companies Risk IdentificationRisk Measurement Risk Controls, Monitoring Activities & Reporting Business Strategies & Operating Practices Financial Goals & Capital Management Risk-Aware Culture Risk Profile Risk Tolerance Roles/Responsibilities ERM Process

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31. Joseph F. Morris, CPA, MBA, has over thirty-four years of insurance industry experience. Prior to founding P&C Insurance Company Strategies, LLC, Mr. Morris was President of Stonecreek Specialty Underwriters, LLC. Previously, Mr. Morris was President and CEO of James River Insurance Company from 2008 until 2010 after serving as President and CEO of The Philadelphia Contributionship, the oldest insurance company in the United States. Mr. Morris also held several positions with United America Indemnity, Ltd. (UAI) including President, President & CEO Penn-America, UAI’s excess & surplus lines subsidiary, and SVP and CFO of Penn-America. Mr. Morris began his insurance career at Reliance Insurance Company where, over a twenty-one year career, he held a number of financial and operating positions. Mr. Morris has been a member of the Board of Directors of The Insurance Society of Philadelphia since 1989 and was its Chairperson in 1997-1999. Joseph F. Morris, CPA, MBA Bio 31 Business and Financial Services for Property and Casualty Insurance Companies Joseph F. Morris jmorris@pcicstrategies.com 215-901-0334 www.pcicstrategies.com

32. Disclaimer of Warranties The content of this webinar and the presentation materials have been prepared by P&C Insurance Company Strategies, LLC (PCIC Strategies) “as is”, for informational purposes only and without warranties of any kind, either express or implied. PCIC Strategies disclaims all warranties including but not limited to warranties of title, implied warranties of merchantability, fitness for a particular purpose, compatibility, security, accuracy, reliability or infringement. Business and Financial Services for Property and casualty Insurance Companies 32