1. 1602: Current Trends in Risk Management for Life Insurance Companies LOOKING BACK…focused on the future

2. Adding Value Through Risk and Capital Management –Tillinghast Survey 1 Hélène Pouliot Towers Perrin

3. Adding Value Through Risk and Capital Management –Tillinghast Survey 2  150 Chief Actuaries, CROs and CFOs from large insurance organizations around the world  Almost half from public stock organizations  More than 2/3 are from life/health insurance organizations  31% of respondents are from international operations  Respondents’ average revenues: US $4.73 B  Respondents’ average assets: US $7.02 B

4. Adding Value Through Risk and Capital Management –Tillinghast Survey 3 Key findings: 1.ERM has come of age 2.ERM is ultimately about creating shareholder value 3.Economic Capital (EC) is a key tool that is on the fast track 4.Risk and EC management are already making a difference 5.We are not done yet

5. Adding Value Through Risk and Capital Management –Tillinghast Survey 4 1. ERM has come of age:  86% of respondents say ERM is more of a priority today than just a year ago  A strong shift in the line of authority and reporting relationship for the person responsible for risk has occurred over the past 2 years: ─ CRO more likely now to be primarily responsible for ERM ─ CRO or other more likely to report up to CEO, a reversal from our last survey when this role was likely to report to the CFO  There has been a marked increase in the number of companies that have cross-functional risk committees  An increase in accountability is illustrated through the clear delineation of roles and responsibilities for most risk management processes

6. Adding Value Through Risk and Capital Management –Tillinghast Survey 5 Responsible for risk management To whom primarily reports

7. Adding Value Through Risk and Capital Management –Tillinghast Survey 6  The presence of cross-functional risk management committees has increased dramatically  This is a marked increase from our last survey when only 38% on average had a cross-functional committee Already have cross-functional committee 63% Considering cross-functional committee 17% No plans for implementing cross-functional committee 20%

8. Adding Value Through Risk and Capital Management –Tillinghast Survey 7 2. ERM is ultimately about creating shareholder value  Insurers see the principal objectives for ERM as helping them create and improve shareholder value, make risk-based decisions and better use of capital  Risk and capital management tools are being increasingly used in key decision-making processes affecting shareholder value  Insurers are currently focusing their efforts on more basic processes: ─Internal risk reporting process ─Measurement of insurance risks ─Risk identification and prioritization processes

9. Adding Value Through Risk and Capital Management –Tillinghast Survey 8 Risk reporting  The frequency of risk reporting is very low, given its importance  Most companies monitor compliance with internal risk guidelines and external risk guidelines  More than ¾ of respondents internally communicate key risk exposure and risk management activities via regular reports to their executive committee/board of directors  External communication is important for the majority of companies ─More than ½ provide separate information to rating agencies ─41% have a separate section devoted to risk management in their annual report

10. Adding Value Through Risk and Capital Management –Tillinghast Survey 9 3. EC is a key tool that is on the fast track  EC is becoming an important tool for improving capital allocation and for use in risk-based decision-making  The methodology for calculating EC is still evolving  The use of EC in NA appears to be focused on the regulatory view of capital  The most prevalent use of EC today is for communicating at the company level with shareholders, rating agencies and regulators  Improvements are being planned by a majority of respondents: ─North Americans are planning to extend their risk coverage in their EC models

11. Adding Value Through Risk and Capital Management –Tillinghast Survey 10 Calculating and using EC  Market risks are most often captured in EC calculations; operational risks least often  Statutory or regulatory liabilities are the most used definition of liabilities in EC calculations  A wide variety of measures of risk tolerance are used with significant differences by region with NA using Tail Value at Risk or CTE and Europe and Asia using Probability of Ruin  The period of risk assessment also varies widely: ─In NA companies use the duration of the run-off of the portfolio ─In Asia & Europe they are more likely to use one year  External communication of EC is widespread

12. Adding Value Through Risk and Capital Management –Tillinghast Survey 11 4. Risk and economic capital management are already making a difference  Risk management considerations have already caused insurers to change business decisions in important parts of their business  The effects on business decisions are likely to increase with the widening use of risk and capital management tools in areas such as strategic planning, product design and product/business mix  Insurers are taking specific actions to optimize asset liability risk and return trade-offs

13. Adding Value Through Risk and Capital Management –Tillinghast Survey 12 5. We are not done yet  There is a gap between what insurers want from ERM and where they are currently focusing their efforts  There are differing bases for measuring the impact of risk as well as the metrics used too measure and quantify risks  While EC is emerging as a key tool, the methodology is still evolving  Insurers continue to show concerns about their ability to effectively implement ERM  Areas where insurers are least satisfied are with their ability to: ─Reflect risk in performance measures ─Aggregate risks across functions and businesses ─Quantify operational risks