1. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Solvency Modernization and Corporate Governance ACLI’s Compliance and Legal Section Annual Meeting July 23, 2009 By Paul Graham – SVP and Chief Actuary, ACLI

2. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Solvency Modernization Worldwide Goal of Modernizing Prudential Oversight of Insurance Companies IAIS – Common Solvency Structure and Standards EU – Solvency II US (NAIC)– Solvency Modernization Initiative Other countries – Various initiatives

3. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Solvency Modernization IAIS – Quantitative and Qualitative Components  Risk-based Financial Requirements  Governance  Market Conduct  Disclosure

4. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Solvency Modernization Solvency II – Follows 3 Pillar Approach of Basel II  Quantitative Solvency Assessment  Risk Management and Supervisory Activities  Public and Supervisory Disclosure

5. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Solvency Modernization U.S. (NAIC) – Solvency Modernization Initiative  Principle-based Approaches to Reserves and Capital (PBR, C3P1, C3P2, C3P3)  Governance (PBR, MAR, and Broad-based)  Group Supervision  Reinsurance Modernization  Accounting (IASB)

6. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Common Elements of All Risk-focused Assessments Own Company Models Enhanced Corporate Governance Requirements

7. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Current NAIC Solvency Framework Reserves Base Reserves Deficiency (or Alternate) Reserves Asset Adequacy Reserves Surplus and Capital Minimum Risk-based Capital Requirements Additional Capital and Surplus

8. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 What Are Reserves? Reserves are a determination of the amount of assets necessary to set aside so that a company can be reasonably sure that they will have enough money to pay future claims

9. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 What Is Risk-based Capital? RBC is a determination of the minimum amount of assets necessary, in addition to reserves, to set aside so that a company can be extremely sure that they will have enough money to pay future claims

10. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 What Is a Principle-Based Approach? Under a true principle-based approach, companies would be allowed to use their own best estimate of future company experience for assumptions such as mortality, policyholder behavior, and expenses, with margins that reflect the level of uncertainty in the assumption (higher margins for RBC than reserves) Additionally, stochastic (random statistical) modeling would be used to determine future economic scenarios for use within the PBA calculation

11. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 NAIC’s New Proposed Framework for Reserves on New Business Mixture of a prescribed formula reserve and a true principle- based reserve  Calculate Formula Reserves as a floor (Net Premium Reserve) Do not vary by company Based on prescribed assumptions  Calculate “Deterministic” Reserve to determine if additional reserve is necessary A formulaic reserve using company-based assumptions for many elements  Calculate “Stochastic” Reserve to determine if additional reserve is necessary A reserve based on company’s models, using statistical testing of random investment returns

12. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Comparison of Proposed vs. Existing Reserve Frameworks Existing 1.Base Reserve – Formulaic & prescribed 2.Alternative (or Deficiency) Reserve - Additional reserves based on gross premiums and company- specific mortality assumptions 3.Asset Adequacy Reserves – Additional reserves based on company models and company-specific assumptions Proposed 1.Net Premium Reserve – Formulaic & prescribed 2.Deterministic Reserve – Additional reserves based on gross premiums and company-specific assumptions (more than just mortality) 3.Stochastic Reserves – Additional reserves based on company models and company specific assumptions and randomly generated economic scenarios

13. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 NAIC’s New Proposed Framework for Risk- based Capital Mixture of a prescribed formula and a true principle-based calculation  Asset Default Risk (C!) Factors do not vary by company Based on prescribed assumptions  Pricing Risk (C2) Factors do not vary by company Based on prescribed assumptions  Asset Mismatch Risk (C3) Calculation based on company’s models, using statistical testing of random investment returns  Business Risk (C4) Factors do not vary by company Based on prescribed assumptions

14. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Additional Features of New System Increased involvement of Board and Senior Management (Governance) Sensitivity testing to determine where small changes in assumptions could cause large changes in outcomes Increased rules and guidance on modeling and determination of assumptions Increased disclosure (to regulators) requirements Mandatory submission of company experience NAIC Valuation Manual can be quickly changed to accommodate new products

15. © AMERICAN COUNCIL OF LIFE INSURERS 101 Constitution Ave., NW, Washington, DC 20001-2133 Timing RBC C3P1 and C3P2 have been implemented RBC C3P3 exposed for comment (2010 implementation) AG VACARVM implemented for 2009 PBR (Life) exposed for comment (2012 or 2013 implementation)