1. Actuarial Value John Burville May 19th, 2004

2. I am an Actuary

3. A “herd” of Actuaries Sure we have body language!?

4. Get to the purpose already... Actuarial Value The drive for profitability

5. The Story of ACE

6. Acquisition Trail 1995 - 1999 2 Lloyds syndicates 2 Catastrophe Reinsurer (Tempest) 2 Westchester (USA) 2 CIGNA’s worldwide P&C 2 Capital Re

7. ACE Transformation YearLocationLines Of Business Number of Staff Total Reserves Total Assets 1994BermudaXL, D&O40$1.2bn$3bn 1999WorldwideMost Commercial Lines 8,000$9bn$30bn

8. Nouveau Business Plan Starting point: CIGNA - Combined >110% Business Plan: 1. Cease all businesses with Combined >100%. 2. Reinsure Run-off liabilities Ending point: ACE USA - Combined <100%

9. ACE Transformation YearNumber of actuariesPhotos 19941 1999100

10. Actuarial Value 2 Reserving 2 ROE 2 Planning 2 Monitoring 2 ROE With specific deliverables to key management

11. Reserving 2 Establish sound reserving practices. 2 Have reviews completed timely. 2 Use a consistent reporting to Head Office. 2 Succinct reports for executive management.

12. ROE Revenue divided by Equity

13. ROE 2 A measure to ensure effective use of capital. 2 Alternative views on ROE: – Calendar year ROE – Pricing ROE – ROE measure for multi-year tailored contracts – et al

14. ROE “Field of Dreams”

15. ROE - E an Enigma 2 Capital needed in ACE – Market comparisons – DFA analysis – Statutory RBC models – Rating Agencies 2 Rating agencies – Each rating agency has different ways of assessing needed capital: O RBC type model. O Various ratios and tests. O Comparison with other companies in common rating category.

16. ROE - E use S&P Model 2 Lower bound of needed capital. 2 Can get a copy from S&P. 2 Is a well defined model. 2 Can be built by the company. 2 Additive. 2 Is simple to use and easy to manage.

17. ROE - method 2 Pricing ROE. 2 Run a cash flow model. 2 Use S&P capital. 2 ROE is IRR of Surplus flows.

18. Liabilities UPR Loss RSV Expense RSV Funds Held Equity Liabilities UPR Loss RSV Expense RSV Funds Held Equity ROE Pricing Model IRR on Equity Flows Pool of Equity Single Policy Venture Ltd. Income UW Invest Taxes Income UW Invest Taxes Assets Invested Receivable Recoverable Assets Invested Receivable Recoverable Equity Flows PremiumLoss, ExpenseIncome TaxInv Income

19. ROE - GL example 1. Surplus amounts use S&P Capital Adequacy factors for premiums, reserves and assets. GL factors used here are: Premiums 1.5 x 0.33, Reserves 1.5 x 0.11, Assets 4.5%. 2. ROE is IRR of surplus flows.

20. Where are we now? Pricing Model ROE

21. ROE - Actuarial Value 2 Using ROE pricing models should result in achieving the ROE in the future. 2 Division managers will be given ROE targets. 2 Division managers will establish ROEs for products and business units within the division. – Manager will set guidance for minimum acceptable ROE by product line. – Some products deserve to achieve higher ROEs. – Some will always achieve a lot less. 2 Use ROEs as part of the planning process.

22. Planning Cycle 2 CEO sets pricing ROE targets. 2 Planning process establishes strategies to achieve loss ratios, ROEs, and volumes. 2 Quarterly monitoring of planned strategies, and revision of loss ratios. 2 Use ROEs as guide in planning process.

23. Planning Cycle Determine Pricing ROEs. Present ROEs to CEOs, and Underwriters. Develop alternative scenarios to achieve acceptable ROE for next year. Manager/Underwriter agree ROE, Volume, plan loss ratios, and the strategies to achieve plan loss ratios. Underwriters work with actuaries to monitor and manage strategies. Eg Pricing, risk selection, loss experience. Results during the year. Submit Plan with strategies Verify achievements of Plan strategies

24. Bridging Analysis

26. ROE planning process 2 Underwriter and actuary must work together to develop the plan ROEs. – Actuary will develop projected loss ratios. – Underwriter will agree achievable price/contract terms/reinsurance costs/new business strategies. – Actuary will reflect underwriters strategies into the ROE bridging analysis to arrive at pricing ROE. 2 The process is dependent upon achieving agreed strategies. 2 The strategies can be verified. – Price monitoring – Underwriter culling activity. – Contract changes – Reinsurance changes 2 The planning process targets the CEOs primary ROE goal. – Deliverables are created – Actuary and underwriter are both responsible for the component verifiable parts.