XXIII Annual ASSAL General Meeting US Risk-Based Supervision Director Christina Urias April 23, 2012

US Solvency Framework Primary goal is to ensure financial health of insurers for purposes of protecting policyholders Work with companies to remedy areas of concern More severe interventions if company continues to deteriorate e.g. regulators will run off or liquidate the insurer if necessary to ensure protection of existing policyholders A zero insolvencies goal would require a different system Additional goals include availability and affordability of insurance, stable and competitive markets »2»2

US Solvency Framework Pillar 1 –Laws and Regulations –Risk-Based Capital (RBC) Pillar 2 –Regulatory Oversight, Assessment and Monitoring Pillar 3 –Public and Regulatory Reporting Requirements for Insurers »3»3

US Solvency Framework Licensing Each state of operation requires compliance with its laws and regulations (subject to NAIC accreditation requirements); not a passport system Domiciliary state, typically first state of licensure, is lead regulator Adequate business plan required to apply Fixed minimum capital or simple capital calculation must be met, and subject to RBC once up and running Fit and proper management checked for licensure Criminal background check Proper experience, skills Guaranty fund participation Unique State-based policyholder protection system Remaining insurers in the sector are assessed a portion of the shortage of policyholder liabilities less assets »4»4

US Solvency Framework Notice of Material Transactions, including intra-group transactions: Acquisition/disposition of assets Revisions to reinsurance agreements Material guarantees/transactions Acquisition/change of control of insurer is approved or rejected by the insurance commissioner Investment limitations Prudent person approach Defined limits approach Derivative use plan requirements Asset adequacy tests and asset/liability matching requirements for life products »5»5

US Solvency Framework RBC Overview Developed in early 1990s; F inalized formulas: Life RBC 1993 Property/Casualty RBC 1994 Health RBC 1998 Maintained and evaluated continuously with eye toward predominant risks for each industry segment The formula considers the entity’s size, structure and risk profile Standardized approach, mainly factor based but with some stochastic and full modeling (predominantly Life RBC) upgrades over the years Not all risks are accounted for – only material categories of risks RBC formulas are uniform among the states Largely tied to annual financial reporting for verifiability Annual modifications occur, both maintenance and enhancements »6»6

US Solvency Framework Risk-Based Capital (RBC) Results RBC is a baseline tool for providing legal authority for specific regulator action Provides 4 action level triggers based on minimum regulatory capital levels - NOT a target capital level or intended as a financial strength indicator above the action levels RBC is supported by a number of Pillar II and Pillar III tools Used in concert with other analysis and exam findings Augmented by robust annual and quarterly financial reporting and State authority for supplemental reporting or data submission Not totally accurate for all companies but reasonably accurate for most companies Found to be highly effective in HELPING to identify weakly capitalized insurers »7»7

RISK BASED CAPITAL CALCULATION See attached handout »8»8

US Solvency Framework SMI review of RBC: Purpose of RBC in U.S. Regulatory Framework US regulators’ response: Maintain RBC as one of many analytical tools, not a target capital level Rely upon RBC for explicit actions authorized by statute RBC Enhancements Assess missing risks - considering a catastrophe component for property/casualty RBC Partial Internal Models for RBC Life RBC currently uses modeling for variable annuities with certain guarantees and similar products Considering expansion to other life products Principle-Based Reserve project will increase RBC models »9»9