© 2005 Towers Perrin OCCA Presentation Enterprise Risk Management December 6, 2006 Pierre Laurin

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 2 There are four phases of ERM Enterprise Risks FinancialFinancial HazardHazard OperationalOperational RegulatoryRegulatoryPoliticalPolitical Human Assets MarketMarket Legal Liability Compliance and Governance Diagnostics and Analytics Solution Analysis and Review Transaction Execution / Risk Mitigation ERM Framework and Processes

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 3 ERM Value Framework How much capital do I need? What type of capital do I need? Risk and Capital Management Value Management Capital Costs Return on Risk Risk Structure Capital Structure Capital Adequacy Portfolio of Capital Resources Portfolio of Enterprise Risks Economic Capital Value Creation Maximize value by relating a firm’s decisions on the risks it takes to decisions on the capital it uses to finance its business

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 4 Specific Tasks under Enterprise Risk Management Economic Capital Reinsurance Optimization Asset Allocation Portfolio Optimization Economic Capital Model Building/Parameterization Database Operational Risk Management ERM Governance/Function Design

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 5 Why is Economic Capital economic? Based on economic, rather than accounting, balance sheet Market value of assets Expected economic cost of liabilities Also reflects distribution of economic, rather than accounting, profits (losses) Actual ultimate economic cost of liabilities Set to maintain a selected defined level of policyholder security Economic cost of ruin

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 6 What is Economic Capital? Cumulative probability Percent Change in Economic Capital Policyholder/depositor security risk relates to insolvency and non-performance Policyholder/depositor security risk relates to insolvency and non-performance -100% 0% Economic Capital covers the downside scenarios in all but the most extreme scenarios

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 7 From a corporate finance perspective, reinsurance should be viewed as a form of capital Tactical: Given the amount of paid up capital, how much contingent should I buy? Strategic: Should I change the mix between paid up capital and contingent capital? Debt Equity Net Risks Net Risks Reinsurance Gross Risks Gross Risks Reinsurance Debt Equity Gross Risks Gross Risks Debt Equity Conventional approach Framework approach

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 8 Reinsurance can also create value when the cost of reinsurance is offset by a reduction in the required rate of return The ERM value framework can be used to evaluate reinsurance and other portfolio hedging strategies Risk With reinsurance Without reinsurance Return Expected cost of reinsurance Market Consistent Required-Rate-of-Return (Opportunity Cost of Capital)

© 2005 Towers Perrin Proprietary and Confidential Not for use or disclosure outside Towers Perrin and its clients 9 Summary ERM: is an important process requires significant resources touches all aspects of the entreprise is an on-going process