1. Integrated Treatment of Enterprise-Wide Risks Rajeev M. Dutt, FSA, FCIA Consulting Actuary ERM Symposium CS 7D - April 27, 2004

2. April 27, 2004Page 2 Necessary Framework ERM strategy supports business strategy ERM strategy supports business strategy Critical risks identified Critical risks identified Data available to monitor and measure Data available to monitor and measure Risk responsibilities defined Risk responsibilities defined Corporate culture of shared responsibility Corporate culture of shared responsibility

3. April 27, 2004Page 3 Corporate Risk Hierarchy Board of Directors Board of Directors Corporate Risk Policy Committee Corporate Risk Policy Committee Insurance Group Risk Committee Insurance Group Risk Committee CRO reports to CEO CRO reports to CEO SBU / LOB Group Risk Management SBU / LOB Group Risk Management Business Platforms Business Platforms

4. April 27, 2004Page 4 Corporate Measurements Distribution of: Distribution of: – Cashflows – Earnings – PV of Earnings – Return Embedded Value Embedded Value – equals the present value of earnings that can be distributed to shareholders PLUS the market value of free surplus

5. April 27, 2004Page 5 Integrated “Pricing” Approach HEALTH PERSPECTIVE Anti-SelectionCompetitionData CreditVolatilityRegulatory LegislativeLitigationReputation ReinsuranceGuaranteeCatastrophic

6. April 27, 2004Page 6 Anti-Selection Are we keeping the right cases? Are we keeping the right cases? Review rating history and dissect EILRs Review rating history and dissect EILRs – Overall book vs. segment – LOBs: policy level vs. coverage level – Geographical – Case size Importance of accurate pricing increases with the level of competition Importance of accurate pricing increases with the level of competition

7. April 27, 2004Page 7 Competition Balancing act Balancing act – Rates sufficient for expected claims, expenses and profits – Sales division comfortable to meet volume commitments – How do actual expenses compare to plan? Monitor subsidies (sold vs. required rates) Monitor subsidies (sold vs. required rates) – Case level – LOB – SBU – Aggregate Margins eroding in group L&H products Margins eroding in group L&H products

8. April 27, 2004Page 8 Data Quality of information Quality of information Comprehension of information Comprehension of information – Predictive models Underwriting policy Underwriting policy – Homogenous cells – Sufficient credibility Confidentiality issues Confidentiality issues

9. April 27, 2004Page 9 Vendor “Credit” Risk Management of provider contract portfolio Management of provider contract portfolio – Administration leads to operational risks – Negotiation expertise Viability of providers Viability of providers – Vendor’s own ERM – Quality indicators – Renewal contracting issues

10. April 27, 2004Page 10 Volatility Claims Claims – Mix of illnesses / treatments – New procedures introduced or demanded – Varying results from disease management strategy – Legislative mandates – Economic instability – Fraud – Processing issues Billing and Collections Billing and Collections

11. April 27, 2004Page 11 Regulatory / Legislative / Legal May affect ability to operate under sound insurance principles leading to financial detriment May affect ability to operate under sound insurance principles leading to financial detriment – Community rating issues and premium limitations – HIPAA – Mandated benefits (state and federal) – National health policy – Establishment of legal precedents – State guarantee funds

12. April 27, 2004Page 12 Reputation Company-wide management of expectations Company-wide management of expectations – Claims adjudication – Financial markets perspective Distribution management Distribution management Corporate governance Corporate governance – Sarbanes-Oxley compliance practices – More transparent internal and external reporting

13. April 27, 2004Page 13 Reinsurance Availability issues may lead to adverse financial outcomes Availability issues may lead to adverse financial outcomes Cost of reinsurance may not be fully passed to ultimate consumer Cost of reinsurance may not be fully passed to ultimate consumer Payment timeline of parties may not coincide Payment timeline of parties may not coincide Reinsurer ERM issues Reinsurer ERM issues

14. April 27, 2004Page 14 Guarantee Period Premium & renewal guarantees: CI,DI and LTC Premium & renewal guarantees: CI,DI and LTC Benefit guarantee periods vary Benefit guarantee periods vary – Medical trend is short-term – LTC / Disability payouts are longer-term Hedging strategy during guarantee period Hedging strategy during guarantee period – Stochastic scenarios – Management of risks across benefits lines – Interest rate shifts – Reinsurance / securitization / segment divestiture Investment in predictive models & advanced claims management systems Investment in predictive models & advanced claims management systems

15. April 27, 2004Page 15 Catastrophic Life and medical coverage Life and medical coverage – SARS, other epidemics – Terrorism Policy limits Policy limits Integrate with P&C approaches Integrate with P&C approaches

16. April 27, 2004Page 16 Level of ERM Integration Consolidate evaluation of risk management processes Consolidate evaluation of risk management processes – Improves risk quantification measures and distributions Assess the risk interrelationships Assess the risk interrelationships Aggregate the distributions Aggregate the distributions Ensure risk strategies are complementary Ensure risk strategies are complementary Monitor strategy with dynamic modeling & projections Monitor strategy with dynamic modeling & projections – Sensitivity testing