Own Risk Solvency Assessment (ORSA)

1. Own Risk Solvency Assessment (ORSA) 2013 ASNY Annual Meeting Josh Windsor, NAIC Mark Yu, General Re-New England Asset Management

2. Today’s ORSA discussion is presented by: The views presented by the speakers are as individual professionals and are not the opinion of their employers or of the Actuarial Society of New York. Josh Windsor Mr. Windsor recently joined the national Association of Insurance Commissioners (“NAIC”) after nearly 20 years insurance related experience. He is a member of the NAIC’s financial regulatory affairs international and market surveillance unit where he will work on a variety of national and international projects.  He was previously associated with a consulting firm that serves regulators with a variety of projects including risk focused examination of insurance companies, risk assessment and capital requirements for various insurance entities. Josh is a Fellow of the Society of Actuaries, Fellow of the Institute and Faculty of Actuaries, a member of the American Academy of Actuaries and the Secretary of the Actuarial Society of New York. Mark M. Yu Mr. Yu joined GR-NEAM in 2012 as an Enterprise Risk Management professional focusing on the capital management and corporate development activities for Life insurance companies. Prior to joining GR-NEAM, Mr. Yu was a senior risk manager within the Governance and Strategy team at AIG Enterprise Risk Management. Prior to working at AIG ERM, he was a Senior Vice President and Treasury Director within the Group Capital Management division of Swiss Re. Mr. Yu holds a B.A. from National Tsing Hua University in Taiwan and a M.S. from the University of Iowa. He is a Fellow of the Society of Actuaries, a CFA charter holder, a Financial Risk Manager, and a Member of the American Academy of Actuaries.

3. Table of Contents ORSA OVERVIEW ASSET RISK EVALUATION – METHODOLOGY & APPROACH ASSET RISK EVALUATION – SAMPLE ANALYTICS AND REPORTING Parting Remarks

4. Own Risk and Solvency Assessment Overview (ORSA)

5. What is ORSA? • It is an own-risk review with the following key questions: • What is our strategy? • What level of risk are we willing to assume in pursuit of this strategy? • What are the key risks that could hinder our ability to achieve our strategy? • How much capital do we need to cover those key risks? • What risks – individually or collectively- would subject us to losses that exceed our tolerance? • What risk scenarios would cause us to fail or stop operating as a going concern?

6. ORSA - Key Points Building a bridge between risks, capital needs and available capital. [Note the distinction between capital needs and RBC requirements] Elevated risk awareness Improve risk governance processes and techniques Evolving by nature (business mix, environment factors, best practices) ORSA will lead insurer management teams to be much more deliberate and explicit in how they identify measure and manage enterprise risks

7. ORSA - Key Points (Cont’d) • A robust ORSA addresses current and prospective risk in five key categories: • Underwriting • Credit • Market • Operational • Liquidity

8. Capital Requirements Governance & Risk Management Solvency Modernization Initiative Group Supervision Statutory Accounting & Financial Reporting Reinsurance Solvency Modernization Initiative NAIC Own Risk and Solvency Assessment • Background • Solvency Modernization Initiative (SMI) adopted by the NAIC in 2008 to respond to financial crisis and international regulatory solvency developments • Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act adopted in September 2012 with effective date of January 2015 • ORSA Guidance Manual to provide guidance regarding the reporting of insurer’s own risk and solvency assessment • ORSA not required for Individual insurers with annual gross premium (“AGP”)< $500 million and/or Insurance groups with AGP of less < $1000 million

9. Timeline • The NAIC launched the Solvency Modernization Initiative (SMI), a critical “self-examination” to update the U.S. insurance solvency regulation framework. • No fundamental revision of the regulatory capital formula (called Risk Based Capital) but only revision to include CAT and Operational Risk. Also introduction on Principle Based Reserving for life companies. • Two new formats of statutory reporting have already been approved by the NAIC as part of the SMI: • Form F Enterprise Risk Report (ERR) – in effect from 2013 in some states (see article in the Fall 2013 Examiner magazine). • ORSA Summary Report – in effect from 2015. ORSA and Form F Timeline ORSA Model Act adopted onSept 12, 2012 NAIC ORSAGuidance ManualNov. 2011 NAIC ORSA Model Actproposed effective dateJan. 1, 2015 2ndORSA Pilot (May-Sept 2013) 1stORSA Pilot (June-July 2012) 2010 2011 2012 2013 2014 2015 First Form F reporting for some states (July 1, 2013) NAIC 2010 Model Law(Form F on ERR)

10. The main building blocks of the NAIC ORSA Section 1 Section 2 Section 3 Risk management framework Assessment of Risk Exposures Group risk capital and prospective solvency assessment Quantitativerisk assessment / economic capital modelling Risk culture and governance structures Risk identification and categorization Group risk capital adequacy determination, approaches and assessment Qualitativerisk assessment Board of Directors oversight Risk prioritization and assessment tools Integrating capital management into decision-making (“Use Test”) Stress testing methodologies and documentation Risk policies, procedures, and programs Risk monitoring methods and controls Capital forecasting and prospectivesolvency assessment Risk appetite, tolerances and limits Risk reporting and communication Model validation and calibration Evaluation and feedback loop Implementing the NAIC ORSA can be structured around segmented building blocks, each with its own principles. The following represents an illustrative building block model that has beendeveloped for ORSA.

11. Own Risk and Solvency Assessment Overview • ORSA’s Two Key Requirements: • NAIC ORSA involves a self-assessment of the insurer’s risk management framework and solvency position

12. NAIC Own Risk and Solvency Assessment Filing Requirements (1/3) • 1. Description of ERM Framework • High level summary of key ERM elements • Identification and assessment of relevant and material risks for executed business strategy • Documentation of assessment tools • Description of accounting basis and legal entity structure • Definition of critical risk management policies and procedures Source: North America CRO council presentation

13. Typical Enterprise Risks(not consistent with Official ORSA Guidance)

14. NAIC Own Risk and Solvency Assessment Filing Requirements (2/3) • 2. Assessment of Risk Exposures • Relevant and material risks • Both quantitative and qualitative assessments • Under normal and stressed environments • Model validation, calibration and assumption setting process • Methodology and approach • Multiple perspectives including regulatory, economic and rating agency, etc • Tolerances and limits setting process

15. NAIC Own Risk and Solvency Assessment Filing Requirements (3/3) • 3. Group Risk Capital and Prospective Solvency Assessment • Group level “available” capital versus “risk” capital evaluation • Intra-group transactions, debt leverage and diversification benefits • One to three years forward-looking solvency assessment • Link business strategy and capital actions to prospective assessment • Different tolerances at different confidence levels under different valuation bases Normal Environment Stressed Environment Risk Tolerance Time

16. NAIC Own Risk and Solvency Assessment ORSA vs. Statutory Risk-Based Capital (RBC) *Filing date: states might set a filing date; the NAIC has discussed allowing companies to submit around their business processes, but some states might require these to be submitted once a year at a particular time

17. Recent Developments As of August 5, 2013, five States have adopted Model Reg 505: RI, IA, NH, ME  and VT. It is under active consideration in 8 more (see map following). The American Academy of Actuaries has a working party that is preparing a model ORSA report for regulators. Another (2013) round of ORSA testing by the NAIC.

18. Recent Developments (Cont.)

19. Deficiencies in the 2012 ORSA Pilot Study addressed by the NAIC (Absent Items) Reports did not always specify the accounting approach used (e.g., GAAP, SAP, IFRS) The organizational and legal structures were not always clearly explained A comparison of material changes over time A comparative look back for three years Legal entity mapping Glossary of terms used by the company

20. Deficiencies in the 2012 ORSA Testing by the NAIC (Absent Items Cont.) Detailed explanation of the company’s risk limits, including key risks and materiality Combined stress test scenarios in addition to the single stress tests Descriptions and explanations of tables and graphs Details on capital model calculations Risk owner assignment

21. Deficiencies in the 2012 ORSA Testing by the NAIC (Absent Items Cont.) Compensation and incentive linkage to risk, including how this is determined by the company Heat maps of risks Graphical comparison of different capital models if mentioned or used Executive summary Stronger, more detailed prospective risk sections

22. Asset Risk Evaluation – Methodology and Approach

23. Prudent Model Assumption: Normal vs. Asymmetric • The world is usually not normal • Assumptions of normality translate into misleading results • It is essential to maintain a broad understanding of the risk characteristics of the portfolio • Risk analysis and evaluation should capture and understand the impact of asymmetry on a portfolio’s risk / return profile Identify Asymmetric, Non-Normal Returns * Prospective Returns & Vols Model VaR / T-VaR Enterprise Decision Consequences 0.02 *4P = four parameters, where normal skewness = 0.0; normal tail = 2.0 Source: GR-NEAM Analytics

24. Tail Risk Evaluation: Multiple Approaches with Various Implications Downside Risk Metrics VaRValue-at-Risk T-VaRTail Value-at-Risk • Measures may be Expressed: • At Multiple Confidence Intervals • Multiple Periods: Daily, Weekly, Monthly, Quarterly, Annually • As Portfolio or Capital Loss • High Degree of Customization • Maximum Loss Not Exceeded With a Certain Probability • Expected Loss if Loss Event Occurs Intra-Period “At any time within the period” End-of-Period Statistical Distribution Normal Market Conditions Extreme Tail Risk • Standard Normal, End-of-Period: SNEOP • Levy with alpha-Stable Methodology, Heavy Tailed • Allows For Jumps • Diffusion Process, Intra-Period: DIP • Neglecting Extreme Market Movements Source: GR-NEAM Analytics

25. Value-at-Risk and Tail Value-at-Risk : Traditional Measures with an End-of-Period View Portfolio Annual Returns Value-at-Risk (VaR) DefinedThe amount of loss not to be exceeded with a certain probability in a given time frame; typically expressed as a percent of capital Tail Value-at-Risk (T-VaR) DefinedThe expected amount of loss if the VaR loss threshold is exceeded Hypothetical 99.0 VAR ~ similar in concept to a 1-in-100 year event Hypothetical 99.5 VAR ~ similar in concept to a 1-in-200 year event Hypothetical 99.6 VAR ~ similar in concept to a 1-in-250 year event Source: GR-NEAM Analytics

26. Intra-Period Losses May Be Significant And Require Advanced Techniques To Avoid Pitfalls of Traditional VaR & T-VaR Metrics Portfolio Annual Returns Intra-Period vs. End-of-Period Traditional VaR/T-VaR methods underestimate Intra-period downside risk by focusing on end-of-period return distributions Solely. (E.g. -1.6% annual portfolio return) Intra-period VaR/T-VaR estimation approach reflects realistic downside risk. (E.g. -19.7%) Source: GR-NEAM Analytics

27. Asymmetric Measures Capture Extreme Events When Markets Are Not Normal: Compare Annual T-VaR @ 6.1% vs. 13.8% Source: GR-NEAM Analytics

28. Asset Risk Evaluation – Sample Analytics and Reporting

29. Multi Portfolio VaR (T-VaR) Evaluation Multi-portfolio, multi-currency, multi-time-period views with consideration of hedge effects Source: GR-NEAM Analytics

30. Multi Portfolio VaR (T-VaR) Migration What-if downside risk analysis under different market cycles, assumptions and approaches Source: GR-NEAM Analytics

31. Incremental VaR (T-VaR) Analysis Asset’s downside risk contribution within portfolio context; portfolio downside risk impact from (proposed) changes in asset allocation Source: GR-NEAM Analytics

32. VaR Risk Decomposition Provides insight into portfolios’ downside risk drivers Addresses regulatory / rating agency risk management expectations Source: GR-NEAM Analytics

33. Asset Return Forecast – Benchmark Comparison Prospective benchmarking and expected tracking error; Estimate potential prospective losses by asset class or risk factor Source: GR-NEAM Analytics

34. Stress Test: Historical Relevance Compare and contrast statistical risk results with historical stress events outcome Source: GR-NEAM Analytics

35. 2012 Life Industry Asset Return vs. T-VaR Distribution Source: GR-NEAM Analytics

36. Parting Remarks

37. Parting Remarks(not NAIC advice) Tail risk evaluations should address non-normal and asymmetric characteristics Intra-period evaluations are equally, if not more than end-of-period results What-if analysis and benchmarking offer valuable insight for contemplated actions Risk analytics and reporting need to provide actionable information Relating statistical results to historical scenarios adds additional context and story

38. Today’s ORSA discussion was presented by: The views presented by the speakers are as individual professionals and are not the opinion of their employers or of the Actuarial Society of New York. Josh Windsor Mr. Windsor recently joined the national Association of Insurance Commissioners (“NAIC”) after nearly 20 years insurance related experience. He is a member of the NAIC’s financial regulatory affairs international and market surveillance unit where he will work on a variety of national and international projects.  He was previously associated with a consulting firm that serves regulators with a variety of projects including risk focused examination of insurance companies, risk assessment and capital requirements for various insurance entities. Josh is a Fellow of the Society of Actuaries, Fellow of the Institute and Faculty of Actuaries a member of the American Academy of Actuaries and the Secretary of the Actuarial Society of New York. JWindsor@naic.org 212 -398-9000 Mark M. Yu Mr. Yu joined GR-NEAM in 2012 as an Enterprise Risk Management professional focusing on the capital management and corporate development activities for Life insurance companies. Prior to joining GR-NEAM, Mr. Yu was a senior risk manager within the Governance and Strategy team at AIG Enterprise Risk Management. Prior to working at AIG ERM, he was a Senior Vice President and Treasury Director within the Group Capital Management division of Swiss Re. Mr. Yu holds a B.A. from National Tsing Hua University in Taiwan and a M.S. from the University of Iowa. He is a Fellow of the Society of Actuaries, a CFA charter holder, a Financial Risk Manager, and a Member of the American Academy of Actuaries. Mark.Yu@grneam.com 860-676-8722

39. Questions?