ERM and the Actuarial Profession

1. ERM and the Actuarial Profession Don Mango, FCAS, MAAA Director of R&D, GE Insurance Solutions Vice President of R&D, CAS CAS Annual Meeting November 2004

2. GE Insurance Solutions protects people, property and reputations. With over $50bn in combined assets, the GE Insurance Solutions group of companies is one of the world’s leading providers of commercial insurance, reinsurance and risk management services. PROPRIETARY INFORMATION NOTICE The information contained in this document is the property of Employers Reinsurance Corporation, a member of the GE Insurance Solutions group of companies. It should not be reprinted, redistributed or disclosed to others without the express written consent of ERC.

3. About Me • Fellow of the Casualty Actuarial Society (FCAS) • Vice President of Research for the CAS (through 2005) • Involved in ERM initiatives with PRMIA, RMA, Society of Actuaries, International Actuarial Association, Georgia State University, Wharton, RAND • Co-report to Chief Actuary and Chief Risk Officer at GE Insurance Solutions • Former CRO of American Re-Insurance (US subsidiary of Munich Re)

4. Bottom Line • Actuaries are the logical candidates for ERM leadership in insurance and pensions • Much of our “risk franchise” has already been co-opted • We need to stop thinking protectionist and embrace expansion fearlessly and confidently

5. Benchmarking ERM Practices in a Derivatives Firm

6. ERM Best practices from leading industries Resource: The Practice of Risk Management, Goldman Sachs (GS), Risk Books, 1996 Securities firm risk management market standard reference Insurers and reinsurers sell derivative-like products Long-dated, illiquid, OTC derivatives on untraded underlyings Learn from GS how to manage risk of a derivatives portfolio Model Standards and Risk Management Not taking any position regarding the accounting treatment of insurance products and embedded options

7. GS: Structure and Skills of Centralized Risk Mgmt Group • Risk Monitoring and Analysis • Quantitative Analysis • Price Verification • Model Development • Systems Development and Integration

8. Derivatives Risk Management

9. Derivatives Risk Management

10. Derivatives Risk Management

11. GS Risk Management PrinciplesNo Self-Marked Portfolios • Self-marked (to market) = self-valued portfolios • Where there may be conflict of interest, incentives to overstate profitability • Sound corporate governance and controls • Peer review from expert source increases credibility • GS has Derivative Price Verification Group • Specialized pricing support to areas with difficult-to-value derivatives

12. Next Steps Implied By This? • Actuaries must learn about ERM • Actuaries must reframe our traditional roles as part of the larger ERM context • Actuaries must prepare to be part of the new Risk Profession (whatever it looks like)

13. Co-Opting the Risk Franchise

14. Credit Risk One of the established methods is called the “actuarial method” # of borrowers by rating category = exposure Default rate by rating category = frequency Defaults = claim count Loss given default = severity Operational Risk Basically an internal actuarial study of loss-generating events State-of-the-art is basically re-created “Basics of Actuarial Analysis” Dr. Ali Samad-Khan’s presentation from the 2004 ERM Symposium www.casact.org/coneduc/erm/2004/handouts/samad-khan.pdf Actuarial Techniques in the Broader ERM World

15. Is not… Statistics Simulation modeling Risk forecasting Honest self assessment: We are not world-leading experts in any of these fields Hybrid Professional Depth and breadth Scientific methods Mathematical rigor We may be the prototype for the risk professional of the future But not necessarily the only risk professionals of the future The Actuarial Risk Franchise

16. Thank you for your attention