1 ERM

Creating Value through ERMERM Symposium – April 26, 2004

Session: CS 6A

Donald Watson

Vice President of Enterprise Risk

ACE Group

2 ERM

Agenda

•Review ERM Role and Structure

• Identify Key Risk Factors

•How ERM Adds Value to an Organization

3 ERM

ACE Limited

• Assets of $49 billion

• P&C combined ratio: 91.1%

• Gross premiums written FY 2003: $14.6 billion

• Net Income FY 2003: $1.4 billion or $4.93 per share

• Bermuda-based insurance and reinsurance company

• Approximately 9,000 employees worldwide, located in 50 countries/territories

• Financial strength ratings of A+ from each of Standard & Poor’s and A.M. Best Company.

4 ERM

ERM Structure

Executive Management

Enterprise Risk

Operating Unit

Risk Officers

Global Function Coordinators

• Compile reports• Implement Strategies

• Recommend strategies• Communicate guidelines• Risk Analysis & Reporting

• Approve strategies and guidelines to manage risk

• Make policy and risk tolerance decisions

Risk Owners

Audit Committeeof the Board

5 ERM

Global Functions

• Actuarial• Audit• Investments• Treasury • Legal• Claims• Disaster Recovery• Human Resources• Systems

Risk Owners

• A&H• Financial Guaranty / Credit • Financial Solutions (ART)• Liability• Marine• Political Risk• Power / Energy• Professional Lines• Property• Satellite and Aviation• Specialty P&C• Reinsurance• Workers’ Comp

Product Lines

• Insurance Operations– North America– Europe– Latin America– Asia Pacific– Far East

• Reinsurance Operations• Financial Services

Operating Segments

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Enterprise Risk Management

Seeks to:• Identify those risk factors that could impair the financial

condition of ACE

• Assemble corporate resources to mitigate or otherwise

manage those risk exposures

• Provide a comprehensive view to the Board through

regular reporting on company-wide risks

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Risk Factors in an Organization

Enterprise Risk

Property Catastrophe

Reinsurance Recoverables

Investment Risk Corporate

Credit Risk

Casualty Clash

Sovereign Risk

Premium Growth

Risks to Capital

Operations Risks

Legislative / Regulatory

Action

Rating / Reputation

Decline

Risks to Earnings

8 ERM

Operations Risk

• Sarbanes Reg. 404 - Key Controls and Processes

• Internal Audit tests compliance and adequacy of controls

• Enterprise Risk Manager prioritizes remediation efforts

• Corporate Governance / Reputation •Risk to earnings•Risk to shareholder value and capital•Ability to recover shareholder value after the event

9 ERM

Credit Risk Management

• Direct Risk– Invested Assets

– CDO’s

– Reinsurance Recoverables

– Premiums Receivable

• Indirect Risk– Financial Lines – D&O, E&O, Surety

– Captives, Fronting

– Trade Credit

– Sovereign Risk

– Workers Comp

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Ceded Reinsurance Guidelines

Cession Limits

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

AAA AA A BBB

Ca

pita

l at R

isk

Maximum LimitOperating Cap

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Political Risk – PML Guidelines

Maximum Limit

Country Ratings

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

A B C D E F

Cap

ital

at

Ris

k

Operating Cap

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Risk Guidelines

0%

2%

4%

6%

8%

10%

1 in 100 Prop Cat Event

Terror C

lash Exposure

Single Name Credit

Single Country Limit

100 b.p. Interest R

ate

Single Reinsurer Limit

Ca

pita

l at R

isk

Operating Cap Maximum Limit

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• Identify risk concentrations by company, industry sector and geographical location

• Develop plausible disaster scenarios and all lines of business affected

Clash Risk

Example: Breakdown of Insured Losses by LOB for WTC disaster

27%25%24%

9%7%

5%2% 1%

0%

5%

10%

15%

20%

25%

30%Business Interruption

Liability

Property

Aviation

Life Insurance

Work Comp

Event Cancellation

Hull

Source: Insurance Information Institute

Losses valued at Sept. 2002

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Value to an Organization

Instill risk awareness across the organization

and encourage best practices • Provide an objective framework to consistently

measure and aggregate risk across operating units

• Identify significant risks and report on emerging risk

issues

• Facilitate group-wide discussions of industry issues

(TRIA)

15 ERM

• Develop Risk Guidelines by Operating

Unit, Division and Group Product Line

• Develop Risk Adjusted Return on Capital

measurement by product line across the

group

Tangible Value to an Organization

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Return on Equity & Volatility

ROE: Financial Services

-5%

0%

5%

10%

15%

20%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Year

RO

E

P/C Comm. Banks ALL

Source: Insurance Information Institute

CV = Coefficient of Variation = Std Dev. / MeanP/C Industry CV: .52 Comm. Banks CV: .17 All US Industries CV: .16

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Creating Value through ERM

Donald Watson

Vice President of Enterprise Risk

ACE Group