ERM and the Actuarial ProfessionDon Mango, FCAS, MAAADirector of R&D, GE Insurance SolutionsVice President of R&D, CASCAS Annual Meeting November 2004

2 /GE /

June 7, 2004

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 NOTICEThe 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 /GE /

June 7, 2004

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 /GE /

June 7, 2004

Bottom Line

1. Actuaries are the logical candidates for ERM leadership in insurance and pensions

2. Much of our “risk franchise” has already been co-opted

3. We need to stop thinking protectionist and embrace expansion fearlessly and confidently

5 /GE /

June 7, 2004

Benchmarking ERM Practices in a Derivatives Firm

6 /GE /

June 7, 2004

ERM Best practices from leading industriesResource: The Practice of Risk Management, Goldman Sachs (GS), Risk Books, 1996>Securities firm risk management market standard

referenceInsurers and reinsurers sell derivative-like products>Long-dated, illiquid, OTC derivatives on untraded

underlyingsLearn 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 /GE /

June 7, 2004

GS: Structure and Skills of Centralized Risk Mgmt Group1. Risk Monitoring and Analysis2. Quantitative Analysis3. Price Verification4. Model Development5. Systems Development and Integration

8 /GE /

June 7, 2004

Derivatives Risk Management

Role Responsibility In Insurance and Pensions

Risk Monitoring and Analysis

•Monitor position and price data•Evaluate risk exposures•Identify and monitor limit violations•Analyze potential scenarios•Summarize and report on risk exposures•Reconcile with other areas•Perform backtesting

•Monitor reserve and price data•Evaluate risk exposures•N/A (usually UW risk mgmt)•Analyze potential scenarios•Summarize and report on risk exposures•Reconcile with other areas•Perform backtesting (e.g., reserve run-off, actual versus expected)

9 /GE /

June 7, 2004

Role Responsibility In Insurance and Pensions

Quantitative Analysis

•Determine modeling for new products•Design new quantitative models•Test new models

•Determine modeling for new products•Design new quantitative models•Test new models

Price Verification •Verify prices of complex derivatives•Track changes in pricing models

•Verify prices of complex policies, treaties, or books of business•Track changes in pricing models and rates

Derivatives Risk Management

10 /GE /

June 7, 2004

Role Responsibility In Insurance and Pensions

Model Development

•Develop new models for system•Develop risk analysis tools•Maintain historical return data

•Develop new models for system•Develop risk analysis tools•Maintain historical reserving and pricing data

Systems Development and Integration

•Develop infrastructure to support processing•Accept feeds from other systems•Automate data scrubbing and translation•Develop database to support risk data

•Develop infrastructure to support processing•Accept feeds from other systems•Automate data scrubbing and translation•Develop database to support risk, pricing and reserving data

Derivatives Risk Management

11 /GE /

June 7, 2004

GS Risk Management PrinciplesNo Self-Marked PortfoliosSelf-marked (to market) = self-valued portfoliosWhere there may be conflict of interest,

incentives to overstate profitabilitySound corporate governance and controlsPeer review from expert source increases

credibilityGS has Derivative Price Verification Group> Specialized pricing support to areas with

difficult-to-value derivatives

12 /GE /

June 7, 2004

Next Steps Implied By This?

1) Actuaries must learn about ERM 2) Actuaries must reframe our traditional

roles as part of the larger ERM context

3) Actuaries must prepare to be part of the new Risk Profession (whatever it looks like)

13 /GE /

June 7, 2004

Co-Opting the Risk Franchise

14 /GE /

June 7, 2004

Actuarial Techniques in the Broader ERM WorldCredit 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

15 /GE /

June 7, 2004

The Actuarial Risk Franchise

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 futureBut not necessarily the only risk professionals of the future

Thank you for your attention