Gary Presentation The International Association of Black Actuaries

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					Enterprise Risk Management from
      the P&C Perspective
         IABA Conference
          August 6, 2010

                           Presented By:
                           Gary Ganci, FCAS,MAAA
                           VP ERM
Travelers Enterprise Risk Management

    The mission of Travelers Enterprise Risk Management is
    to facilitate risk assessment and implement strategies to
    optimize risks/returns in accordance with the Company’s
    goals and values.

  To enhance the coordination of risk management across all categories
   of risk throughout the company and develop dynamic models to
   quantify and examine the interaction of these risks and returns on our
   capital structure and earnings potential.
  Work in partnership with all current key risk management leaders who
   are focused on risks related to their disciplines (i.e. underwriting,
   reserving, investments, credit, regulatory compliance, operations etc.)
   to ensure that coordinated cross-departmental risk management is
  Create and maintain a dynamic capital model that will be used in the
   process of allocating capital to our products and business lines, as well
   as helping to ensure capital efficiency in concert with regulatory and
   rating agency targets.

Travelers Enterprise Risk Management

 • Long established enterprise risk management processes imbedded in the culture of the
   organization, reflected in the Company’s conservative investment policy and the
   Company’s disciplined underwriting philosophy with strong overall corporate governance
 • Strong established Board governance provided by the following sub-committees of the
       Risk Committee
       Investment and Capital Markets Committee
       Audit Committee
       Compensation Committee
       Nominating and Governance Committee
 • Strong established management governance supported by the highly seasoned,
   experienced and stable management team across all disciplines – underwriting, claim,
   reinsurance, investing, legal/regulatory and finance/actuarial
 • Dedicated senior executive appointed to oversee Enterprise Risk Management process
 • Corporate governance further supported by Chief Compliance Officer, Business Conduct
   Officer, Corporate Actuarial Group, Internal Audit and Accounting Policy Group
 • Strong earnings base of Company and diversified, national scope of operations reduces
   franchise exposure to catastrophe events as well as non-catastrophe losses
 • Maintaining conservative capital adequacy position to protect franchise, further supported
   by financial flexibility afforded by strong liquidity and low financial leverage

Travelers ERM: Management Process

                                                            •   Management Committee
                   ERM                                           – Senior executive team
                                                                 – Strategic and tactical focus
                                                                 – Monthly financial and operational reviews

                                                            •   Operating Committee
                                                                 – Expanded executive team
     Investment       Insurance         Financial                – Strategic and tactical focus
                                                                 – Business line financial and operating reviews

                                                            •   Insurance Risk Committee
               Legal &                                           –   CAT Committee
             Regulatory                                          –   Emerging Issues Committee
                                                                 –   Climate Change Committee
                                                                 –   New Product Group

                                                            •   Administrative Risk
 • Local Office / Regional / Countrywide                         – Business Resiliency Steering Committee
     – Controllable Income Statements                            – Executive Crisis Management Team
     – Monthly Summary of Production Results                     – Operational Response Team
     – Regional President’s reports

 • Business Units / Support Units
                                                            •   Investment & Credit Risk
                                                                 – Monthly investment performance
     – Monthly detailed financial and operational reviews
                                                                 – Quarterly investment report to Board
     – Performances measures evaluated against
                                                                 – Credit Committee
       established benchmarks based on allocated equity
       and target ROE’s
                                                            •   Legal Services Mgmt Team
Code of Business Conduct & Ethics
•   All employees are required to certify that they have reviewed the Code on an annual basis,
    including applicable policies such as the Code of Conduct for Systems Users and the
    Employment Policy Guide.

•   All employees are required to complete Code of Business Conduct & Ethics training courses
    on an annual basis. Training includes the review and testing of key components of the
    Code such as:
      Conflicts of Interest
      Confidential Information
      Computer Safety
      Privacy
      Accurate Financial Reporting

•   All employees are required to affirm the Code on an annual basis - failure to do so will
    result in termination.

•   Toll-free Ethics Helpline available for U.S. & International employees. Any employee who
    in good faith seeks advice, raises a concern or reports misconduct will not be subject to
    discipline or retaliation for doing so. Employees may report anonymously.

Fraud – Special Investigation Unit

 •   Monitor and measure fraud detection in the field through enhanced quality
     management and metrics
 •   Many former law enforcement with diverse federal, state, local law
     enforcement or private industry backgrounds (accident reconstruction, fire
     science, pharmaceutical industry or forensic accounting, medical fraud, cargo
     and chiropractic)
 •   Continue to recruit individuals who have extensive experience and connections
     with law enforcement (e.g., Leader of NJ Cargo Theft Task Force; TX WC
     Fraud Bureau)
 •   96% of staff are field-based and are dedicated to outside investigative work.
 •   SIU investigated 50,000 files in 2006 (individual claims)
 •   Investigating 80+ providers each having hundreds and sometimes thousands
     of files (provider/group fraud).
 •   Results: (124 arrests; 64 convictions; $1.2MM in restitution)

Travelers Accounting Policy Group

• Is staffed by CPAs and actuaries
• Represents the Company before insurance regulators and the FASB
  on financial and accounting issues
• Develops and executes implementation plans for new GAAP and
  Statutory accounting standards and interpretative guidance issued
  by authoritative accounting bodies
• Researches and develops positions on emerging accounting issues
  emanating from new exposure drafts from authoritative sources;
  from the Group’s participation in accounting or trade association
  committees and task forces; from business lines or from proposed
• Provides consultation and support on accounting and actuarial
  issues identified by the business lines, financial reporting and
  corporate finance
• Monitors changes in accounting practices and policies at the
  business lines

World Class Corporate Audit Organization

•   Leadership: The Chief Auditor is a former insurance partner from a Big 5 Public Accounting Firm and
    has direct reports with an average of over 16 years Internal Audit experience.
•   Mission: To provide assurance to Senior Management and the Audit Committee that internal controls
    across the organization are operating effectively, the company maintains compliance with SOX 404,
    and we hire and develop personnel with the intent of providing them career opportunities in the
    company. Our work must meet the quality expectations of KPMG, our external auditors, in order that
    they can rely upon our audit procedures.
•   Risk Assessment Approach: Travelers integrates risk assessments from Corporate Audit and the
    Businesses to develop the Annual Audit Plan to test financial, operational, compliance and system
    controls over strategic emerging and operational risks
•   Assessment: In a recent independent quality assurance review performed by Ernst & Young, they
    reported that Travelers Corporate Audit exhibited 122 of 136 leading practices, making Travelers “the
    leading internal audit function within the US Property and Casualty industry.”

    Capital Modeling

•    How much is enough?
      •   Economic
      •   Statutory
      •   Rating Agency views
•    Allocation to Risk Types, Businesses/Products
      •   Many different approaches
               • Tail Based
               • By Percentile Layer
               • Utility Theory

•    Other Uses
      •   Reinsurance strategy
      •   M&A and divestitures
      •   Investment strategies
•    Stress Testing
      •   What if?
               • Inflation of early 80s returns
               • and, the next big northeast hurricane hits…

How are Results Measured?

                    Reference Outcome



                              Required Capital

Reserve Risk – Statutory vs. Economic Views
                                    Statutory View

                             Carried                               VaR[99]   TVar[99]

 25.0   30.0          35.0   40.0         45.0           50.0   55.0         60.0       65.0

                                    Economic View

               Mean           Carried   VaR[99]   TVAR[99]

 25.0   30.0          35.0   40.0         45.0           50.0   55.0         60.0       65.0

Co-TVaR vs Relative TVaR: Risk Attribution Issues

          Relative TVaR[99]

                              Non-CAT U/W


                                                          Non-CAT U/W

Enterprise Risk Model


                 Premium                      Risk Drivers          Reserves
                                               (Economic Scenario
                    (Plan)                         Generator)

                                              (Future Years)

Examples of Potential Risk Drivers:
 Interest Rates/Inflation
 Underwriting Cycles
 Catastrophes
 Other economic indicators (S&P 500, GDP, Unemployment)

Reserve/UW Risk – Correlation of Accident Years

                                         AYs independent

                                         AYs 100% correlated

                                         AYs correlated with
                                         inflation index


       -       5.0    10.0      15.0    20.0       25.0        30.0

Reinsurance Collectability

     Top Reinsurers modeled individually, remaining grouped by credit quality.
           Balance Sheet recoverables and prospective treaties modeled.

  • Introduced correlation between invested asset risk (bonds) and reinsurance asset risk

  • Introduced correlation between TRV CAT exposure and reinsurance asset risk

  • Introduced correlation between TRV exposure to economic/social inflation and reinsurance
    asset risk


                     GEMS – Corp.
                     Bond Defaults
                                                       CAT Loss

Model Limitations


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