2014 PAMIC Financial Management Seminar Enterprise Risk Management Presentation Jeff Pratt – Director FP&A September 30, 2014.

2014 PAMIC Financial Management Seminar

Enterprise Risk Management Presentation

Jeff Pratt – Director FP&ASeptember 30, 2014

What is Enterprise Risk Management?

Different Stakeholders / Different Opinions

Pre-Cursors – RBC, Capital Adequacy, DFA

Different Definitions

Initially – Select Rating Agencies

Currently – All Rating Agencies and Regulators

Penn National Insurance ERM start-up timeline

July 2006 – Initial ERM Committee Meeting Held

March 2007 – Initial Risk Tolerances Developed

July 2007 – Incident Log Started

August 2007 – Scorecard Development Started

November 2007 – First Presentation to Board

Primary Purpose of ERM

To assure that the Company properly allocates its capital to seize appropriate business opportunities and identifies and mitigates underwriting, investment, financial or operational risks that approach or exceed acceptable risk tolerance levels.

Why do we think ERM is important?

ERM Supports Good Corporate Governance

Good Business Practice To Understand Risks And Opportunities That Exist Throughout The Organization

Rating Agencies Are Requiring It

Role of the Board of Directors

Knowledge and understanding of corporate risks

Communicate Board support of ERM to the organization

Assure that corporate risk taking is in line with Board expectations

Authorize ERM Committee to implement as outlined in Policy Statement

Review and approve changes to the ERM Policy Statement annually

Annual Board Report

Updates on risks previously identified

Identification of emerging risks

Significant items that relate to the management of risk and capital

Recommended changes to the ERM Policy Statement

Current Risks

Separated into four Risk Categories

•Strategic•Underwriting•Investment•Operational

Total of twenty nine defined risks

Keeping an eye out for emerging risks

Typical ERM Program Components

ERM Policy

Risk Framework

Risk Appetite

Risk Tolerance

Risk Monitoring

Standard & Poor’s Risk FrameworkCredit Interest Insurance Operational

Asset Default Interest Rates Underwriting IT Systems

Counterparty: Interest Spreads Pricing Continuity

Reinsurers Optionality Cycle Management Environmental

Derivative Catastrophe Regulation

Banks Market Reserving Compliance

Brokers Equities Claims Management Fraud

Dealers Foreign Exchange Terrorism

TPAs Real Estate Personnel

Change Management

Distribution

Outsourcing

Reputation

AM Best Risk FrameworkCredit Market Underwriting Operational Strategic

Default Equities UW Process Monetary Competition

Downgrade Other Assets Pricing Reporting Demographics

Disputes Currency Reserves Legal Publicity

Settlement Concentration Product Design Distribution Rating

Sovereign Basis Basis IT Systems Demands

Concentration Reinvestment Frequency Regulatory Regulatory Capital

Liquidity Severity Training Availability

ALM Lapse Turnover Technological

Interest Rates Longevity Data Capture

Mortality/Morbidity

Optionality

Concentration

Economy

Other Important Considerations for ERM

Risk Management Culture

Prospective Risk Management

Financial Models Used

Financial Models Supporting ERM

Deterministic Models•Project financial results based upon assumptions, e.g.

•Inflation rates

•Interest rates

•Stock market results

•Rate changes

•Loss reserve performance

•Useful for testing sensitivity to economic and other changes

Stochastic Models•Model the full range of possible financial results

•Produces a statistical distribution of financial results

What do we do with ERM data?

Address Identified Risk Tolerance Breaches

Rank Risks

Use Modeled Results In Planning

Supports Reinsurance Purchases

Disclosures to Regulators and Rating Agencies

Allocate Capital

2014 PAMIC Financial Management Seminar

Enterprise Risk Management Presentation

Jeff Pratt – Director FP&ASeptember 30, 2014