Risk Management Presentation October 29 2012

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International Association of Risk and ComplianceProfessionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750www.risk-compliance-association.com

Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the

week's agenda, and what is nextDear Member,

This week I will start from a really

interesting approach to risk management:

There are essential parts of the valuationframework still underpolitical discussions

What? Politicians in actuarial roles? Who said that?

The European Insurance and Occupational Pensions Authority (EIOPA)that was established in consequence of the reforms to the structure ofsupervision of the financial sector in the European Union.

This phrase is at the top of the"I wish I had the guts to say it" list for asupervisor. Congratulations EIOPA.

Read more at Number 4 below.

Welcome to the Top 10 list.

International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
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Chairman Ben S. Bernanke

U.S. Monetary Policy and InternationalImplications

At the "Challenges of the Global Financial System:Risks and Governance under Evolving Globalization," A High-Level Seminar sponsored by Bank of Japan-InternationalMonetary Fund, Tokyo, Japan

The new UK Regulator:The Financial ConductAuthority

The Financial ConductAuthority (FCA) will be the newregulatorwhose vision it is tomake markets work well soconsumers get a fair deal.

It will be responsible forrequiring firms to put thewell-being of their customers atthe heart of how they run theirbusiness, promoting effectivecompetition and ensuring thatmarkets operate with integrity.

The FCA will start work in 2013,

when it will receive new powersfrom the Financial Services Bill that is currently going throughparliament.

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Cyber Experts Engage on DARPAs Plan X

ProposersDay dialogue cements program approach

When the team behind DARPAs Plan X mapped out where it wanted togo with research in the development ofcyber capabilities and platforms, itknew the DARPA approach to problem solving included soliciting inputfrom the leading experts in the field.

Technical Specifications for theSolvency II valuation and SolvencyCapital Requirements calculations(Part I)

This technical specification is aworking document proposed by EIOPAto be used by insurance and reinsurance undertakings participating inany quantitative assessment to be undertaken until new update isavailable.

International Association of Insurance Supervisors

IAIS Releases Proposed Policy Measures forGlobal Systemically Important InsurersPublic consultation to continue through 16 December 2012

Basel The International Association of Insurance Supervisors (IAIS)

today released its proposed policy measures forglobal systemicallyimportant insurers, or G-SIIs.



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President's Summary of

Outcomes from the Expertsmeeting on Corruption

The Financial Action Task Force (FATF) convened, in collaboration withthe G20 Anti-Corruption Working Group, an Experts Meeting onCorruption.

Lim H ng Kiang: Whats next for hedgefunds?

Keynote address by Mr Lim Hng Kiang,Minister for Trade and Industry and DeputyChairman of the Monetary Authority ofSingapore, at the SkyBridge Alternative (SALT)Conference, Marina Bay Sands

Gill Marcus: Why education is important tothe South African ReserveBank

Address by Ms Gill Marcus, Governor of theSouth African Reserve Bank, at the Partners inPerformance 2012 Celebration Lunch at theMaths Centre, Braamfontein



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Andrew G Haldane: The Bank and thebanks

Speech by Mr Andrew G Haldane, ExecutiveDirector, Financial Stability, Bank ofEngland, at QueensUniversity, Belfast

Proposal for a Directive of theEuropean Parliament and of theCouncil on criminal sanctions forinsider dealing and marketmanipulation (MAD)State of play and orientation debate



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Chairman Ben S. BernankeAt the "Challenges of the Global Financial System:Risks and Governance under Evolving Globalization,"A High-Level Seminar sponsored by Bank ofJapan-International Monetary Fund, Tokyo, Japan

U.S. Monetary Policy and InternationalImplications

Thank you. I t is a pleasure to be here. This morning I will first brieflyreview the U.S. and global economic outlook.

I will then discuss the basic rationale underlying the Federal Reserve'srecent policy decisionsand place these actions in an internationalcontext.

U.S. and Global Outlook

The U.S. economy has faced significant headwinds, and, although theeconomy has been expanding since mid-2009, the pace of our recoveryhas been frustratingly slow.

The headwinds include the effects ofdeleveragingby households, thestill-weak U.S. housing market, tight credit conditions in some sectors,spillovers from the situation in Europe, fiscal contraction at all levels ofgovernment, and concerns about the medium-term U.S. fiscal outlook.

In this environment, households and businesses have been quite cautiousin increasing spending.

Accordingly, the pace of economic growth has been insufficient to

support significant improvement in the job market; indeed, theunemployment rate, at 7.8 percent, is well above what we judge to be itslong-run normal level.



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Federal Reserve's Recent Policy Actions

All of the Federal Reserve's monetary policy decisions are guided by ourdual mandate to promote maximum employment and stable prices.

With the disappointing progress in job markets and with inflationpressures remaining subdued, the FOMC has taken several importantsteps this year to provide additional policy accommodation.

In January, the Committee noted that it anticipated that economicconditions were likely to warrant exceptionally low levels of the federalfunds rate at least through late 2014--a year and a half later than inprevious statements.

In June, policymakers decided to continue through year-end the maturityextension program (MEP), under which the Federal Reserve purchaseslong-term Treasury securities and sells short-term ones to help depresslong-term yields.

At its September meeting, with the data continuing to signal weak labormarkets and no signs of significant inflation pressures, the FOMCdecided to take several additional steps to provide policyaccommodation.

It extended the period over which it expects to maintain exceptionally lowlevels of the federal funds rate from late 2014 to mid-2015.

Moreover, the Committee clarified that it expects to maintain a highlyaccommodative stance of monetary policy for a considerable period afterthe economic recovery strengthens.

The FOMC coupled these changes in forward guidance with additionalasset purchases, announcing that it will purchase agency

mortgage-backed securities (MBS)at a pace of $40 billion per month, on

top of the $45 billion in monthly purchases of long-term Treasurysecurities planned for the remainder of this year under the MEP.



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The FOMC also indicated that it would continue to purchase agencyMBS, undertake additional asset purchases, and employ other tools asappropriate until the outlook for the labor market improves substantiallyin a context of price stability.

The open-ended nature of these new asset purchases, together with theirexplicit conditioning on improvements in labor market conditions, willprovide the Committee with flexibility in responding to economicdevelopments and instill greater public confidence that the FederalReserve will take the actions necessary to foster a stronger economicrecovery in a context of price stability.

An easing in financial conditions and greater public confidence shouldhelp promote more rapid economic growth and faster job gains over

coming quarters.

As I have said many times, however, monetary policy is not a panacea.

Although we expect our policies to provide meaningful help to theeconomy, the most effective approach would combine a range ofeconomic policies and tackle longer-term fiscal and structural issues aswell as the near-term shortfall in aggregate demand.

Moreover, we recognize that unconventional monetary policies come

with possible risks and costs; accordingly, the Federal Reserve hasgenerally employed a high hurdle for using these tools and carefullyweighs the costs and benefits of any proposed policy action.

International Aspects of Federal Reserve Asset Purchases

Although the monetary accommodation we are providing is playing acritical role in supporting the U.S. economy, concerns have been raisedabout the spillover effects of our policies on our trading partners.

In particular, some critics have argued that the Fed's asset purchases, andaccommodative monetary policy more generally, encourage capital flowsto emerging market economies.



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These capital flows are said to cause undesirable currency appreciation,too much liquidity leading to asset bubbles or inflation, or economicdisruptions as capital inflows quickly give way to outflows.

I am sympathetic to the challenges faced by many economies in a worldof volatile international capital flows.

And, to be sure, highly accommodative monetary policies in the UnitedStates, as well as in other advanced economies, shift interest ratedifferentials in favor of emerging markets and thus probably contribute toprivate capital flows to these markets.

I would argue, though, that it is not at all clear that accommodativepolicies in advanced economies impose net costs on emerging market

economies, for several reasons.

First, the linkage between advanced-economy monetary policies andinternational capital flows is looser than is sometimes asserted.

Even in normal times, differences in growth prospects amongcountries--and the resulting differences in expected returns--are the mostimportant determinant of capital flows.

The rebound in emerging market economies from the global financial

crisis, even as the advanced economies remained weak, provided stillgreater encouragement to these flows.

Another important determinant of capital flows is the appetite for risk byglobal investors.

Over the past few years, swings in investor sentiment between "risk-on"and "risk-off," often in response to developments in Europe, have led tocorresponding swings in capital flows.

All told, recent research, including studies by the International MonetaryFund, does not support the view that advanced-economy monetarypolicies are the dominant factor behind emerging market capital flows.



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Consistent with such findings, these flows have diminished in the pastcouple of years or so, even as monetary policies in advanced economieshave continued to ease and longer-term interest rates in those economieshave continued to decline.

Second, the effects of capital inflows, whatever their cause, on emergingmarket economies are not predetermined, but instead depend greatly onthe choices made by policymakers in those economies.

In some emerging markets, policymakers have chosen to systematicallyresist currency appreciation as a means of promoting exports anddomestic growth.

However, the perceived benefits of currency management inevitably

come with costs, including reduced monetary independence and theconsequent susceptibility to imported inflation.

In other words, the perceived advantages of undervaluation and theproblem of unwanted capital inflows must be understood as apackage--you can't have one without the other.

Of course, an alternative strategy--one consistent with classicalprinciples of international adjustment--is to refrain from intervening inforeign exchange markets, thereby allowing the currency to rise and

helping insulate the financial system from external pressures.

Under a flexible exchange-rate regime, a fully independent monetarypolicy, together with fiscal policy as needed, would be available to helpcounteract any adverse effects of currency appreciation on growth.

The resultant rebalancing from external to domestic demand would notonly preserve near-term growth in the emerging market economies whilesupporting recovery in the advanced economies, it wouldredound toeveryone's benefit in the long run by putting the global economy on amore stable and sustainable path.



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Finally, any costs for emerging market economies of monetary easing inadvanced economies should be set against the very real benefits of thosepolicies.

The slowing of growth in the emerging market economies this year inlarge part reflects their decelerating exports to the United States, Europe,and other advanced economies.

Therefore, monetary easing that supports the recovery in the advancedeconomies should stimulate trade and boost growth in emerging marketeconomies as well.

In principle, depreciation of the dollar and other advanced-economycurrencies could reduce (although not eliminate) the positive effect on

trade and growth in emerging markets.

However, since mid-2008, in fact, before the intensification of the financialcrisis triggered wide swings in the dollar, the real multilateral value of thedollar has changed little, and it has fallen just a bit against the currenciesof the emerging market economies.

Conclusion

To conclude, the Federal Reserve is providing additional monetary

accommodation to achieve its dual mandate of maximum employmentand price stability.

This policy not only helps strengthen the U.S. economic recovery, but byboosting U.S. spending and growth, it has the effect of helping supportthe global economy as well. Assessments of the international impact ofU.S. monetary policies should give appropriate weight to their beneficialeffects on global growth and stability.



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The new UK Regulator:The Financial Conduct

Authority

The Financial Conduct Authority (FCA) will be the new regulatorwhosevision it is to make markets work well so consumers get a fair deal.

It will be responsible forrequiring firms to put thewell-being of their customers atthe heart of how they run theirbusiness, promoting effectivecompetition and ensuring thatmarkets operate with integrity.

The FCA will start work in 2013,when it will receive new powersfrom the Financial Services Billthat is currently going throughparliament.

The Journey to the FCA sets outhow we will approach ourregulatory objectives, how weintend to achieve a fair deal infinancial services for consumersand where we are on this

journey.

Changes to authorisations

The UK regulatory structure will be changing in 2013, whenthe FSA willsplit into two regulatory bodies the Financial Conduct Authority (FCA)and the Prudential Regulation Authority (PRA).

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In April 2012, Supervision adopted the internal-twin peaks structure, andnow Authorisations are implementing a similar structure, withassessments carried out by both the Prudential Business Unit (PBU) andthe Conduct Business Unit (CBU).

This change will only affect firms that will be dual regulated in future.

The application submission process will not change and we will continueto seek to meet our statutory deadlines.

What will change is how the application is processed internally.

There will be a CBU case officer and a PBU supervisor responsible foreach application and they will coordinate to minimise duplication or theimpact on applicant firms and individuals.

The final decision will need to be agreed by both the PBU and the CBU toensure a single FSA decision during transition to the new regulatorystructure.

These changes will allow us to start to deliver, as far as possible, a modelthat will mirror the future authorisation procedures in the PRA and theFCA.

What is happening to the FSA Handbook?

At legal cutover, the FSA Handbook will be split between the FCA andthe PRA to form two new Handbooks, one for the PRA and one for theFCA.

Most provisions in the FSA Handbook will be incorporated into thePRAs Handbook, the FCAs Handbook, or both, in line with each newregulators set of responsibilities and objectives.

Users of the Handbook will be able to access the following online:

1. The PRA Handbook, displaying provisions which apply toPRA-regulated firms



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2. The FCA Handbook, displaying all provisions which apply toFCA-regulated firms; and

3. To support the transition, a central version which will show theprovisions of both Handbooks, with clear labels indicating which

regulator applies a provision to firms.

The new Handbookswill reflect the new regulatory regime (for example,references to the FSA will be replaced with the appropriate regulator), andin some areasmore substantive changes will be made to reflect theexistence of the two regulators, their roles and powers.

(This is likely to include such aspects as the future processes forpermissions, passporting, controlled functions, threshold conditions andenforcement powers.)

The more substantive changes will be consulted on before the PRA andthe FCA acquire their legal powers.

Changes to the FSA Handbook as a result of EU legislation and FSApolicy initiatives will continue throughout this work.

After acquiring their powers, the FCA and the PRA will amend their ownsuites of policy material as independent bodies in accordance with theprocesses laid down in the Financial Services Bill, including cooperation

between them and external consultation.

What does this mean for firms?

This approach to the Handbooks for the FCA and the PRA has beenplanned to ensure a safe transition for firms and the new regulators as thenew regime is introduced.

Firms will have a new regulator or regulators, and will consequently needto assess how the new Handbooks of these bodies will apply to them.

Dual regulated firms will need to look to both the PRA and the FCAHandbooks, and FCA regulated firms to the FCA Handbook.



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When will the changes be in the Handbook?

We expect to publish the new Handbooks before legal cutover.

This will allow firms and others time to adjust to the application of the

new Handbooks before the FCA and the PRA are fully operational.

The new Handbooks will not be available in detail before this.

Alongside the publication, we will publish material on how to interpret

the application of the Handbooks, where this is not dealt with in theHandbooks themselves.

The FSA will continue to make changes to its Handbook in accordancewith the normal procedure, until the new bodies acquire their legalpowers.

The FSA Handbook will remain in force until the FCA and PRA acquiretheir legal powers.



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Launch of the Journey to the FCA

Speech by Martin Wheatley - Managing Director,FSA, and CEO Designate, FCA at the Launch ofthe Journey to the FCA event

Good morning. I would like to thank the MinisterGreg Clark for joining us today, for his supportivewords and for demonstrating the Governmentscommitment to working alongside us to deliver better conduct regulation.I would also like to thank Thomson-Reuters for hosting this morning.

Today is a big step forward on the road to becoming the new regulator,and I am glad that you are all here to join us as we launch the Journey tothe FCA.

The FCA offers a huge opportunity for the regulator and firms to startafresh, and work in partnership to reset how we deal with conduct infinancial services.

We see it as the role of the regulator to not only make the relevant marketswork well but also to help firms get back to putting their customers at theheart of how they do business.

Regulation has a huge impact on the people and businesses that rely onfinancial services, and we should never forget this.

We have approached the creation of the FCA in a thoughtful andconsidered way, as the document we are sharing with you today shows.

We will regulate one of our most successful industries, central to thehealth of our economy and a provider of two million UK jobs.

This makes our job an important one, and it will mean that we carry outour work in a way that is as open and accountable as possible.

We spent the summer engaging with consumer organisations, and 500

firms from all areas of financial services, as we developed our thinking onthe FCA.

This allowed us to gather useful feedback and we will continue this openworking in the FCA.

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We aim in the Journey to the FCA to demonstrate what our neworganisation will mean for the firms we regulate and the consumers weare here to help protect.

I encourage you all to read it, and to give us your views.

We are clear about the type of regulator we want to become, and we wantto work with all of our stakeholders to get there and deliver regulation thatworks better.

You have not yet had a chance to read the document, so let me explain abit more about what the FCA is going to be about.

The FCA has been set up to work with firms to ensure they put consumersat the heart of their business.

Underlining this are three outcomes:

1.Consumers get financial services and products that meet their needsfrom firms they can trust.

2.Firms compete effectively with the interests of their customers and theintegrity of the market at the heart of how they run their business.

3.Marketsand financial systems are sound, stable and resilient withtransparent pricing information.

Reforming regulation is not just good for consumers, it will also be goodfor firms. The industrys standing has suffered as the mis-selling scandalsand other problems have taken their toll.

This has damaged the reputation of firms across the industry, whetherdirectly involved or not. We need to work with you to put that right.

While much of what we will do is new, we will also build on what hasworked well under the FSA.

We will keep up our policy of credible deterrence, pursuing enforcement

cases to punish wrongdoing.

And our markets regulation will continue to promote integrity and carryon the FSAs fight against insider dealing, which has secured 20 criminalconvictions since 2009.



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We will continue to keep unauthorised firms from trying to takeadvantage of consumers.

We will set high expectations for those firms that want to enter financialservices, while still allowing innovation and good ideas to flourish.

And we will take forward a strong interest in the fair treatment ofcustomers an agenda that has been around for many years, but is stillkey to the FCA.

There will, however, be important changes, and our approach will bemore forward-looking, better informed, and we will have a greaterappetite to get things done.

A new department will act as the radar of our new organisationcombining better research into what is happening in the market, andanalysis of the risks to our objectives.

This will then feed into our policymaking and our supervision of firms.We want to really understand what is happening to your customers, thedeal they are getting and the issues they face.

This will include getting a better understanding of why consumers act inthe way they do, so we can adapt our regulation to their commonbehavioural traits.

Fewer firms will have regular direct contact with supervisors, as we shiftresources to allow us to deal more quickly and effectively with emergingissues, and run more cross-industry projects to get to the root cause ofproblems.

We will have new partners to work with and our relationship with the newPrudential Regulation Authority will be crucial, and driven by a culture ofcooperation.

We will aim to bring our expertise to international debates, so that EU

and international policymaking works for UK consumers and firms.

All of this will be delivered by a new culture in the FCA. We willencourage our staff to be more confident in making bold, firm andpredictable decisions.



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To help us do our job, the Government intendsto give the FCA new toolsto ensure that consumers get products that meet their needs.

This builds on one of the key lessons from past problems, which is thatregulation is often more effective if it steps in early to pre-empt and

prevent widespread harm.

We will reflect this in our supervision work when we look at how firmsdesign and sell their products.

But a key new power will mean that we can step in and ban the sale ofproducts that pose unacceptable risks to consumers for up to 12 months,without consulting first.

We will also be able to ban misleading advertising.

We will use these new tools in a measured way and while we will actsooner, and more decisively, our approach will be based on a properunderstanding of the issues and a full consideration of the potentialsolutions.

So whilst there may be times when we have to act rapidly, this is notsomething that firms should be afraid of.

Firms selling the right products, in the right way, to the right consumershave little to fear.

Our new approach will mean that we will take competition into account inall our work.

We will weigh up the impact on competition of new measures wepropose.

We will also consider whether competition could lead to better resultsthan other action we could take.

In our work here, and in other areas, I am very conscious that we have to

work with firms.

Making regulation work better for us is also about allowing firms room totry new ideas and develop their business.

Promoting competition will play an important part in this.



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We are not here to stand in the way of progress that will be of benefit toconsumers.

Our goals as the FCA are clear: we will work for an industry that is betterat serving the needs of its customers.

I see this as an opportunity not just for us but for the industry.

We can do our job better if we work with you, and I am pleased that somany of the chief executives that I speak to are talking the same languageand have committed to rebuilding confidence and trust, and reconnectingwith their customers.

It is great hearing about these good intentions, but the difficult bit for usall is to make sure this change actually happens.

There are challenges and opportunities for both us the regulator, and youthe industry.

It is a journey we have to walk together, as we put consumers back at theheart of what we do.



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Cyber Experts Engage on DARPAs Plan X

ProposersDay dialogue cements program approach

When the team behind DARPAs Plan X mapped out where it wanted togo with research in the development ofcyber capabilities and platforms, itknew the DARPA approach to problem solving included soliciting inputfrom the leading experts in the field.

On October 15 and 16, DARPA outlined its plans for Plan X to a packedhouse of potential developers and performers and solicited theirfeedback.

More than 350 software engineers, cyber researchers and human-machineinterface experts attended the event.

DARPA officials presented the goals of Plan X in preparation for releaseof the programsBroad Agency Announcement (BAA)anticipatedwithin the next month.

Plan X, announced in May 2012, is the first DARPA program of its kind.

It will attempt to create revolutionary technologies for understanding,planning and managing DoD cyber missions in real-time, large-scale anddynamic network environments.

Plan X will conduct novel research on the cyber domain.

The Plan X program is explicitly not funding research and developmentefforts in vulnerability analysis or generation of cyberweapons.

Insights obtained from discussions with government partners andpotential performers during the ProposersDay workshop will help usfinalize our approach to the Plan X program, said Dan Roelker, DARPAprogram manager.



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The program covers largely unchartered territory as we attempt toformalize cyber mission command and control for the DoD.

It is anticipated that the BAA for this effort will be posted to www.fbo.govwithin the next month.

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Technical Specifications for theSolvency II valuation and Solvency

Capital Requirements calculations(Part I)

NoteThis technical specification is aworking document proposed by EIOPAto be used by insurance and reinsurance undertakings participating inany quantitative assessment to be undertaken until new update isavailable.

As there are essential parts of the valuation framework still under political

discussions, i.e. the discount rates for the technical provisionscalculations, this document is not intended to be a complete set oftechnical specifications for the Solvency 2 balance sheet valuation nor forthe Solvency Capital Requirements calculations.

Howsoever these essential parts are not included at this stage but willfollow in due course.

Not even when the specification of discount rates for TP calculations are

finally added, the resulting technical specifications should be seen as acomplete implementation of the Solvency II framework, since for thepurpose of feasibility of testing exercises, shortcuts and ad hocsimplifications have been included.

In particular, relevant parts of the SCR calculation such as internalmodels section, undertaking specific parameters section and within thegroup section: the combination method, the treatment of Participations,Ring Fenced funds and internal model for group calculation have beendeliberately not includedin the current technical specifications, as these

were not considered by EIOPA as providing key information for thepurposes of the quantitative tests that may be launched in the comingmonths.



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However, this should not be interpreted as an EIOPA speculation on itsinclusion in the final Solvency I I framework.

This technical specification isinspired by the knowledge that EIOPA hason the current status of the negotiations on Omnibus 2 Directive, theworking documents on implementing measures and its own work in thedevelopment of Technical Standards and Guidelines.

EIOPA plans to incorporate the relevant elements of the technicalprovisions valuation, once the outcome of the OMDI I negotiations isstabilised.

Important parts

IAS 39 Financial Instruments: Recognition and Measurement

IAS 39 establishes principles forrecognising and measuring financialassets, financial liabilities and some contracts to buy or sell non-financialitems.

For the purpose of measuring a financial asset after initial recognition,this Standardclassifies financial assets into the following four categoriesdefined in paragraph 9:

(a) Financial assets at fair value through profit or loss;

(b ) Held-to-maturity investments;

(c) Loans and receivables; and

(d) Available-for-sale financial assets.

These categories apply to measurement and profit or loss recognitionunder this Standard.

The entity may use other descriptors for these categories or othercategorisations when presenting information in the financial statements.



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After initial recognition, an entity shall measure financial assets,including derivatives that are assets, at their fair values, without anydeduction for transaction costs it may incur on sale or other disposal,except for the following financial assets:

(a)Loans and receivables, which shall be measured at amortised costusing the effective interest method

(b ) Held-to-maturity investments, which shall be measured at amortisedcost using the effective interest method

(c) Investments in equity instruments that do not have a quoted marketprice in an active market and whosefair value cannot be reliablymeasured and derivatives that are linked to and must be settled by

delivery of such unquoted equity instruments, which shall be measured atcost.

Solvency I I framework:Fair value measurement principles are consideredto be consistent with article 75 of Directive 2009/ 138/ EC, except forsubsequent adjustments to take account of the change in own creditstanding of the insurance or reinsurance undertaking after initialrecognition in the measurement of financial liabilities.

Technical Provisions

Introduction

TP.1.1. The reporting date to be used by all participants should be 30June.

TP.1.2. Solvency I I requires undertakings to set up technical provisionswhich correspond to the current amount undertakings would have to payif they were to transfer their (re)insurance obligations immediately toanother undertaking.

The value of technical provisions should be equal to the sum of a bestestimate and a risk margin.



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However, under certain conditions that relate to the replicability of thecash flows underlying the (re)insurance obligations, best estimate andrisk margin should not be valued separately but technical provisionsshould be calculated as a whole.

TP.1.3. Undertakings should segment their (re)insurance obligationsintohomogeneous risk groups, and as a minimum by line of business, whencalculating technical provisions

TP.1.4. The best estimate should be calculated gross, without deductionof the amounts recoverable from reinsurance contracts and SPVs. Thoseamounts should be calculated separately.

TP.1.5. The calculation of the technical provisions should take account of

the time value of money by using the relevant risk-free interest rate termstructure.

TP.1.6.The actuarial and statistical methods to calculate technicalprovisions should be proportionateto the nature, scale and complexity ofthe risks supported by the undertaking.

V.2.1. SegmentationGeneral principles

TP.1.7. Insurance and reinsurance obligations should be segmented as aminimum by line of business (LoB) in order to calculate technicalprovisions.

TP.1.8. The purpose of segmentation of (re)insurance obligations is toachieve an accurate valuation of technical provisions.

For example, in order to ensure that appropriate assumptionsare used, it

is important that theassumptions are based on homogenous data to avoidintroducing distortions which might arise from combining dissimilarbusiness.



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Therefore, business is usually managed in more granular homogeneousrisk groupsthan the proposed minimum segmentation by lines ofbusiness where it allows for a more accurate valuation of technicalprovisions.

TP.1.9. Undertakings in different Member States and even undertakings inthe same Member State offer insurance products covering different sets ofrisks.

Therefore it isappropriate for each undertaking to define thehomogenous risk group and the level of granularity most appropriate fortheir businessand in the manner needed to derive appropriateassumptions for the calculation of the best estimate.

TP.1.10. (Re)insurance obligations should be allocated to the line of

businessthat best reflects the nature of the risks relating to the obligation.

In particular, the principle of substance over form should be followed forthe allocation.

In other words, the segmentation should reflect the nature of the risksunderlying the contract (substance), rather than the legal form of thecontract (form).

TP.1.11. The segmentation into lines of businessdistinguishes betweenlife and non-life insurance obligations.

This distinction does not coincide with the legal distinction between lifeand non-life insurance activities or the legal distinction between life andnon-life insurance contracts.

Instead, the distinction between life and non-life insurance obligationsshould be based on the nature of the underlying risk:

- Insurance obligations of business that is pursued on a similartechnical basis to that of life insurance should be considered as lifeinsurance obligations, even if they are non-life insurance from a legalperspective.

- Insurance obligations of business that is not pursued on a similartechnical basis to that of life insurance should be considered as non-life insurance obligations,even if they are life insurance from a legalperspective.



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TP.1.12. In particular, annuities stemming from non-life insurancecontracts (for example for motor vehicle liability insurance) are lifeinsurance obligations.

TP.1.13. The segmentation should be applied to both components of the

technical provisions (best estimate and risk margin). I t should also beapplied where technical provisions are calculated as a whole.

Segmentation of non-life insurance and reinsurance obligations

TP.1.14. Non-life insurance obligations should be segmented into thefollowing 12 lines of business:

Medical expenses insurance

This line of business includes obligations which cover the provision ofpreventive or curative medical treatment or care including medicaltreatment or care due to illness, accident, disability and infirmity, orfinancial compensation for such treatment or care, where the underlyingbusiness is not pursued on a similar technical basis to that of lifeinsurance, other than obligations considered as workers' compensationinsurance;

Income protection insurance

This line of business includes obligations which coverfinancialcompensation in consequence of illness, accident, disability or infirmitywhere the underlying business is not pursued on a similar technical basisto that of life insurance, other than obligations considered as medicalexpenses or workers' compensation insurance;

Workerscompensation insurance

This line of business includes health insurance obligations which relate toaccidents at work, industrial injury and occupational diseases and wherethe underlying business is not pursued on a similar technical basis to thatof life insurance covering:



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- the provision of preventive or curative medical treatment or carerelating to accident at work, industrial injury or occupational diseases;or

- financial compensation for such treatment;

- or financial compensation for accident at work, industrial injury oroccupational diseases;

Motor vehicle liability insurance

This line of business includes obligations which cover all liabilitiesarising out of the use of motor vehicles operating on land (includingcarriers liability);

Other motor insurance

This line of business includes obligations which cover all damage to orloss of land vehicles, (including railway rolling stock);

Marine, aviation and transport insurance

This line of business includes obligations which cover all damage or lossto river, canal, lake and sea vessels, aircraft, and damage to or loss ofgoods in transit or baggage irrespective of the form of transport.

This line of business also includes all liabilities arising out of use ofaircraft, ships, vessels or boats on the sea, lakes, rivers or canals(including carriers liability).

Fire and other damage to property insurance

This line of business includes obligations which cover all damage to orloss of property other than motor, marine aviation and transport due to

fire, explosion, natural forces including storm, hail or frost, nuclearenergy, land subsidence and any event such as theft;



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General liability insurance

This line of business includes obligations which cover all liabilities otherthan those included in motor vehicle liability and marine, aviation andtransport;

Credit and suretyship insurance

This line of business includes obligations which cover insolvency, exportcredit, instalment credit, mortgages, agricultural credit and direct andindirect suretyship;

Legal expenses insurance

This line of business includes obligations which cover legal expenses andcost of litigation;

Assistance insurance

This line of business includes obligations which cover assistance forpersons who get into difficulties while travelling, while away from homeor while away from their habitual residence;

Miscellaneous financial loss insurance

This line of business includes obligations which cover employment risk,insufficiency of income, bad weather, loss of benefits, continuing generalexpenses, unforeseen trading expenses, loss of market value, loss of rentor revenue, indirect trading losses other than those mentioned before,other financial loss (not-trading) as well as any other risk of non-lifeinsurance business not covered by the lines of business alreadymentioned.

TP.1.15. Obligations relating to accepted proportional reinsuranceshouldbe segmented into 12 lines of business in the same way as non-lifeinsurance obligations are segmented.



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TP.1.16. Obligations relating to accepted non-proportional reinsurance innon-life should be segmented into 4 lines of business as follows:

- Health: non-proportional reinsurance obligations relating toinsurance obligations included in the following lines: medicalexpenses, income protection and workerscompensation.

- Property: non-proportional reinsurance obligations relating toinsurance obligations included in the following lines: other motorinsurance, fire and other damage to property, credit and suretyship,legal expenses, assistance, miscellaneous financial loss.

Casualty: non-proportional reinsurance obligations relating toinsurance obligations included in the following lines: motor vehicle

liability and general liability.

- Marine, aviation and transport: non-proportional reinsuranceobligations relating to insurance obligations included in the linemarine, aviation and transport insurance

Segmentation of life insurance and reinsurance obligations

TP.1.17. Life insurance obligations should be segmented into6 lines ofbusiness.

Health insurance

Health insurance obligations where the underlying business is pursuedon a similar technical basis to that of life insurance, other than thoseincluded in the following line of businessAnnuities stemming fromnon-life insurance contracts and relating to health insurance obligations.

Life insurance with profit participation

Insurance obligations with profit participation other than thoseobligations included in the annuities stemming from non-life insurancecontracts.



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Index-linked and unit-linked insurance

Insurance obligations with index-linked and unit-linked benefits otherthan those included in the annuities stemming from non-life insurance.

Other life insurance

obligations other than obligations included in any of the other life lines ofbusiness.

Annuities stemming from non-life insurance contracts and relating tohealth insurance obligations (annuities stemming from non-life contractsand NSLT health insurance).

Annuities stemming from non-life insurance contracts and relating toinsurance obligations other than health insurance obligations

TP.1.18. Obligations relating to accepted reinsurance in life should besegmented into 4 lines of business as follows:

Health reinsurance

Reinsurance obligations which relate to the obligations included in linesof business health insurance and Annuities stemming from non-lifeinsurance contracts and relating to health insurance obligations.

Life reinsurance

Reinsurance obligations which relate to the obligations included in linesof businessLife I nsurance with profit participation,Index-linked andunit-linked insurance,Other life insurance and Annuities stemmingfrom non-life insurance contracts and relating to insurance obligationsother than health insurance obligations.

TP.1.19. There could be circumstances where, for a particular line ofbusiness in the segment "life insurance with profit participation"



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(participating business), the insurance liabilities can, from the outset, notbe calculated in isolation from those of the rest of the business.

For example, an undertaking may have management rules such thatbonus rates on one line of business can be reduced to recoup guaranteedcosts on another line of business and/ or where bonus rates depend on theoverall solvency position of the undertaking.

However, even in this case undertakings should assign a technicalprovision to each line of business in a practicable manner.

Health insurance obligations

TP.1.20. Health insurance covers one or both of the following:

- The provision ofpreventive or curative medical treatment or careincluding medical treatment or care due to illness, accident, disabilityand infirmity, or financial compensation for such treatment or care;

- Financial compensation in consequence of illness, accident, disabilityor infirmity.

TP.1.21. In relation to their technical nature two types of health insurancecan be distinguished:

- Health insurance which is pursued on a similar technical basis to thatof life insurance (SLT Health)

- Health insurance which is not pursued on a similar technical basis tothat of life insurance (Non-SLT H ealth)

TP.1.22. Health insurance obligations pursued on a similar technical basisto that of life insurance (SLT H ealth) are the health insurance obligations

for which it is appropriate to use life insurance techniques for thecalculation of the best estimate.

Health insurance obligations should be assigned to life insurance lines ofbusiness where such obligations are exposed to biometrical risks (i.e.



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mortality, longevity or disability/morbidity) and where the commontechniques used to assess such obligations explicitly take intoconsideration the behaviour of the variables underlying these risks.

Where insurance or reinsurance health obligations are calculatedaccording to the conditions set out in Article 206 of Directive2009/ 138/ EPC they should be assigned to SLT health insurance lines ofbusiness.

TP.1.23.SLT health insurance obligations should be allocated to one ofthe four following lines of business for life insurance obligations definedin subsection V .2.1:

- Insurance contracts with profit participation where the main risk

driver is disability/ morbidity risk

- Index-linked and unit-linked life insurance contracts where the mainrisk driver is disability/morbidity risk

- Otherinsurance contracts where the main risk driver isdisability/morbidity risk

- Annuities stemming from non-life contracts.

TP.1.24. With regard to the line of business for annuities stemming fromnon-life contracts or health insurance includes only annuities stemmingfrom Non-SLT health contracts (for example workers' compensation andincome protection insurance).

Insurance or reinsurance obligations that, although stemming fromNon-Life or NSLT health insurance, and originally segmented intoNon-Life or NSLT health lines of business, as a result of the trigger of anevent are pursued on a similar technical basis to that of life insurance,should be assigned to the relevant life lines of business as soon as there issufficient information to assess those obligations using life techniques.

TP.1.25.Non-SLT healthobligationsshould be allocated to one of thethree following lines of business for non-life insurance obligations:



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- Medical expense

- Income protection

- Workers' compensation

TP.1.26. The definition of health insurance applied in the QuantitativeAssessment may not coincide with national definitions of healthinsurance used for authorisation or accounting purposes.

TP.1.27. The granularityof the segmentation of insurance or reinsuranceobligationsshould allow for an adequate reflection of the nature of therisks.

For the purpose of calculation of the technical provisions, thesegmentation should consider the policyholders right to profitparticipation, options and guarantees embedded in the contracts and therelevant risk drivers of the obligations.

Unbundling of insurance and reinsurance contracts

TP.1.28. Where a contract includes life and non-life (re)insuranceobligations, it should be unbundled into its life and non-life parts.

TP.1.29. Where a contract covers risks across the different lines ofbusiness for non-life (re)insurance obligations, these contracts should beunbundled into the appropriate lines of business.

TP.1.30. A contract covering life insurance risks should always beunbundled according to the following lines of business

- SLT

- Life insurance with profit participation

- Index-linked and unit-linked life insurance

- Other life insurance



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TP.1.31. Where a contract gives rise to SLT health insurance obligations, itshould be unbundled into a health part and a non-health part where it istechnically feasible and where both parts are material.

Notwithstanding the above, unbundling may not be required where onlyone of the risks covered by a contract is material.

In this case, the contract may be allocated according to the main risk.

Best estimate

V.2.2.1. Methodology for the calculation of the best estimateAppropriate methodologies for the calculation of the bestestimate

TP.2.1. The best estimate should correspond to the probability weightedaverage of future cash-flowstaking account of the time value of money.

TP.2.2. Therefore, the best estimate calculationshould allow for theuncertainty in the future cash-flows.

The calculation should consider the variability of the cash flows in orderto ensure that the best estimate represents the mean of the distribution ofcash flow values.

Allowance for uncertainty does not suggest that additional marginsshould be included within the best estimate.

TP.2.3. The best estimate is the average of the outcomes of all possiblescenarios, weighted according to their respective probabilities.

Although, in principle, all possible scenarios should be considered, it maynot be necessary, or even possible, to explicitly incorporate all possiblescenarios in the valuation of the liability, nor to develop explicitprobability distributions in all cases, depending on the type of risksinvolved and the materiality of the expected financial effect of thescenarios under consideration.

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Risk Management Presentation October 29 2012

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