IABA ConferenceAugust 6, 2010

Enterprise Risk Management from the P&C Perspective

Presented By:Gary Ganci, FCAS,MAAAVP ERM

2

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 achieved.

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.

3

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 Board:

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

4

Travelers ERM: Management Process

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

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

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

• Administrative Risk–Business Resiliency Steering Committee–Executive Crisis Management Team–Operational Response Team

• Investment & Credit Risk–Monthly investment performance –Quarterly investment report to Board–Credit Committee

• Legal Services Mgmt Team

• Local Office / Regional / Countrywide–Controllable Income Statements –Monthly Summary of Production Results–Regional President’s reports

• Business Units / Support Units–Monthly detailed financial and operational reviews –Performances measures evaluated against established benchmarks based on allocated equityand target ROE’s

ERMERM

Insurance

Legal &

RegulatoryAdministrative

FinancialInvestment

5

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.

6

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)

7

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 transactions

• 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

8

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.”

9

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…

10

How are Results Measured?

Required Capital

...

TVaR[99]

Reference Outcome

Outcome

VaR[99]

11

Reserve Risk – Statutory vs. Economic ViewsStatutory View

TVar[99]VaR[99]Carried

0

2 E -1 1

4 E -1 1

6 E -1 1

8 E -1 1

1 E -1 0

1 .2 E -1 0

1 .4 E -1 0

25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0

Economic View

TVAR[99]VaR[99]Mean Carried

0

2 E -1 1

4 E -1 1

6 E -1 1

8 E -1 1

1 E -1 0

1 .2 E -1 0

1 .4 E -1 0

25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0

12

Co-TVaR vs Relative TVaR: Risk Attribution Issues

Relative TVaR[99]

Reserve

URR

CAT

Non-CAT U/W

Asset

Co-TVaR[99]

Reserve

URR

CAT

Non-CAT U/W

Asset

13

Enterprise Risk Model

Risk Drivers(Economic Scenario

Generator)

Reserves

Assets

Premium (Plan)

Premium (Future Years)

Examples of Potential Risk Drivers:

Interest Rates/Inflation

Underwriting Cycles

Catastrophes

Other economic indicators (S&P 500, GDP, Unemployment)

14

Reserve/UW Risk – Correlation of Accident Years

- 5.0 10.0 15.0 20.0 25.0 30.0

AYs independent

AYs 100% correlated

AYs correlated withinflation index

TVaR[99]

15

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

AdverseInsuranceOutcomes

GEMS – Corp. Bond Defaults

SimulatedIndustry

CAT Loss

ReinsuranceCollectability

16

Model Limitations