The document provides an overview of a risk appetite webcast held by Towers Perrin and PartnerRe on July 14, 2009. It includes biographies of the speakers, discussion topics to be covered such as defining risk appetite and PartnerRe's approach, and an illustrative case study on how a board of directors and management can work together to set risk appetite and limits. The goal is to help organizations better articulate their risk tolerance both qualitatively and quantitatively.

1. Risk Appetite Webcast
July 14, 2009
© 2009 Towers Perrin

2. Biographies
Linda Chase-Jenkins, Towers Perrin
Linda Chase-Jenkins is a Principal of Towers Perrin based in the firm’s New
York office. Ms. Chase-Jenkins also co-leads the firm’s global enterprise risk
management insurance practice. Her areas of expertise include risk and capital
management, strategy development and business planning for a wide range of
insurance and financial services companies.
Eric Gesick, PartnerRe
Eric Gesick is the Chief Actuarial Officer for PartnerRe and is based in the
firm’s Bermuda office. Mr. Gesick has oversight responsibility for PartnerRe’s
actuarial function, including the organization’s reserving process for group
coverage. Additionally, he is responsible for PartnerRe’s capital modeling,
capital allocation and return measurement.
Joe Lebens, Towers Perrin
Joe Lebens is a Principal of Towers Perrin based in the firm’s Hartford office.
Mr. Lebens also leads the firm’s enterprise risk management sales team within
Towers Perrin’s North America property & casualty insurance practice. His
areas of expertise include capital management through the use of dynamic
financial modeling.
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3. Discussion topics
Current practices and plans
Definitions and best practices
PartnerRe risk appetite
Illustrative case study
Q&A
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4. Current practices and plans
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5. Within 12 months, 84% of respondents expect to
have a documented risk appetite/tolerance statement
Do you have a documented risk appetite/tolerance statement?
No, and no plans to develop
within next 12 months
16%
47% Yes
No, but planned to
be in place within 37%
next 12 months
In Place Planned Within 12 Months Not Planned
Small 34% 44% 22%
Medium and 57% 33% 10%
Large
Base: Total Respondents for Q.11
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6. Balance sheet solvency is the principal
focus of risk appetite/tolerance statements
Which of the following measures of risk are used in your
risk appetite/tolerance statement? Please select all that apply.
Regulatory capital 55%
Economic capital 54%
Rating agency capital 33%
GAAP or IFRS earnings volatility 28%
Risk of loss of percentage
27%
of GAAP or IFRS equity
Risk of regulatory intervention 27%
Risk of rating agency downgrade 22%
Risk of percentage reduction in
20%
GAAP or IFRS earnings vs. forecast
Risk of loss of percentage of 20%
embedded value or economic value
Base: Those that have a documented risk appetite/tolerance statement n = 168
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7. Nearly 60% of respondents say their
statements specifically forbid taking certain risks
Does your risk appetite/tolerance statement specifically forbid the
taking of certain risks? Please select all that apply.
Yes — for risks where we do not have 44%
sufficient understanding of the risks
Yes — for risks where significant
35%
damage to reputation may result
Yes — for risks where we are unable to
21%
satisfactorily model the risks
Yes — for another reason 13%
No 41%
Base: Those that have a documented risk appetite/tolerance statement n = 168
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8. The majority of companies have risk limits for their
major risks, but only 23% have limits on operational risk
For which of the following types of risk have you set limits to
govern day-to-day risk taking within the business? Please select all that apply.
Market risk 64%
Credit risk 65%
Insurance risk 62%
Operational risk 23%
None of the above 13%
Base: Total respondents n = 359
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9. Only 40% have demonstrated consistency of their
bottom-up risk limits with their risk appetite statements
Have you demonstrated/modeled the consistency of your
bottom-up risk limits with your top-down risk appetite/tolerance statement?
40% Yes 54% of North American
respondents have demonstrated
No 60% consistency with their risk
appetite/tolerance statement vs.
Europe 30% vs. Asia/Pacific 30%
European companies have more
comprehensive risk limits
Base: Those that have a documented risk appetite/tolerance statement and have set limits to govern day-to-day risk taking n = 146
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10. Definitions and best practices
© 2009 Towers Perrin 10

11. Risk appetite aims to provide a
framework for managing risk in the business
Risk appetite is defined formally by the board to
provide guidance/principles to management
Risk appetite does not seek to address the detail of
policies, procedures, etc.
Provides a means of communicating the board’s
views/expectations on risk
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12. Definitions
Risk appetite is…
Total risk exposure organization will undertake to achieve its
objectives
Generally expressed in qualitative terms that reflect policyholder
and shareholder considerations
Set and endorsed by the board through discussions with
management
Corporate risk tolerance is…
Amount of risk an organization is willing to accept in aggregate
(or occasionally within a specific business unit or risk category)
Expressed in quantitative terms that can be monitored
Risk limits are…
The more granular tolerance levels expressed for specific
products, business lines or risk categories used to monitor the
organization’s risk exposure
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13. The risk appetite statement provides
guidance for a variety of key stakeholders
1. Policyholders, Bondholders…and Regulators,
Rating Agencies
Focus on strategies to prevent default
Little or no interest in upside from risk taking
or nature of risks
2. Shareholders and Analysts
Focus on return on capital above the price of risk
Don’t like surprises
Interested in upside from risk taking; want thorough
understanding of nature and distribution of risks
3. Management and Employees
Need guidance regarding risk limits
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14. Risk appetite is not captured by any one measure due
to the varied characteristics of underlying risk events
Risk Appetite
Key risk measures
Other risk
Profit Required Return on constraints
volatility capital capital
S/h focus P/h focus S/h focus
Risk management processes, policies and procedures
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15. Establishing risk appetite and setting risk
tolerances are integral to better risk-based decisions
ERM Framework
Organization
Governance
Accountability: Roles and
Strategy Responsibilities
Output Goals and objectives
Risk Appetite Tools
from Risk
Process
Appetite Corporate Risk Tolerance
Process Identify
Quantify
Solve
Execute
Monitoring and Reporting
Board reviews actual overall risk vs. established corporate risk tolerance
Business units monitor aggregate risks against defined risk limits
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16. Summary of risk appetite best practices
Risk appetite articulated explicitly and calibrated to
company’s targeted financial performance indicators
Management engages board in discussion about risk appetite
(qualitative) and corporate risk tolerances (quantitative)
Risk profiles for business units and enterprise consider stress
events to ensure company can withstand unexpected events
Risk limits for individual business activities established like
overall risk appetite —quantitative, bottom-up aggregation
Compliance with corporate risk tolerances and risk limits is
monitored and reported
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17. Risk Appetite
Eric Gesick
Chief Actuarial Officer
July 14, 2009

18. Risk Appetite
July 14, 2009 18
Importance of a Stated Risk Appetite
Clients, shareholders, employees and regulators need to know
how much risk you are willing to take, not just how much you
actually take
Key to governance: Set of principles and policies that guide
behavior for all risks
Limit, accumulation and exposure management
Necessary to determine required capital
Alignment of risk and return objectives

19. Risk Appetite
July 14, 2009 19
Basis of Measurement – Economic Framework
Quantitative aspect focuses on assumed risks
Economic balance sheet drives our thinking
GAAP and regulatory models provide additional constraints when
reviewing capitalization
Downside measure
Impairment to economic balance sheet
Not earnings volatility
Risk attitudes can be described by associating probabilities of
loss with tolerance of economic capital loss
Once a maximum risk tolerance is determined, we can translate into a
guideline for actions on specific risks
Determine required capital range

20. Risk Appetite
July 14, 2009 20
PartnerRe: Evolution of Stated Risk Appetite
Focus on the three reinsurance “killers” or “shock losses”
Catastrophe
Loss trends/inflation (casualty)
Equity market risk
Define the metric
Catastrophe = annual aggregate loss, all zones all perils
Loss trends/inflation = prior year casualty loss ratio deterioration
Equity market risk = stock market drop over one year period

21. Risk Appetite
July 14, 2009 21
PartnerRe: Evolution of Stated Risk Appetite
Return goals are easy to state, risk goals are more difficult
Risk tolerance is informed by return goals
Risk appetite and return goals need to be aligned
We asked the board the following: How much economic capital
are you willing to lose for each shock loss?
Focus on unlikely and remote events for specific risks
Unlikely = 1-in-15 year event
Remote = 1-in-75 year event
Difficult to relate to a 1-in-100 or 1-in-250 due to model error and context

22. Risk Appetite
July 14, 2009 22
PartnerRe: Evolution of Stated Risk Appetite
There is no right answer
Survey of Board in role of representatives of shareholder interests
Need a context: scenario testing from prior known events or
“what if” scenarios
Repeat of the 1929 – 1933 bear market and equity portfolio sizes
Hurricane Andrew and various aggregation assumptions
Early 2000’s prior year casualty development and premium volumes
Considerations
Perception and credibility of Company: how would clients/shareholders
view a loss from each specific risk
Ability to recover and trade through a shock loss

23. Risk Appetite
July 14, 2009 23
PartnerRe Risk Appetite
1-in-15 year event 1-in-75 year event
Q1 2009 Q1 2009
Risk Modeled Risk Modeled
Appetite Loss Appetite Loss
Catastrophe (incl. ILS) 12% 7% 24% 20%
Casualty 12% 9% 18% 12%
Equity and Equity Like 15% 4% 18% 6%
Stated as a percent of Economic Capital
Where you are within your risk appetite is informed by the
expected return outlook

24. Risk Appetite
July 14, 2009 24
PartnerRe: Extension of Risk Appetite to Risk Limits
Consistent with and derived from risk appetite
Non-modeled metrics that are observable, can be directly
measured, and are easily actionable
Aggregation of limits
Casualty premium
Market value of equities
Limits
Shock losses set by board
Executive and business unit management define more specific limits by
risk within underwriting authorities and guidelines

25. Risk Appetite
July 14, 2009 25
PartnerRe Risk Limits
Risk Metric Aggregate Limit % of Total Capital
Max. aggregate exposure in any single zone $1.5 billion 31%
on any single peril
Actual
Risk Dash Board: Current level of Catastrophe exposure $1.5 billion
Limit
$1.5 billion
Risk Metric $billions
Earned premium limit for casualty and other long-tail lines $3.8
for the 4 most recent underwriting periods
Actual 4-year aggregate long-tail premiums earned 23%
as % of all premiums earned in same period
Risk Dashboard: Current level of 4-year aggregate long-tail earned premiums
Actual
$2.7 billion
Limit
$3.8 billion
Based on exposure as at March 31, 2009

26. Risk Appetite
July 14, 2009 26
Equity Investment Risk Limit
Risk Metric Absolute Limit % Total Capital
Maximum investment in equity and $2.4 billion 50%
equity-like assets
Current investments in equity and $0.8 billion 17%
equity-like assets
Risk Dashboard: Current level of equity and equity-like exposure
Actual
$0.8 billion
Limit
$2.4 billion
Based on exposure as at at March 31, 2009

27. Risk Appetite
July 14, 2009 27
PartnerRe: Desired Capital Range
Modeled loss for all risks in extreme tail
Additional consideration based on judgment regarding known
but non-modeled loss
Scenario testing and “what if’s” to put in context
The Question: How much of your capital are you willing to lose if
multiple tail events occur in one year?
Diversification becomes an important element to consider and is
a key risk management tool

28. Risk Appetite
July 14, 2009 28
Desired Capital and Capital Management
Desired
Economic
Capital
Range
Capital Capital
Coverage At Risk
Ratio
Economic Capital
1-in-100 1-in-250
Return Period

29. Risk Appetite
July 14, 2009 29
Risk Appetite: Conclusion
Board engagement is required
Credibility
Stated risk appetite and proven ability to manage exposures to within the
appetite
Transparency and communication are important so clients and
shareholders can make their own assessments
Qualitative and Quantitative Assessment
Without a risk appetite, it is difficult to put a return goal into context
Optimize risk/return within risk appetite and risk limits

30. Illustrative case study
© 2009 Towers Perrin 30

31. There is an implied “contract” between
the board and management on risk and return
Board of Directors Management
Sets/approves overall risk Develops business strategy,
appetite and corporate risk sets financial targets (e.g.,
tolerance that align with growth, earnings, ROE)
stakeholder expectations*
Determines overall
Approves capital plan “Risk (economic) capital needs and
Contract” performs capital budgeting
Ensures appropriate
corporate risk governance Allocates capital
Manages business to achieve
results according to detailed
business plans and agreed
risk tolerances/ limits
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32. More granular expectations can be defined once
the board and management agree on overall objectives
Risk Appetite
Board/CEO
Risk Tolerance
Statements
C-Suite Risk Limit Risk Limit Risk Limit
BU Leaders Risk Limit Risk Limit Risk Limit
Etc.
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33. Client background
Board composed of individuals from varied
backgrounds and different industries
Lacked common definition or understanding of “risk”
No common perspective on amount of risk company
was currently accepting
No common perspective on amount of risk company
should be willing to accept
No risk appetite or risk tolerance statements in place
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34. Client objectives
Establish a common foundation/understanding and
vocabulary for discussions of risk between the board
and senior management (and the entire organization)
Develop preliminary risk appetite and risk tolerance
statements
Informed by relevant industry and client information
and benchmarks
Create an approach to validating and refining the
preliminary risk appetite/tolerance statements
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35. Risk appetite was defined using a
combination of qualitative and quantitative inputs
Approach to Defining Client’s Risk Appetite/Risk Tolerance
Qualitative Quantitative Inputs
Client’s Mission,
Vision, & Values
Phase 1
Management and BOD Preliminary Risk
Perspectives Appetite/Tolerance
Industry/Client
Historical Reference
Points
Client’s Risk Modeling
and Sensitivity Testing
Phase 2
Regulatory/Rating Revised Risk
Agency Thresholds Appetite/Tolerance
Board Review
and Input
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36. The initial phase aimed at establishing a
common understanding and risk vocabulary
Board and management perspectives on risk were captured
through confidential individual interviews
The objective was to determine how much uniformity there is in
the perspectives of board members and senior management
We asked a common set of questions to each participant
Results were compiled and presented to the board and
management
Individual responses remained anonymous
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37. For example, we asked each participant about their
willingness to sustain various levels of surplus declines…
Tolerance for Loss of Surplus
Tolerable Annual
Probability
1-in-2 50%
Maximum
40% Management Average
Outlier
responses Board Average
1-in-3 Overall Average
30% 30% Minimum
1-in-X-Year
Event 1-in-4
Equivalent
1-in-5 20%
18%
Strong 14% Nearly all interviewees
11% stated that this should
1-in-10 10% Consensus
7% never happen.
7%
1-in-20 5%
3% 2% 2%
0% 0% 0%
10% Loss of Surplus 20% Loss of Surplus 50% Loss of Surplus
Scenario
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38. …and compared responses to the
historical experience for both the industry and client
Comparison of Client's Tolerance for Surplus
Losses to Historical Experience
Probability
1-in-5 20%
16%
1-in-7
15%
1-in-X-Year
Event
Equivalent 11%
1-in-10 10%
8%
1-in-20 5% 5%
0% 0%
10% loss 20% loss 50% loss U.S. P/C Industry Client
of surplus of surplus of surplus (1946 – 2008) (19XX – 2008)
Client Interviewee Historical Benchmarks —
Tolerance (Average) Frequency of Surplus Loss
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39. Some questions were aimed at comparing the
perceived current and desired risk appetites
Client’s Risk Appetite
Number of Current Number of Desired
Responses Responses
7 Management 7 Management
6 6 2
Board member Board member
5 2 5
4 4
1 3
3 2 3
1 5
2 4 2
3
1 2 1 2 2
1 1 1 1 1
0 0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
(Low) Risk Appetite (High) (Low) Risk Appetite (High)
Average Scores
Current Desired
Management 4.1 5.6
Board 3.1 4.8
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40. This interview/feedback approach laid the
foundation for developing a risk appetite statement
Consistent vocabulary created among all board and
management participants
Process helped drive a more consistent appetite for risk
between and among the board and management
More realistic expectations
Interview process created non-threatening environment to
facilitate learning and understanding
Preliminary risk appetite statement was drafted
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41. This interview/feedback approach also elevated the
level of discussion and decision making about risk
In subsequent phases of the project:
Economic capital modeling was completed
— Results were compared with the preliminary risk
tolerances; some incompatibility was observed
Preliminary risk appetite statement was refined
Plan was developed to bring company into line with its newly
agreed upon and stated risk appetite and risk tolerances
Additional work is under way:
Risk monitoring and reporting process are being established
Risk limits are being established
Risk modeling is being refined
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42. Q&A

43. Q&A
Linda Chase-Jenkins, Towers Perrin
(212) 309-3897
Linda.chase-jenkins@towersperrin.com
Eric Gesick, PartnerRe
(441) 294-5291
Eric.gesick@partnerre.com
Joe Lebens, Towers Perrin
(860) 843-7056
Joe.lebens@towersperrin.com
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