Risk Assessment By Vanguard

For this issue of Vanguard, we have analyzed the risks identified by the four main institutional clusters which include International Organizations, Banks, Reinsurance Companies and Consulting Firms. We have also identified the common risks within each institutional cluster. The risk landscape below portrays both common and unique risks identified in each of the four institutional clusters. It is divided by four different color themes ranging from dark to light tones from the core to the border areas. The most common risks identified in each cluster by three or more institutions are positioned nearest to the core and are depicted by the darkest tone. The middle ring shows the common risks identified by at least two institutions and is depicted by the mid-range tone. The outer-most ring shows the unique risks identified by institutions and is depicted by the lightest tone. The risks, while compared within each cluster, are not compared across all four clusters, as each cluster has a unique perspective on risks. In addition to this "risk landscape", we have produced four separate summary tables which will list and compare the risks identified by each institution within the four clusters. In summary, the common risks identified by International Organizations include Health Risk, Natural Disasters, Macroeconomic Risk and Climate Change Risk. For Banks, these include Over-Complexity of Banking Regulation, Global Economic Risk, and Banking and Market Liquidity Risk. Reinsurance Companies have listed PropertyCausality Insurance Risk, Capital Market Risk and Underwriting Risk. And Consulting Firms have identified Exchange Rate Risk, General Economic Risk, Regulation Requirement Risk, and Market and Credit Risk.

International Organizations Summary Table

The United Nations 1. The World’s Recession in a More Pessimistic Scenario Given the great uncertainty prevailing today, a more pessimistic scenario is entirely possible. If the global credit squeeze is prolonged and confidence in the financial sector is not restored quickly, the developed countries would enter into a deep recession, with their combined gross domestic product (GDP) falling by 1.5 per cent; economic growth in developing countries would slow to 2.7 per cent, dangerously low in terms of their ability to sustain poverty reduction efforts and maintain social and political stability. In this pessimistic scenario, the size of the global economy would actually decline, an occurrence not witnessed since the 1930s. 2. Increased Commodity Price Volatility The crisis has already had a severe impact on global commodity markets with far-reaching implications for the prospects of the developing world at large. Commodity prices have been highly volatile during 2008. Most prices surged in the first half of 2008, continuing a trend that had begun in 2003. Trends in world market prices reversed sharply from mid-2008. Oil prices have plummeted by more than 60 per cent from their peak levels of July to November. The prices of other commodities, including basic grains, also declined significantly. In the outlook, most of these prices are expected to even out further along with the moderation in global demand. 3. Falling Amounts of International Trade Growth of world trade decelerated to 4.3 per cent in early 2008, down from 6.4 per cent in 2007, owing mainly to a decline in imports by the United States. United States imports, which account for about 15 per cent of the world total trade, have registered a decline in every quarter since the fourth quarter of 2007 and dropped as steeply as 7 per cent in the second quarter of 2008. Growth in the volume of world trade had dropped to about 3 per cent by September 2008, to about one third of the rate of growth a year earlier. In the outlook, global trade is expected to weaken further in the future. 4. The U.S. Dollar Collapse The United States dollar had depreciated substantially vis-à-vis other major currencies, particularly the euro, in the first half of 2008, but has since reversed direction even more sharply. Many currencies in developing countries have also either reversed their earlier trend of appreciation vis-à-vis the dollar or slowed their appreciation. Currencies in a number of developing countries, particularly those that are commodity exporters, have depreciated against the dollar substantially since mid-2008. The heightened risk aversion of international investors has led to a “flight to safety”, as indicated by the lowering of the yield of the short-term United States Treasury bill to almost zero. However, it is expected that the recent strength of the dollar will be temporary and the risk of a hard landing of the dollar in 2009 or beyond remains. 5. Lack of credible mechanisms to respond to systemic failures As immediate solutions are being worked out, it remains important to understand the systemic causes of the present crisis, which, in a nutshell, relate to weaknesses in global economic governance, excessive financial deregulation, the problem of global (current and capital account) imbalances and related systemic shortcomings in the international reserve system and the lack of an international lender of last resort. The immediate priority in today’s context is to prevent the global financial crisis from turning into a 1930s-style Great Depression. Over time, the ability of the IMF to safeguard the stability of the global economy has been hampered by, among other things, limited resources and increasingly undermined by the vastly greater (and more volatile) resources of private actors with global reach. As a consequence, the IMF has, by and large, been sidelined in handling the present crisis. The lack of a credible mechanism with broad representation for international policy coordination reflects an urgently felt lacuna which is limiting swift and effective responses to the present crisis. 6. The Poor will be the Worst Victims Coming on the heels of the food and energy security crises, the global financial crisis will most likely substantially set back progress towards poverty reduction and the Millennium Development Goals. The tightening of access to credit and weaker growth will cut into public revenues and limit the ability of developing countries’ governments to make the necessary investments to meet education, health and other human development goals. Unless

adequate social safety nets are in place, the poor will be the worst victims. An estimated 125 million people in developing countries were already driven into extreme poverty because of the surge in global food prices since 2006. Lessons from earlier major financial crises point to the importance of safeguarding (public) investment in infrastructure and social development; this is to avoid major setbacks in human development and allow a recovery towards a high-quality economic growth in the medium term.

Source: World Economic Situation and Prospects 2009, Department of Economic and Social Affairs, the United Nations Conference on Trade and Development and the five United Nations regional commissions http://www.un.org/esa/policy/wess/wesp2009files/wesp2009.pdf OECD 1. Natural Disasters The observed number of natural disasters, including floods, storms and droughts, has risen dramatically since the beginning of the 1960s. In the past decade, such disasters have resulted in some 79 000 fatalities on an annual basis, with 200 million people affected. Progress has been much more limited in developing countries than in developed countries, so that victims of natural disasters are nowadays concentrated in the former. In financial terms, on the other hand, damage has grown exponentially, and is concentrated in developed countries, especially if insured damage is considered. 2. Technological Disasters/Accidents Recorded technological disasters such as explosions, fires, and transportation accidents have also risen rapidly since the beginning of the 1970s. During the 1990s, they caused on average 8 000 fatalities and affected 67 000 people per year. In financial terms, their cost has been exceptionally high in the past two decades, but remains erratic. According to these measures, recorded technological accidents are small events with a limited scope in both space and time with respect to their human and economic impacts, especially when compared to health or natural disasters. This does not exclude, however, the occasional occurrence of very large accidents, such as the 1987 ferry collision in the Philippines (4 375 victims), the 1984 chemical factory accident in Bhopal, India (3 000 victims), the 1986 nuclear reactor meltdown in Chernobyl (31 immediate victims, 135 000 reported affected, USD 2.8 billion in economic losses), or the 1988 Piper Alpha oil platform explosion in the United Kingdom (167 victims, insured losses close to USD 3 billion in 2000 prices). 3. Health Risk Disasters related to health have gained ground. The “Health For All 2000” accord signed in 1978 by the member states of the United Nations predicted that by the end of the century, infectious diseases would no longer pose a significant threat to human beings, even in the poorest countries. Today, it appears that the long-term trend of progress in the control and eradication of infectious diseases that fuelled this optimism has been reversed. This results from a number of factors, including the spread of drug-resistant microbes, the emergence of new infections with devastating effects in some parts of the world, adverse socioeconomic factors such as the rise of megacities with poor sanitary conditions, and the rapid increase in cross-border movements of people and merchandise. 4. Climate Change Risk Climate change today constitutes another highly preoccupying environmental trend for the future of risks. According to the latest evaluations, the average temperature at the surface of the planet has increased by 0.6 ° C during the twentieth century. Such a rise in global temperature is very large by historical standards, making the 1990s the warmest decade of the past millennium in the northern hemisphere. As a consequence of warming, the global extent of snow cover has receded by some 10% since the end of the 1960s, the global average sea level has risen by 0.1 to 0.2 meters in the course of the century, and precipitation has increased in the higher latitudes of the northern hemisphere while it has decreased in sub-tropical regions. Climatic phenomena such as heavy rains in parts of the northern hemisphere, warm episodes of the El Niño Southern Oscillation over the tropics, and droughts in some regions of Asia and Africa have gained in intensity and frequency.

The planet’s environment is undergoing major changes that are increasingly considered to be related, at least partly, to unsustainable human activities during the past fifty years. As such, the atmosphere’s gas composition has been significantly modified by anthropogenic gas emissions. An increase in the atmospheric concentration of carbon dioxide (CO2) started at the beginning of the industrial era after having been stable for at least seven centuries, and has continuously accelerated since. Currently, the carbon dioxide concentration is close to 370 parts per million, compared to 280 in the pre-industrial period. 5. Globalization Risk Information, communication, space and transport technologies have developed possibilities of exchange between people – no matter how distant – to an extent that few imagined only twenty years ago. From the point of view of risks, connectedness makes individuals and organisations accessible over distance, both for the better and the worse. On the positive side, victims of disasters are easier to reach, and emergency rescues can be organised more efficiently. Monitoring and warning systems can be developed thanks to satellites and wireless communications. Capacities for gathering and processing information on natural processes and hazards as well as diseases increase dramatically, helping to improve our understanding of risks. On the negative side, connectedness multiplies the channels through which accidents, diseases or malevolent actions can propagate. Natural disasters at one side of the planet can have substantial economic and financial impacts at the other. Epidemics spread more rapidly and more widely due to the intensification of international travel and trade and the development of tourism. Every day, computer systems and internal networks are submitted to electronic attacks originating from sources that are usually unidentified. Although in each of these cases damage is highly unlikely to spread to all parts of the network, it might nonetheless affect some critical nodes, with devastating second-round effects. 6. Bio-technology Risk Next-generation technologies often entail a modification of living matter. Combined with the continued increase in capacities for computing, transmitting and storing information, they represent a potential for transforming humans and their environment that probably has no precedent. At the same time, they are capable of interacting far more closely than ever before with the living environment. They are often self-replicating, or might be relatively easy to access once their development is completed. Therefore, they might diffuse easily, and trigger long-term evolutions that are extremely difficult to predict. Uncontrolled release of genetically modified organisms, the subject of an intense debate during past years, is among the first examples of the risk issues induced by new technologies. It has been established that the possibility of interactions between GMOs and wild plant species, as well as that of unintended effects on the human metabolism, needs to be carefully examined. Many next-generation technologies might generate unforeseeable risks with irreversible consequences, while their potential uses will be virtually impossible to control. 7. Poverty/Income Discrepancy Risk There is widespread poverty and income discrepancies between countries, regions and people. Entrenched poverty, quite apart from aggravating sanitary and health problems for large swathes of the population, can also fuel social and political tensions (e.g. drugs, violence) in the regions concerned. Coupled with the possibility of a widening income and wealth gap between OECD countries and developing countries following the emergence of the knowledge economy, developments might spill over into the international arena in the form of larger uncontrolled migratory flows and criminal activities. Source: Emerging Risks in the 21st Century, 2003, OECD http://browse.oecdbookshop.org/oecd/pdfs/browseit/0303011E.PDF The World Bank 1. Lifecycle Risks These risks identify individuals at-risk due to age, gender, and other personal or household characteristics. Lifecycle approaches are used to identify vulnerable groups at particular points in their life cycles or given particular characteristics. The Risk and Vulnerability Analysis (RVA) for Benin found that older people, having had time to accumulate agricultural land, fruit tree plantations or other income-generating means, were often considered relatively prosperous. On the other hand, younger people who have not yet accumulated wealth were more likely

to be counted among the poorer, especially young women whose productivity is greatly reduced by childbearing and childrearing. In Colombia, individuals who are displaced due to conflict were found extremely vulnerable to shocks. 2. Macroeconomic Shocks Macroeconomic factors such as terms of trade shocks or financial crises may affect large segments of the population. Some studies examined the impact of terms-of-trade-shocks on rural households showing the impacts of the 2000-2002 “coffee crisis” on the coffee-growing regions of Latin America. Other studies addressed whether the volatility of workers' hours and incomes increased as a result of increasing trade liberalization, and whether the same has had an impact on vulnerability to poverty. 3. Climate Change Risks and Shocks Climatic variation is a common covariate shock that affects rural households throughout the world. For example, the Risk and Vulnerability Analysis (RVA) conducted in Ethiopia identified drought as the main shock leading to food insecurity, with famine being a yearly occurrence. The effects of crop damage due to pests, insects, or frosts on consumption were also found substantial. The Senegal RVA listed drought and flooding as the key shocks facing rural households. Drought cycles reduce agricultural production. In addition, insects, and the disease these carry, affect plants and animals. 4. Natural Disasters Regions prone to natural disasters are likely to be particularly vulnerable to poverty. For example, Turkey experienced severe losses of life and infrastructure in 1999 caused by an earthquake. The earthquake was followed by a period of economic and financial crisis, culminating in a major currency devaluation in February 2001. The World Bank examined the coping mechanisms households used to cope with the earthquake and found that the major effect of subsequent crises has resulted in an increase in poverty in urban areas. 5. War, Civil Conflict and Violence The impact of war and conflict on livelihoods and vulnerability is discussed in several World Bank studies which include the Poverty Assessments (PAs) for Kosovo, Bosnia and Herzegovina, Yemen and Guinea-Bissau. In Guinea-Bissau, conflict and political instability have considerably weakened the country’s productive tissue. This itself increased the degree of vulnerability of the population - mainly in rural areas where most economic activities take place - and hence impeded economic growth. 6. Health Shocks While health shocks are generally considered to be idiosyncratic shocks, the widespread nature of HIV/AIDS and malaria in some parts of the world implies that these shocks can often be viewed as covariate shocks. In Zambia’s Poverty and Vulnerability Assessment (PVA), formal and informal coping mechanisms for dealing with shocks have come under increasing stress due to high rates of HIV/AIDS and death. Health risks may also be due to environmental degradation and outmoded industrial practices. For example, the Kosovo Poverty Assessment (PA) found that exposure to health risks is widespread, largely resulting from environmental pollution. 7. Unemployment/Underemployment Risk Unemployment and underemployment have been identified as major risks faced by households of a certain demographic especially in Bolivia, Uruguay, Argentina and Colombia. The Columbia 2002 Safety Net Assessment notes that even though economic growth recovered modestly in 2000, poverty and unemployment remained high, and there had been a decline in some human development indicators. This was partly due to Colombia not having an effective safety net in place, capable to address the social consequences of the crisis. 8. Corruption, Crime and Violence Many World Bank studies noted the adverse impacts of corruption, crime and violence. Problems are particularly acute in urban areas as evidenced in analytic work in Latin American and Caribbean countries such as Haiti, Guyana, and Jamaica. Most Risk and Vulnerability Analysis has had a rural focus, particularly for low-income countries. Risks associated with crime, fire, and loss of property were noted in a number of reports for African countries such as Senegal, Kenya as well as other conflict affected countries. Source: Risk and Vulnerability Analysis in World Bank Analytic Work: FY2000—FY2007, 2008, World Bank http://www-

wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/07/21/000333038_20080721044237/Ren dered/PDF/447800NWP0Box327410B01PUBLIC10SP00812.pdf World Economic Forum 1. Food price volatility Food prices peaked in mid-2008. Expectations are that food prices may be more volatile over the coming years. 2. Oil and Gas Price Spike In the short term, slowing global demand of oil and fears of a further drop in global growth signify that price spikes in oil and gas over the next 12 months is unlikely despite the OPEC's production in December 2008. The longterm trend is for rising demand and a potential return to tighter conditions. 3. Major Fall in US$ Experts consider that the dollar could come under pressure as investors reflect on the long-term impact of current monetary expansion, high fiscal deficits and the continuing fragility of the US financial system. 4. Slowing Chinese Economy (6%) Though China’s domestic market could help compensate for its loss of exports due to recession in the US and other markets, the government will need to encourage private spending to boost domestic consumption. 5. Economic Crisis In the view of the economic crisis, the pressure on fiscal systems will be exacerbated by current bailout packages and fiscal programmes to jump-start growth. Asset prices have also declined dramatically. There will be continued scope for further losses over a broad class of assets in the short term. 6. Protectionist Trade Risk Although the current outlook on the world economy is stable, some retrenchment is likely to occur if governments revert to protectionist strategies in an effort to protect jobs. Cross-border private investment may also decrease until investor confidence returns. Experts also considered that the risk of more inward-looking economic policies in emerging economies could also increase in a 'protectionist' reaction to the current financial turmoil. 7. Terrorism Risk The perceived risk has decreased overall internationally but the risk remains relatively high in several countries such as Iraq, Afghanistan, Pakistan and Somalia. 8. Collapse of Nuclear Proliferation Treaty Although the controversial US-India nuclear deal was signed in 2008 and no progress was made on the Iranian programme, the outlook is for neither improvement nor deterioration compared to 2008. 9. Geopolitical Conflict Risk The World Economic Forum identified several geopolitical conflicts between US/Iran, US/DPRK, and Israel/Palestine. However, they added that with a new US administration entering office, these risks are perceived as less likely to occur. 10. Geopolitical Instability The World Economic Forum identified that both Afghanistan’s geopolitical instability, as well as violence in Iraq, are possible risk factors. Experts engaged for the study on Afghanistan judged that a degree of progress had been made but the severity of the instability remains constant in terms of cost and human causality. Likewise for the violence in Iraq, the likelihood of more violence has decreased slightly relative to 2008 but the costs and loss of life remain constant as well.

11. Transnational Crime and Corruption Corruption continues to cost over US$ 1 trillion annually. Transnational crime remains endemic and related to a number of other global risks.

12. Ineffective Global Governance Experts engaged for the study noted the absence or lack of effective and inclusive governance on global issues such as financial stability, trade, climate change, water and security as a source of risk in and of itself. As such, the WEF assessment places this risk as highly likely and severe in its impact. As the interconnections map shows, weak global governance sits at a central position between geopolitical, economic and environmental risks. 13. Climate Change Risk As the effects of climate change have begun to manifest themselves in weather events, this risk remains constant year on year but given that many of these incidents affect developing regions, the number of deaths is likely to rise. With the increase in the incidence of drought, food production has shifted where possible to less droughtprone areas or to more drought-resistant crops. Nonetheless, desertification remains a risk to incomes and health in vulnerable regions. Although there is a general increase in a greater awareness and education in water scarcity, this risk is still constant in terms of likelihood and severity. 14. Natural Disaster Risk Improved building standards and better warning information have contributed in aiding to the reduction of human causality from cyclones but the risk remains constant for relevant area. Nevertheless, the threat of earthquakes remains the same as they are driven by geophysics. In addition, inland flooding risk rose over previous years, primarily due to flood plain development and an expected increase in climate change-related weather events. 15. Pandemic and Infectious Disease Although there is effort in advocating awareness and coordination between different governmental agencies, pandemic risk remains constant in terms of human causality due to the unpredictability and uncertainty of a potential outbreak. In addition, the incidence of chronic disease is rising across both the developed and developing world. Medical advances and awareness can reduce the risk severity but chronic disease is still the main cause of death worldwide. 16. Increased U.S. Liability and its Spillover Effects Experts saw the risk of US-style liability regimes spreading to other countries as increasing. 17. Emergence of Nanotechnology Risks As the study and use of nanotechnology and materials progresses, uncertainty remains about the potential risks involved. Source: Global Risks, 2009, WEF http://www.weforum.org/en/media/publications/GlobalRiskReports/index.htm International Monetary Fund 1. Macroeconomic Risk Forward-looking estimates of risks from macroeconomic variables show that a one-half standard deviation permanent shock to real growth would increase the debt-to-GDP ratio five years later by 6.8 percent of GDP on average in a sample of 19 advanced and emerging market countries. A one-half standard deviation shock to the primary deficit would raise the debt-to-GDP ratio by 5.2 percentage points. And a one-half standard deviation shock to interest rates would lead to somewhat smaller increases on average, though it would have even more significant effects in countries that rely primarily on floating interest rate debt. In developing countries, a decline in economic growth would have an especially notable effect on debt dynamics. In addition, there is also the risk of a deterioration of debt-to-GDP ratio through Exchange Rate Depreciations. The impact of exchange rate depreciations is immediate, and can be especially strong when a large share of the debit is in foreign currency. A 30 per cent depreciation of the real exchange rate would increase the debt-to-GDP

ratio by 8 percent in the year of the shock and (reflecting gains in competitiveness) 6.5 percent after five years in the sample of advanced and emerging economies, and by similar amounts in developing countries. Indeed, turning to information on ex post realization of risks, exchange rate depreciation accounted for a major share of the increase in the debt-to-GDP ratio in the context of several emerging market crises during the 1990s. 2. Volatility in Commodity Prices The price volatility impact is more palpable for commodity producers. For example, a US$20 decline in oil prices would lead the overall fiscal balance to worsen by 10 percentage points of GDP in a sample of oil-producing countries. The magnitude of the impact is also apparent in the large negative forecast errors for the debt-to-GDP ratio of oil producers during the years when oil price increases. Commodity price changes affect the fiscal sustainability of commodity importers primarily through economic growth, though their direct fiscal impact may be considerable for countries with energy subsidies. 3. Volatile Aid Flows in Low-Income Countries In some highly aid-dependent countries, aid is more volatile than fiscal revenues, and shortfalls in aid and domestic revenues tend to coincide. More generally, uncertainty about aid disbursements is large and the information content of commitments made by donors is limited. Moreover, sharp increases in staple food prices may unexpectedly require incurring sizable fiscal costs. 4. Bank Failures A review of the fiscal costs of systemic banking crises identified 24 episodes in which cumulative costs exceeded 5 percentage points of GDP, based on a sample of 117 banking crises that occurred in 93 countries during 1977– 98. It estimated costs at 30–55 percent of GDP in Argentina, Chile, and Uruguay in the early 1980s, 25–50 percent of GDP in Indonesia, Korea, and Thailand in 1997–98, and about 20 percent of GDP in Japan in the 1990s. Such costs arise primarily from depositor and debtor bailouts, open-ended liquidity support, and repeated recapitalization programs—and are often larger when incurred after years of implicitly subsidized lending by stateowned financial institutions. 5. Natural Disasters Direct economic losses from natural disasters have often exceeded 10 percentage points of GDP in developing countries and amounted to a few percentage points of GDP in some advanced countries. Such losses are unevenly distributed across countries, as disasters usually revisit the same geographic zones. The fiscal implications are clearly substantial, though estimates are available only for a limited sample. A study on Latin American and Caribbean countries found several episodes where the fiscal deficit rose substantially in the aftermath of natural disasters. 6. Fiscal Deficits via Government Bailouts Public enterprises have often been a significant source of contingent government liabilities, especially as a result of political interference, mismanagement, or irresponsible borrowing. Losses or excessive debt have resulted in costly government bailouts, especially in the aftermath of crises. Subnational government defaults or bankruptcies have also often led central governments to provide rescue packages, occasionally with large costs: examples include Brazil (7 percent of GDP in 1993 and 12 percent of GDP in 1997, Argentina (1 percent of GDP, cumulative, in the mid-1990s, and Mexico (1 percent of GDP in the aftermath of the Tequila crisis. 7. Fiscal Deficits via Legal Compensation Governments have paid compensation in legal cases related to disparate claims; the amounts, often difficult to predict prior to a ruling, can be sizable. Examples include war claims and frozen foreign currency deposits (Bosnia and Herzegovina, 12 percent of GDP); litigation on domestic arrears (Chad, 9 percent of GDP); claims related to privatization (Brazil); liquidation of State Owned Enterprises (Brazil and Indonesia); personnel management (Brazil and France); compensation for real estate and other property losses (Lithuania and Poland); tax refunds (Indonesia); bank restructuring guarantees (Czech Republic); and environmental cleanup (e.g., related to defense or nuclear power; Canada and United States). 8. Potential Economic Risks from Government Guarantees Although systematic information on actual calls on guarantees is limited, it is clear that potential risks from

governmental guarantees are substantial. Information on exposure is available for explicit guarantees legally binding the government to take on an obligation should a specified event occur (e.g., price guarantees, loan guarantees, or profit guarantees). These amounted to 12 percent of GDP on average in a sample of then pre-EU accession countries as of end-2002 and to 5 percent of GDP in the countries for which questionnaire responses were available. 9. Costly Public-Private Partnerships Failures PPPs have gained importance as a source of fiscal risks in many advanced and emerging market economies, particularly for large investment projects in transportation infrastructure and the power sector. They often entail fiscal obligations not captured in the fiscal accounts which includes state guarantees for concessionaire borrowing, minimum revenues, and exchange rate losses. Indeed, there is growing anecdotal evidence of costly PPP failures due to unrealistic demand projections or other shortcomings in project planning and management. Source: Fiscal Risks: Sources, Disclosure, and Management, 2009, IMF Fiscal Affairs Dept http://www.imf.org/external/pubs/ft/dp/2009/dp0901.pdf

International Risk Governance Council 1. Critical Infrastructure Risk Throughout the industrialized world, society depends on a set of systems that supply food, water, public health services, energy, and transport. Other systems are used to manage information, provide communications services and sanitation services. In limited ways, these systems have always been dependent on each other. However, recent decades have witnessed a much greater and tighter integration and interdependence between them – effectively the creation of a ’system of systems’ which has no single owner or operator. While this has often yielded improved service and convenience and promoted greater efficiency, it has also led to increased social vulnerabilities in the face of accidental or intentional disruption. Today, a disruption or malfunction often has much greater impacts than was typically the case in the past, and can also propagate to other systems, resulting in further additional disruptions. Source: http://www.irgc.org/-Critical-Infrastructures-.html 2. Pandemic Risk A potential influenza pandemic remains a hot topic in the field of infectious diseases with considerable attention focused on avian influenza, both for its consequences for wild and domestic fowl and its impact on the human population. The World Health Organisation (WHO) has published a pandemic preparedness plan and many countries around the world are developing national preparedness plans. Source: http://www.irgc.org/-Pandemic-Diseases-.html 3. Risk in Nanotechnology A particular concern of IRGC is that the opportunities flowing from new technologies and innovations are not forgone due to inadequate or inappropriate risk governance, including poor communication. When these technologies have the capacity to alleviate major global concerns, a failure to adopt them has potentially catastrophic consequences. An example will be the emergence of nanotechnology, where it is an important and rapidly growing field of scientific and practical innovation that will fundamentally transform our understanding of how materials and devices interact with human and natural environments. These transformations may offer great benefits to society such as improvements in medical diagnostics and treatments, water and air pollution monitoring, solar photovoltaic energy, water and waste treatment systems, and many others. Despite the benefits, the transformations may also pose serious risks. The social, economic, political and ethical implications are significant. Because nanotechnology raises issues that are more complex and far-reaching than many other innovations, the current approach to managing the introduction of new technologies is not up to the challenges posed by nanotechnology. Source: http://www.irgc.org/-Nanotechnology-.html

4. Risk in Carbon Capture and Geological Storage Carbon capture and storage has the potential to be an important climate change mitigation technology for the 21st century, integrating fossil fuels into a carbon managed energy system, and helping to meet the growing worldwide demand for energy until fully renewable energy systems come online. The technology is conceptually simple: carbon dioxide (CO2) is captured from electric power plants or industrial sources, transported to the injection site, and injected deep underground for storage. However, the technology is still some years from commercial implementation. There are very few test sites in operation and, therefore, almost no risk assessment data available. There are, additionally, substantial unresolved questions which relate to how the technology will be regulated, how the necessary investment will be financed and what liability regime(s) will be most appropriate. Source: http://www.irgc.org/-Carbon-Capture-and-Storage-.html 5. Bio-Energy Risk The development, production and use of bioenergy have become increasingly attractive to governments around the world as an alternative to traditional fossil fuels (oil, coal, and gas). The attractions of bio-energy are many. However, awareness is increasing about some of the potential environmental, economic and social risks associated with bio-energy development, and aspects of the current situation may represent a failure of good risk governance. Source: http://www.irgc.org/-Governance-of-Bioenergy-.html 6. Risk in the Design of Synthetic Biological Component Synthetic biology is the development of well-characterized biological components with the objective of constructing and redesigning natural biological systems. The possible uses of synthetic biology are many and include new pharmaceuticals developments, generation of hydrogen for a post-petroleum economy and the detection of toxic chemicals. However, there are also some potential risks and governance issues arising from the design of synthetic biological components. For example, there are ethical issues surrounding converting nature into market commodities and the ownership of what has previously been seen as a “public good”, as well as potential unintended harmful consequences for human health or the environment (e.g. due to accidental release) or deliberate misuse (e.g. recreation of known pathogens). Another risk may result from the fact that the technology is cheap and easy to acquire and a lot of the coding being developed and used is made public through the Internet. This could both decrease the potential for patent protection and increase the potential for an emerging hacker culture to exploit this public information. Source: http://www.irgc.org/Synthetic-biology-genomics.html 7. Energy Security Risk Given the critical importance of today’s decision making on future energy security and sustainability, IRGC developed a project to help improve the risk governance of energy security. The aim of the project was to improve the quality of energy security decisions, with the specific objectives of: • • • • •

Analyzing the current needs and expectations for energy security (reliability, affordability, autonomy and sustainability) in terms of supply and demand Identifying the main risk trade-offs Understanding the diverging stakeholder interests in managing the major risks and challenges Identifying the main gaps in the current governmental and private decision making processes Setting the basis for an innovative risk-based decision making process to improve the management of risks and support management decisions in the energy sector.

Source: http://www.irgc.org/Risk-based-Decision-Making-for.html 8. Risk Governance Deficits A risk governance deficit is a failure in the identification, framing, assessment, management and communication of the risk issue or of how it is being addressed. As such, it can also be understood as a risk governance challenge. Governance deficits are common. They may be found throughout the risk handling process, and limit its effectiveness. They are actual and potential shortcomings and can be remedied or mitigated. Potential consequences of risk governance deficits can include: • • • • • •

Loss of opportunities Cost of inefficient regulations Loss of public trust Inequitable distribution of risks and benefits between countries, organizations and social groups Excessive focus on high profile risks, to the neglect of higher probability but lower profile risks Failure to move from business as usual and trigger action

Understanding how risk governance deficits arise and how they can be minimized is an important part of dealing with new risks and, in some cases, of revising approaches to existing risks. This is important not just for governments and regulators who may have to codify the approaches to new risks, but also for industry and, in general, all those who are potential drivers of the risks or are affected by them, including society at large. Source: http://www.irgc.org/Current-work-focus,85.html

Banking Sectors Summary Table

HSBC 1. Banks Liquidity and Funding Risk A bank’s business model depends upon its ability to access financial resources whenever required to meet its obligations. A bank’s earnings is affected by its ability to properly value financial instruments. In certain illiquid markets, determining the value at which financial instruments can be realized is highly subjective, and processes to ascertain value and estimates of value, both of which require substantial elements of judgment, assumptions and estimates (which may change over time), are required. Increased illiquidity adds to uncertainty over the accessibility of financial resources and may reduce capital resources as valuations decline. The extreme market conditions facing the financial services industry have been reflected in shortages of liquidity, lack of funding, pressure on capital and extreme price volatility across a wide range of asset classes. Illiquidity of these assets has prevented the realization of existing asset positions and has constrained risk distribution in ongoing banking activities. The extreme market conditions, which have highlighted the importance of a strong diversified core deposit base, have lead to increased competition for such deposits and the risk of deposit migration.

2. Counterparty Risk A bank’s ability to engage in routine transactions to fund its operations and manage its risks could be adversely affected by the actions and commercial soundness of other financial services institutions. Financial institutions are extremely interdependent because of trading, clearing, counterparty or other relationships. As a consequence, a default by, or decline in market confidence in, individual institutions, or anxiety about the financial services industry generally, can lead to further individual and/or systemic difficulties, defaults and losses. 3. Impeded Banking Growth due to Global Competition Consolidation in the financial services industry is increasingly concentrating activity in companies that are capable of offering a wide array of financial products at competitive prices, with globalization exposing banks to competition in capital markets and financial services at global and local levels alike. In addition, technological advances, the growth of e-commerce, regulatory developments and public sector participation or guarantees have made it possible for non-depository institutions to offer products and services that traditionally were the preserve of banks. The prominence in recent years of sovereign wealth funds, private equity and hedge funds as alternative sources of funding – which has increased competition for traditional financial institutions – may ease as investors seek safer, more traditional alternatives. Competition may further intensify or the competitive landscape may change as the consolidation of financial services companies continues and others are brought into part or full public ownership in response to the current market conditions. A bank’s ability to grow its businesses, and therefore its earnings, is affected by these competitive pressures and is dependent on the bank’s ability to attract and retain talented and dedicated employees. 4. Political and Economic Country Risks Banking performance is subjected to the risk of loss from unfavorable political developments, currency fluctuations, social instability and change in government policies on such matters as expropriation, authorizations, international ownership, interest-rate caps, limits on dividend flows and tax in the jurisdictions in which a bank operates. These factors may also negatively affect revenues from the trading of securities and investments, the effect being accentuated through certain international trading markets, particularly those in emerging market countries which are typically smaller, less liquid and more volatile than those of the developed trading markets. 5. Operational Risks Banks are exposed to many types of operational risk, including fraudulent and other criminal activities (both internal and external), breakdowns in processes or procedures and systems failure or non-availability. 6. Reputational Risk The risks to a bank’s reputation arise from a variety of sources with the potential to cause harm to the organization and its ability to operate. These issues require the bank to deal appropriately with potential conflicts

of interest, legal and regulatory requirements, ethical issues, anti-money laundering laws or regulations, privacy laws, information security policies, sales and trading practices, and the conduct of companies with which it is associated. Failure to address these issues appropriately may give rise to additional legal and compliance risk to banks, with an increase in the number of litigation claims and the amount of damages asserted against them, or subjects them to regulatory enforcement actions, fines or penalties. 7. Over-Complexity of Banking Regulation From time to time, new laws are introduced, including tax, consumer protection, privacy and other legislation, which affect the operating environment in which banks operate. As a result of the recent interventions by governments in response to global economic conditions, it is widely expected that there will be a substantial increase in government regulation and supervision of the financial services industry, including the imposition of higher capital requirements and restrictions on certain types of transaction structure. If enacted, such new regulations could require additional capital to be injected into a bank’s subsidiaries and affiliates, require the bank to enter into business transactions that are not otherwise part of its current organizational strategy, prevent the bank from continuing current lines of operations, or restrict the type or volume of transactions the bank may enter into. Banks may also face increased compliance costs and limitations on their ability to pursue business opportunities. 8. Tax-related risks Banks are subject to the substance and interpretation of tax laws in all countries in which they operates. A number of double taxation agreements entered into between countries also affect the taxation of the bank. Tax risk is the risk associated with changes in tax law or in the interpretation of tax law. It also includes the risk of changes in tax rates and the risk of consequences arising from failure to comply with procedures required by tax authorities. Failure to manage tax risks could lead to increased tax charges, including financial or operating penalties, for not complying as required with tax laws. Source: Annual Report, 2008, HSBC http://www.hsbc.com/1/PA_1_1_S5/content/assets/investor_relations/hsbc2008ara0.pdf Citigroup 1. Market Disruption Risks Dramatic declines in the housing market during 2008, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivatives, have caused many financial institutions to seek additional capital and to merge with other financial institutions. Such disruptions in the global financial markets have also adversely affected the corporate bond markets, debt and equity underwriting and other elements of the financial markets. In addition, the current market and economic disruptions have affected, and may continue to affect, consumer confidence levels, consumer spending, personal bankruptcy rates and home prices, among other factors, which provide a greater likelihood that more of bank customers or counterparties could use credit cards less frequently or become delinquent in their loans or other obligations to the banks. This, in turn, could result in a higher level of charge-offs and provision for credit losses, all of which could adversely affect bank earnings. 2. Volatile and Illiquid Market Conditions Market volatility, illiquid market conditions and disruptions in the credit markets have made it extremely difficult to value bank assets. In addition, at the time of any sales of these assets, the price that banks ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could require banks to take further write-downs in respect of these assets, which may have an adverse effect on individual bank results of operations and financial condition in future periods.

3. Ineffective Legislation and Regulation On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. In addition, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed by President Obama. The purpose of these U.S. government actions is to stabilize and provide liquidity to the U.S. financial markets and jumpstart the U.S. economy. The U.S. government is currently considering, and may consider in the future, additional legislation and regulations with similar purposes. The EESA, ARRA and other governmental programs may not have their intended impact of stabilizing, providing liquidity to or restoring confidence in the financial markets. Further, the discontinuation and/or expiration of these or other governmental programs could result in a worsening of current market conditions. 4. Changes in Accounting Standards A bank’s accounting policies and methods are fundamental to how it records and reports its financial condition and results of operations. From time to time, the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of individual bank’s financial statements. These changes can be hard to predict and can materially impact how banks record and report their financial condition and results of operations. 5. Systemic Risk The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which banks interact on a daily basis. 6. Liability and Regulatory Risks Banks face significant legal risks in their businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Legal claims by customers and clients have tended to increase in a market downturn. In addition, employment-related claims typically increase in periods when banks have reduced the total number of employees. In addition, there have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and banks run the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct and the extensive precautions that banks take to prevent and detect this activity may not be effective in all cases. 7. Inability to Retain Qualified Employees A bank’s performance is largely dependent on the talents and efforts of highly skilled individuals. A bank’s continued ability to compete effectively in its businesses, to manage its businesses effectively and to expand into new businesses and geographic regions depends on the bank’s ability to attract new employees and to retain and motivate its existing employees. Competition from within the financial services industry and from businesses outside of the financial services industry for qualified employees has often been intense. This is particularly the case in emerging markets, where banks are often competing for qualified employees with entities that have a significantly greater presence or more extensive experience in the region. Source: Annual Report, 2008, Citi http://www.citi.com/citi/fin/data/ar08c_en.pdf Royal Bank of Scotland (RBS)

1. Nationalization risk When banks nationalize, the shareholders may face the possibility of losing the full value of their shares. Under the provisions of the Banking Act in the United Kingdom, substantial powers have been granted to Her Majesty's Treasury, the Bank of England and the Financial Services Authority as part of the Special Resolution Regime to stabilize banks that are in financial difficulties and may fail. The Special Resolution Regime gives the authorities three stabilization options: private sector transfer; transfer to a ‘bridge bank’ established by the Bank of England, and temporary public ownership (nationalization).

2. Global Economy Recession and Financial Market Instability The performance of a bank will be influenced by the economic conditions of the countries in which it operates, particularly in the United Kingdom, the United States and other countries throughout Europe and Asia. Recessionary conditions are present in many of these countries, and such conditions are expected to continue or worsen over the near to medium term. In addition, the global financial system is continuing to experience the difficulties which first manifested themselves in August 2007, and the financial markets have deteriorated significantly since the bankruptcy filing by Lehman Brothers in September 2008. These conditions have led to severe and continuing dislocation of financial markets around the world and unprecedented levels of illiquidity, resulting in the development of significant problems at a number of the world’s largest corporate institutions operating across a wide range of industry sectors. 3. Lack of Banking Liquidity Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of enterprise specific factors, including an over-reliance on a particular source of funding (including, for example, short term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Credit markets worldwide have experienced and continue to experience a severe reduction in liquidity and term-funding in the aftermath of events in the US sub-prime residential mortgage market and the current severe market dislocation. Perception of counterparty risk between banks has also increased significantly following the bankruptcy filing by Lehman Brothers. This increase in perceived counterparty risk has led to further reductions in inter-bank lending, and hence, in common with many other banks, banks’ access to traditional sources of liquidity has been, and may continue to be, restricted. In addition, there is also a risk that corporate and institutional counterparties with credit exposures may look to reduce all credit exposures to banks, given current risk aversion trends. It is possible that credit market dislocation becomes so severe that overnight funding from non-government sources ceases to be available. 4. Ineffective Governmental Support Schemes Cancelled or changed governmental support schemes may have a negative impact on the availability of funding in the markets in which the bank operates. To the extent government support schemes are cancelled or changed in a manner which diminishes their effectiveness, or to the extent such schemes fail to generate additional liquidity or other support in the relevant markets in which such schemes operate, the bank may continue to face limited access to, have insufficient access to, or incur higher costs associated with, funding alternatives, which could have a material adverse impact on the bank’s business, financial condition, results of operations, prospects and result in a loss of value in the bank’s shares. 5. Risk of Borrower Credit Quality Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of banking business. The outlook for the global economy over the near to medium term has continued to deteriorate, particularly in the UK, the United States and other European economies. For example, there is an expectation of further reductions in residential and commercial property prices, higher unemployment rates and reduced profitability of corporate borrowers. Source: Annual Report, 2008, RBS http://www.rbs.com/microsites/gra2008/downloads/RBS_Annual_Report_08.pdf JPMorgan Chase 1. Lack of a Banking Regulator In the onset of the financial crisis, there is a need to move ahead quickly to establish a systemic regulator in the financial sector. In the absence of a regulator, there exist various underlying weaknesses in our system and gaps in regulation that contributed to the crisis. It is also clear that the U.S. policy must be coordinated with the proper set of international regulators. When the crisis emerged, there is a systemic risk, where the actions of individual countries had a critical impact on numerous other countries. Thus, international coordination is essential in resolving this kind of crisis.

2. Over-Complexity of Existing Banking Regulation The existing system is fragmented and overly complex. The U.S. banking sector had many regulators and too many regulatory gaps. No one agency had access to all the relevant information. Responsibility often is highly diffused. New legislation and regulatory changes could also cause business disruptions, result in significant loss of revenue, limit business’ ability to pursue business opportunities, impact the value of assets held, require businesses to change certain business practices, impose additional costs and ultimately adversely affect business. If this regulatory trend continues, it could adversely affect businesses’ operations and, in turn, financial results. Adverse publicity and damage to businesses’ reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect their ability to attract and retain customers or to maintain access to capital markets, which could also adversely affect their financial condition. 3. Underwriting Risk Securitization has been a highly effective way to finance assets in the U.S. financial sector. But some securitizations, particularly mortgage securitizations and mortgage servicing contracts, had an enormous flaw built into them: no one was responsible for the actual quality of the underwriting. Without a standardized methodology and regulations, the customer would get consistent resolution when the security and contracts turn void. 4. The Need to Fix Basel II Basel II has many flaws – it has taken too long to implement, it responds slowly to market changes and it is applied unevenly across global borders. Perhaps its worst failing is that, in its current construct, Basel II does not include liquidity, which allowed commercial and investment banks to buy liquid or illiquid assets and fund them short. While this practice did not appear quite so dangerous in benign times, it created huge issues for many financial institutions during the market crisis. Basel II has also relied too heavily on rating agencies and, by its nature, has been highly pro-cyclical in its capital requirements for assets. It would be easy to make these capital requirements less pro-cyclical and require Basel II to recognize the risk of short-term funding, particularly that of wholesale funding. Finally, Basel II should be applied consistently, reviewed continuously and updated regularly. 5. Ill-defined Accounting Practices Accounting should always reflect true underlying economics, which actually is how financial institutions are being run. However, accounting practices are not widely understood, are changed too frequently and are too susceptible to interpretation and manipulation. 6. The Need for Appropriate Counter-Cyclical Policies During the U.S. mortgage crisis, it became evident that the U.S. financial system created enormous pro-cyclical tendencies: Accounting policies such as mark-to-market and loan loss reserving are pro-cyclical. Basel II capital requirements are pro-cyclical. Regulatory and legal requirements are pro-cyclical. Repo and short-term financing are pro-cyclical. The one pro-cyclical tendency probably can never corrected is that of the market itself, where the cost of capital goes way up in a downturn or investors refuse to finance less liquid assets. 7. Socio-Environmental Risk Beyond the financial crisis, there are several important issues that will dictate whether or not the U.S. will continue to thrive over the next century. The nation can and should be able to provide health care coverage for all, an energy policy to be economically efficient, create great innovation, reduce geopolitical tensions and improve the environment, and finally, improve U.S. infrastructure and develop an education system. 8. Economic and Market Condition Risks Financial institutions have been, and in the future will continue to be, materially affected by economic and market conditions, including factors such as: • • • •

the liquidity of the global financial markets, the level and volatility of debt and equity prices, interest rates and currency and commodities prices, investor sentiment,

• • • • • •

corporate or other scandals that reduce confidence in the financial markets, inflation; the availability and cost of capital and credit; the occurrence of natural disasters, acts of war or terrorism; and the degree to which U.S. or international economies are expanding or experiencing recessionary pressures.

These factors can affect, among other things, the activity level of clients with respect to the size, number and timing of transactions involving investment and commercial banking businesses, including underwriting and advisory businesses, the realization of cash returns from private equity and principal investments businesses, the volume of transactions that are executed for customers and, therefore, the revenue being received from commissions and spreads, the number or size of underwritings being managed on behalf of clients, and the willingness of financial sponsors or other investors to participate in loan syndications or underwritings. 9. Financial Liquidity Risk Financial liquidity is critical to the ability to operate financial businesses, grow and be profitable. Some potential conditions that could negatively affect liquidity include illiquid or volatile markets, diminished access to capital markets, unforeseen cash or capital requirements (including, among others, commitments that may be triggered to special purpose entities (“SPEs”) or other entities), difficulty or inability to sell assets, unforeseen outflows of cash or collateral, and lack of market or customer confidence. 10. Concentration of Credit Risk There will be increased levels of risk when a number of customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The efforts to diversify or hedge credit portfolio against concentration risks may not be successful and any concentration of credit risk could increase the potential for significant losses in the credit portfolio. In addition, disruptions in the liquidity or transparency of the financial markets may result in the inability to sell, syndicate or realize upon securities, loans or other instruments or positions held by financial institutions, thereby leading to increased concentrations of such positions. These concentrations could expose financial institutions to losses if the mark-tomarket value of the securities, loans or other instruments or positions decline causing the financial institutions to take write downs. All of these factors increase the level of risk-weighted assets on the balance sheet, thereby increasing the capital requirements and funding costs, all of which could adversely affect businesses’ operations and profitability. 11. Ineffective Management Of Risk Although banking institutions have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and fiduciary risk, reputational risk and private equity risk, among others, as with any risk management framework, there are inherent limitations to the risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If the risk management framework proves ineffective, financial institutions could suffer unexpected losses and could be materially adversely affected. 12. Unfavorable Economic, Monetary, Political and Legal Developments Businesses and revenues are subjected to the risks inherent in maintaining international operations and in investing and trading in securities of companies worldwide. These risks include, among others, risk of loss from the outbreak of hostilities or acts of terrorism and various unfavorable political, economic, legal or other developments, including social or political instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, and changes in laws and regulations. Furthermore, countries in which U.S. financial institutions operate or invest have in the past experienced severe economic disruptions, including extreme currency fluctuations, high inflation, or low or negative growth, among other negative conditions. Crime, corruption, war or military actions, acts of terrorism and a lack of an established legal and regulatory

framework are additional challenges in some of these countries, particularly in the emerging markets. Revenue from international operations and trading in non-U.S. securities may be subject to negative fluctuations as a result of the above considerations. The impact of these fluctuations could be accentuated as some trading markets are smaller, less liquid and more volatile than larger markets. Also, any of the above-mentioned events or circumstances in one country can and has in the past, affected our operations and investments in another country or countries. Any such unfavorable conditions or developments could have an adverse impact on our business and results of operations. The emergence of a widespread health emergency or pandemic also could create economic or financial disruption that could negatively affect revenue and operations or impair the ability to manage financial businesses in certain parts of the world. 13. Natural Disasters/Environmental Risk Energy production and commodities activities exposes institutions to the risk of unforeseen and catastrophic events, including natural disasters, leaks, spills, explosions, release of toxic substances, fires, accidents on land and at sea, wars, and terrorist attacks that could result in personal injuries, loss of life, property damage, damage to our reputation and suspension of operations. If insurance recovery is not adequate to cover liabilities with respect to particular incidents, the financial condition and results of operations may be adversely affected by such events. 14. Technological Systems Breakdown Since businesses are dependent on the ability to process, record and monitor a large number of increasingly complex transactions, any failure of financial, accounting, or other data processing systems will have severe adverse consequences. Similarly, businesses are also dependent on employees, and a significant operational break-down could occur if an employee causes a technical failure, either through human error, or through a deliberate attempt to sabotage and manipulation of operations or systems. However, disruptions to the operating systems can arise from events that are wholly or partially beyond control, which may include, for example, computer viruses or electrical or telecommunications outages, natural disasters, disease pandemics or other damage to property or physical assets, or events arising from local or larger scale politics, including terrorist acts. 15. Increasing Competition Risk Financial institutions operate in a highly competitive environment and they expect competitive conditions to intensify as continued merger activity in the financial services industry produces larger, better-capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at more competitive prices. They also face an increasing array of competitor which include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, trust companies, securities processing companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. Competition is made worse through technological advances and the growth of e-commerce, which had made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions and other companies to provide electronic and Internet-based financial solutions, including electronic securities trading. Increased competition also may require institutions to make additional capital investment to remain competitive. These investments may increase expenses or may require them to extend more of their capital on behalf of clients in order to execute larger, more competitive transactions. As such, ongoing or increased competition may put downward pressure on prices for products and services or may cause institutions to lose market share. 16. Integration/Acquisition Risk In the future, institutions may seek to grow their business by acquiring other businesses. As such, there can be no assurance that the acquisitions will have the anticipated positive results, including results relating to: the total cost of integration, the time required to complete the integration, the amount of longer-term cost savings, the overall performance of the combined entity, or an improved price for common stock. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect operations or results.

Acquisitions may also result in business disruptions that cause institutions to lose customers or cause customers to remove their accounts from them and move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect the ability to maintain relationships with clients, customers, depositors and employees. The loss of key employees in connection with an acquisition could adversely affect the ability to successfully conduct their business. 17. Reputational Risk Damage to reputation could damage businesses. Maintaining a positive reputation is critical to the ability of the institution to attract and maintain customers, investors and employees. Damage to the reputation can therefore cause significant harm to business and prospects. Harm to reputation can arise from numerous sources, including, employee misconduct, litigation or regulatory outcomes, failing to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. 18. Financial Statement Error Risk Pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”), institutions are required to use certain assumptions and estimates in preparing their financial statements, including in determining credit loss reserves, reserves related to litigations and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying their financial statements are incorrect, they may experience material losses.

Source: Annual Report, 2008, JP Morgan Chase • http://files.shareholder.com/downloads/ONE/622168895x0x283416/66cc70ba-5410-43c4-b20b181974bc6be6/2008_AR_Complete_AR.pdf • http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID=950123-09-3840 Bank of America 1. Interest Rate Risk Interest rate risk represents exposures to instruments whose values vary with the level or volatility of interest rates. These instruments include, but are not limited to loans, debt securities, certain trading-related assets and liabilities, deposits, borrowings and derivative instruments. 2. Foreign Exchange Risk Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in other currencies. The types of instruments exposed to this risk include investments in foreign subsidiaries, foreign currency-denominated loans and securities, future cash flows in foreign currencies arising from foreign exchange transactions, foreign currency-denominated debt and various foreign exchange derivative instruments whose values fluctuate with changes in the level or volatility of currency exchange rates or foreign interest rates. 3. Mortgage Value Volatility Risk Mortgage risk represents exposures to changes in the value of mortgage-related instruments. The values of these instruments are sensitive to prepayment rates, mortgage rates, agency debt ratings, default, market liquidity, other interest rates and interest rate volatility. The exposure to these instruments takes several forms: first, institutions trade and engage in market-making activities in a variety of mortgage securities including whole loans, pass-through certificates, commercial mortgages, and collateralized mortgage obligations including CDOs using mortgages as underlying collateral. Second, they originate a variety of mortgage-backed securities which involves the accumulation of mortgage-related loans in anticipation of eventual securitization. Third, they may hold positions in mortgage securities and residential mortgage loans as part of the ALM portfolio. Fourth, they create Mortgage Servicing Rights (MSRs) as part of their mortgage origination activities. 4. Equity Market Risk Equity market risk represents exposures to securities that represent an ownership interest in a corporation in the form of domestic and foreign common stock or other equity-linked instruments. Instruments that would lead to this

exposure include, but are not limited to, the following: common stock, exchange traded funds, American Depositary Receipts (ADRs), convertible bonds, listed equity options (puts and calls), over-the-counter equity options, equity total return swaps, equity index futures and other equity derivative products. 5. Commodity Risk Commodity risk represents exposures to instruments traded in the petroleum, natural gas, power, and metals markets. These instruments consist primarily of futures, forwards, swaps and options. 6. Risk of Borrower Credit Quality Issuer credit risk represents exposures to changes in the creditworthiness of individual issuers or groups of issuers. Institutions' portfolios are exposed to issuer credit risk where the value of an asset may be adversely impacted by changes in the levels of credit spreads, by credit migration, or by defaults. 7. Market Liquidity Risk Market liquidity risk represents the risk that expected market activity changes dramatically and in certain cases may even cease to exist. This exposes institutions to the risk that they will not be able to transact in an orderly manner and may impact their results. This impact could further be exacerbated if expected hedging or pricing correlations are impacted by the disproportionate demand or lack of demand for certain instruments. Source: Annual Report, 2008, Bank of America

Reinsurance Companies Summary Table

Munich Re 1. Property-Casualty Insurance Risk Insured losses in property-casualty business may be higher than expectations. Binding underwriting guidelines, limits and clear underwriting authorities in reinsurance companies regulate who is authorized and accountable for concluding reinsurance contracts. In addition, corporate underwriting draws up best-practice standards based on risk and performance analysis. These define how underwriters model individual risk types and which underwriting methods are to be applied. In underwriting reviews, companies check compliance with underwriting guidelines and analyze to what extent actual underwriting conforms to best practice in the respective unit. 2. Biometric and Lapse Risk In life reinsurance, the biometric risk and the lapse risk are especially relevant. The calculation of technical provisions is based on “biometric” actuarial assumptions, for instance on assumptions with regard to mortality and disablement, which also take future trends into account and are regularly adjusted to reflect new knowledge. In primary insurance, the assumptions are determined by the requirements of the supervisory authorities or institutes of actuaries, depending on the specific national regulations, and for reinsurance business, they include appropriate safety margins determined by actuaries. As such, the most significant risk for life reinsurance is the risk of future mortality being less favourable than that assumed in valuation bases. 3. Market Risk

Market risk is defined as the risk of economic losses resulting from changes on the capital markets. Relevant here are, inter alia, the equity risk, the interest-rate risk, the property risk and the currency risk. Market price fluctuations affect investments and liabilities. 4. Credit Risk Credit risk is defined as an economic loss which the company could incur as a result of changes in the financial profile of a counterparty, issuer of securities or other debtor with liabilities towards us.

5. Operational Risk Operational risks is defined as potential losses resulting from inadequate processes, technical failure, human error or external events. These include criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations or disagreements with business partners.

a. Risks in Information Technology These risks are identified and limited by Integrated Risk Management Division’s security and emergency planning team. b. Risks involving Human Resources Targeted personnel marketing measures, staff potential assessment and development schemes, and systematic succession planning are designed to reduce the risk of shortages in qualified staff. Modern management tools and adequate monetary and non-monetary incentives ensure a high level of motivation.

6. Liquidity Risk Liquidity risk is defined as the risk of not being in a position to meet financial obligations when they are due. Detailed liquidity planning ensures that resinsurance companies are able to make the necessary payments at all times. Liquidity risks may also arise because the actual payout structure of liabilities differs from that assumed in asset-liability management (e.g. due to a lengthening or acceleration of claim payments in a line of business or region).

7. Strategic Risk Strategic risk is defined as the risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in the operating environment.

8. Reputational Risk The reputational risk is the risk of a loss resulting from damage to the company’s public image or its reputation among clients, shareholders or other parties such as the supervisory authorities. Source: http://www.munichre.com/publications/302-05987_en.pdf Swiss Re 1. Aviation Risk The number of fatalities per accident has risen from 12.5 to 29.2 since 1945, and if aircraft are soon to carry close to 800 passengers, the possible consequences of an individual accident will be almost doubled. 2. Flood Protection Risk Reduced incidence leads to graver consequences when an event does occur can be seen in the case of flood protection. Although dams and similar protective measures reduce the probability of floods, this safety advantage leads to denser settlement of the fluvial plains. The result is fewer floods, but higher losses per event.

3. Rail Transport Risk The systematic use of state-of-the-art safety technologies has noticeably reduced the probability of accidents in rail transport in recent decades. At the same time, the introduction of high-speed trains has multiplied the possible consequences, because a doubling of the speed means a quadrupling of the collision impact. 4. Urbanization Risk People flock to cities because they expect to find more social and economic security than in more rural areas. It is estimated that by 2015, some 23 mega cities will be home to some 375 million inhabitants. In response to this powerful influx, cities are growing downwards and upwards. In all metropolises, more and more traffic areas and shopping centres are being reallocated underground, where fires can have particularly devastating consequences: emergency exits and escape routes are getting longer and longer. 5. Natural Hazards More people, buildings, factories and infrastructure per unit of area mean that events of equal magnitude will affect more people 6. Economic Concentration Risk Economic strength also magnifies the possible consequences. The current market value of Exxon Mobile, the world’s highest earning company in 2001, is higher than the gross domestic product of many countries. Just as in the past, the ruin of the biggest employer in a locality led to the economic downfall of whole towns, so too will the losses of transnational companies will have national, and possibly even intercontinental effects in future. 7. Over-reliance on Power Supply More and more consumers, functions and values are hooked up to power networks. If power supply fails, it is no longer just the lights that go out: most business processes grind to a halt. 8. Over-reliance on Telecommunications Between 1990 and 2002, the worldwide telephone network more than doubled and now numbers some 1.1 billion users. In the same period, the number of registered mobile phone subscribers rose from 11 million to 1.3 billion. The total time spent on the phone during international calls quadrupled during this time, coming to 135 billion minutes. In purely arithmetical terms, over 250,000 international calls are made round the clock every day. Telecommunications networks are no longer mere links. Instead, they constitute virtual spaces in which commerce is conducted and work colleagues all over the world interact intensively. Power cuts nowadays have thus attained the status of market and institution collapses, such that the cyber-quake is considered one of the most damaging scenarios. An aggressive computer virus could trigger a worldwide collapse of entire markets and industries within hours. 9. Easiness of Mobility Risk Between 1991 and 2001, the global fleet of commercial aircraft grew from 14,308 to 20,771. Sea freight volume grew from 1.6 billion to 5.4 billion tons a year in the years between 1965 to 2001. The effect of this increasing mobility – as in the case of all networking – is that losses can proliferate faster, over greater distances and on a wider scale. For example: on 21 September 1999, an earthquake struck Chi-Chi in Taiwan, damaging several factories which produce memory chips. The resulting two-week interruption of production caused a supply shortage on world markets and drove prices up fivefold. According to WHO estimates, a new influenza epidemic could claim up to 650,000 fatalities even in the medically best-equipped industrialized countries within two years. It could cause economic losses of up to USD166 billion in the U.S. alone. Source: http://zonecours.hec.ca/documents/H2005-P6-385185.FutureRisks.pdf Hannover Re 1. Underwriting Risk

A significant technical risk is the risk of underreserving and the associated strain on the underwriting result. 2. Technical Risk in Life and Health Reinsurance In life and health reinsurance, biometric risks are of special importance to our company. This term refers to all risks directly connected with the life of an insured person, such as miscalculation of mortality, life expectancy, morbidity and occupational disability. Since we also prefinance our cedants' new business acquisition costs, lapse and catastrophe risks. We reduce these potential risks with a broad range of risk management measures. For example, the reserves in life and health reinsurance are calculated in accordance with actuarial principles using secure biometric actuarial bases and with the aid of portfolio information provided by our clients. Through our own quality assurance, we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e.g. use of mortality and disability tables, assumptions regarding the lapse rate etc.). New business is written in all regions in compliance with internationally applicable Global Underwriting Guidelines, which set out detailed rules governing the type, quality, level and origin of risks. These global guidelines are revised every two years and approved by the Executive Board. They are supplemented by country-specific special underwriting guidelines that cater to the special features of individual markets. In this context the quality standards set for the portfolio reduce the potential counterparty risk stemming from an inability to pay or deterioration in the credit status of cedants. We review the risk feasibility of new business activities and of the assumed international portfolio on the basis of a series of regularly performed, holistic analyses, inter alia with an eye to the lapse risk. Quality is further assured, especially at the level of the subsidiaries – by the actuarial reports and documentation required by local regulators. A key tool of our value-based management and risk management in the area of life and health reinsurance is the European Embedded Value (EEV). This is calculated as the present value of future earnings from the worldwide life and health reinsurance portfolio plus the allocated capital. In this context appropriate allowance is made for all risks underlying the covered business. Since the 2006 financial year the EEV has been calculated on a marketconsistent basis. In future, this Market Consistent Embedded Value (MCEV) is to be established on the basis of the principles of the CFO Forum published in June 2008. We publish the MCEV on our Internet website at the same time as the quarterly report for the first quarter. The interest guarantee risk, which is important in life business in the primary insurance sector, is of only minimal risk relevance to our business owing to the structure of our contracts. 3. Capital Market Risks The net income or loss generated by the Hannover Re Group is fundamentally determined by two components, namely the "underwriting result" and the "investment income". The asset portfolios derive in substantial measure from insurance premiums that must be set aside for future loss payments. The risks in the investment sector encompass primarily market risks (share price, interest rate, real estate and currency risks as well as the spread risk). Credit risks are also relevant. The share price risk results from volatilities on equity markets. Fixed-income securities are exposed to the interest rate risk when market interest rates change. Declining market yields lead to increases and rising market yields to decreases in the fair value of fixed-income securities portfolios. Real estate risks derive from unfavorable changes in the value of our own real estate. This may be caused by a general downslide in market values (as seen with the present US real estate crash) or a deterioration in the particular qualities of the property. Real estate risks are of subordinate importance for our company owing to our minimal real estate portfolio. Currency risks result from fluctuations in exchange rates, especially if there is a currency imbalance between the technical liabilities and the investments. By systematically adhering to matching currency coverage, i.e. extensive matching of currency distributions on the assets and liabilities side, we are able to minimize this risk. The spread risk refers to the risk that the interest rate differential between a risk-entailing bond and risk-free bond may change while the quality remains unchanged. We reduce these potential risks using a broad range of risk-controlling measures, the most significant of which are monitoring of the Value at Risk (VaR), various stress tests that estimate the loss potential under extreme market conditions as well as sensitivity and duration analyses and our asset/liability management (ALM). Despite our conservative investment strategy, restrictive limits and thresholds as well as the controlling tools described above, we cannot divorce ourselves entirely from general market developments. We took a number of riskminimizing measures in the year under review in response to the financial market crisis:

• • • • • •

Limitation of the investment spectrum to government or supranational bonds in September 2008. Although this step reduced the average yield for 2008, it also limited any new risk-taking on the credit markets in view of the uncertain state of the market. Elimination of all counterparty risks with respect to existing options for equity hedging. Despite the already high diversification of the portfolio, further tightening of issuer limits for all investments of the Hannover Re Group in September 2008 in order to minimise potential accumulation risks. Near complete reduction of unhedged holdings of listed equities in October 2008. Thorough review of the existing investment guidelines in December 2008. Scarcely any adjustments were necessary even in the present circumstances; the limits, especially in respect of covered bonds, ABS and MBS, were nevertheless further refined. Making available of a minimum level of liquidity or assets that can be realized at any time in an amount of at least EUR 4 billion or around 20% of the investments under own management as the prevailing illiquidity of secondary markets that had begun in September 2008 continued and in view of the risks arising in connection with the acceptance of LOCs by ceding companies.

4. Credit risks The credit risk consists primarily of the complete or partial failure of the counterparty and the associated default on payment. Also significant, however, is the so-called migration risk, which results from a rating downgrade of the counterparty and is reflected in a change in fair value. In reinsurance business the credit risk is material for our company because the business that we accept is not always fully retained, but instead portions are retroceded as necessary. These retrocessions conserve our capital, stabilize and optimize our results and enable us to derive maximum benefit from a "hard" market (e.g. following a catastrophe loss event). Alongside traditional retrocession we also transfer risks to the capital market. Overall, these tools support diversification within the total portfolio and promote risk reduction. Credit risks are also relevant in life and health reinsurance because we prefinance acquisition costs for our ceding companies. Our investments similarly entail a credit risk. Our clients, retrocessionaires and broker relationships as well as our investments are therefore carefully evaluated and limited in light of credit considerations and are constantly monitored and controlled within the scope of our system of limits and thresholds. 5. Operational risks In our understanding, this category encompasses the risk of losses occurring because of the inadequacy or failure of internal processes or as a result of events triggered by employee-related, system-induced or external factors. Operational risks also encompass legal risks, although they do not extend to strategic or reputational risks. Operational risks may derive, inter alia, from system failures or unlawful or unauthorized acts. Given the broad spectrum of operational risks, there is a wide range of different management measures tailored to individual risks. Core elements of risk management are our contingency plans that ensure the continuity of mission-critical enterprise processes and systems (recovery plans, backup computer centre). The range of tools is rounded off with external and internal surveys of clients and staff, the line-independent monitoring of risk management by Internal Auditing and the Internal Control System (ICS). 6. Emerging, Strategic, Reputational and Liquidity Risk Under the heading of "Other risks" we primarily consider emerging risks, strategic risks, reputational risks and liquidity risks. The hallmark of emerging risks (such as obesity, nanotechnology) is that the content of such risks is not as yet known with any certainty and their implications – especially for our portfolio – are difficult to assess. It is therefore vital to detect such risks at an early stage and determine their relevance. On this basis it is possible to decide which steps must be taken, e g. ongoing observation, the implementation of contractual exclusions or the development of new reinsurance products. Strategic risks derive principally from an imbalance between the corporate strategy and changing general economic conditions. Such an imbalance might be caused, for example, by incorrect strategic policy decisions, a failure to consistently implement the defined strategies or by fundamental changes in court decisions or the regulatory environment. We therefore regularly review our strategy and systematically adjust our structures and processes as and when required. Our holistic management system of "Performance Excellence" ensures that our strategy is constantly reviewed and consistently translated into practice. Hannover Re's reputation as a company is one of its most vital intangible assets. It often takes decades to build

up a positive reputation, yet this reputation can be damaged or even destroyed within a very brief space of time. Like the strategic risk, the reputational risk usually manifests itself in combination with other risks, such as market or technical risks. Management of this risk is facilitated by our mandatory communication channels and processes that have been specified for defined crisis scenarios as well as by our business principles. The liquidity risk refers to the risk of being unable to convert investments and others assets into cash in order to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk, i.e. the necessary cash cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial market transactions can only be completed at a poorer price than expected due to a lack of market liquidity. Regular liquidity planning and a liquid asset structure are core elements of our ability to manage this risk. Our active liquidity management has helped to ensure that even in times of financial crisis we are able to meet our payment obligations at all times without reservation.

7. Natural Disasters Catastrophe risks, especially those associated with natural hazards such as earthquakes or windstorm events, constitute another material risk for Hannover Re. Licensed scientific simulation models, supplemented by our own expertise, are used to assess the risks posed by natural hazards. Within the scope of accumulation control the Executive Board defines the appetite for assuming natural hazards risks once a year on the basis of our risk strategy. In order to manage the portfolio with this consideration in mind, maximum underwriting limits (capacities) are stipulated for various extreme loss scenarios and return periods/probabilities, utilization of which is monitored and reported to the relevant bodies. 8. Price/Premium Risk The price/premium risk lies primarily in a failure to correctly calculate the necessary premiums in relation to the future loss experience. The risk arises out of the incomplete or inaccurate estimation of future claims, especially over time. Regular and independent reviews of the models used for treaty quotation as well as the implemented methods, e.g. our compulsory central and local underwriting guidelines, are therefore essential for the management of these risk potentials. Source: http://www.hannover-re.com/resources/cc/generic/hr-reports/2008_GBKonzern_E.pdf Lloyd’s of London 1. Operational Losses Through Inadequate Pricing Lloyd’s insurers suffer operational losses and/or erode their capital base through inadequate pricing. 2. Losses of Market Share Through Competition Lloyd’s is unable to maintain its competitive position and deliver process improvements that create a more efficient marketplace.

3. Underwriting Risk Underwriting losses incurred are outside expected thresholds, resulting in potential failure of members and subsequent Central Fund exposures. Lloyd’s suffers financial loss and/or reputational damage through poor underwriting. 4. Insurance Liabilities Lloyd’s suffers increased insurance liabilities, additional regulatory burden, decreased asset values and/or capital constraints. management principles. 5. Inability to Perform Effective Operational Functions and Market Oversight Lloyd’s is unable to perform operational functions or provide effective market oversight.

6. Potential Risk in Solvency II Lloyd’s fails to meet requirements of Solvency II, resulting in regulatory sanctions and disadvantageous capital

requirements.

Source: http://www.lloyds.com/NR/rdonlyres/E3BE7537-CEE9-46A2-849BFF8972CB9D3B/0/AR2008_Lloyds_AR08_20090424.pdf SCOR Global P&C 1. Natural/Man-made Disasters The Property business underwritten by SCOR Global P&C is exposed to multiple insured losses arising from a single or multiple events, which can be catastrophic, being either caused by nature (e.g. hurricane, windstorm, flood hail, severe winter storm, earthquake, etc.) or by the intervention of a man-made cause (e.g. explosion, fire at a major industrial facility, act of terrorism, etc.). Any such catastrophic event can generate insured losses in one or several of SCOR’s lines of business. The same losses may be covered under various different lines of business within the Property branch such as fire, engineering, aviation, space, marine, energy and agricultural. 2. Causality Business Risk For casualty business, the frequency and severity of claims and the related indemnification payment amounts can be affected by several factors. The most significant factors are the changing legal and regulatory environment, including changes in civil liability law. Additionally, due to the length of amicable, arbitral and court procedures, the casualty business is exposed to inflation risks regarding the assessment of claim amounts and potentially to so-called emerging risks, which are risks considered to be new or at least known but which are subject to constant evolution such as EMF (Electro Magnetic Fields). 3. Cyclicality of Business Risk Non-Life insurance and reinsurance businesses are cyclical. Historically, reinsurers have experienced significant fluctuations in operating income due to volatile and unpredictable developments, many of which are beyond the control of the reinsurer including primarily, frequency or severity of catastrophic events, levels of capacity offered by the market and general economic conditions and to varying extents the price competition and capacity available. The primary consequences of these structural factors are to reduce the volume of Non-Life reinsurance premiums on the market, to make the reinsurance market more competitive, and also to favour the operators who are most attentive to the specific needs of the cedents. Beyond the general trends, the premium rate cycle is affecting certain geographic markets and/or certain lines of business in a differentiated fashion and independently of each other. 4. Underwriting Risk The assessment of biometric risks is at the centre of underwriting risk in life reinsurance. These are risks which result from adverse developments in mortality, morbidity longevity and pandemic claims for direct insurers and reinsurers. These risks are evaluated by SCOR Global Life’s medical underwriters and actuaries, who analyze and use information from SCOR Global Life’s own portfolio experience, from the ceding companies as well as relevant information available in the public domain, such as mortality or disability studies and tables produced by various statistical organizations. 5. Policyholder Behavioral risks SCOR Global Life is also exposed to risks related to the policyholders’ behavior. This includes risks such as fraudulent applications, anti-selection at policy issue detrimental to the insurer, lapsation, or the exercise of early cancellation options by the policyholder varying from the rates expected. 6. Specific Guarantee Risk Certain life insurance products include guarantees, most frequently with respect to premium rates, insurance benefits, and surrender or maturity values, or guarantees with regard to interest accrued on reserves or policyholder funds. Other guarantees may exist, for example with regard to automatic adjustments of benefits or options applied in deferred annuity policies. Such guarantees may be explicitly or implicitly covered by the reinsurer under the reinsurance contract and if so do expose the reinsurer to the risk of adverse developments which increase the value of the guarantee and thereby necessitate respective increases in benefit reserves. 7. Terrorism In the context of business, SCOR may be exposed to claims arising from the consequences of terrorist acts.

Future terrorist acts, whether in the U.S. or elsewhere, could cause the company significant claims payments and could have a significant effect on our current and future revenues, net income, cash flow and financial position. 8. Environmental Pollution Almost all reinsurance companies are exposed to environmental pollution and asbestos related risks, particularly in the United States. Insurers are required under their contracts to notify us of any claims or potential claims that they are aware of. However, the companies often receive notices from insurers of potential claims related to environmental and asbestos risks that are not precise enough, as the primary insurer may not have fully evaluated the loss at the time it notifies us of the claim. Due to the imprecise nature of these claims, the uncertainty surrounding the extent of coverage under insurance policies and whether or not particular claims are subject to any limit, the number of occurrences and new developments regarding the insured and insurer liabilities only give a very approximate estimate of potential exposure to environmental and asbestos claims that may or may not have been reported. As a result of these imprecisions and uncertainties, reinsurance companies cannot exclude the possibility that they could be exposed to significant environmental and asbestos claims, or have to increase their reserving level, which could have an adverse effect on their current and future revenues, net income, cash flow and financial position. 9. Liquidity/Claim Reserves Risk Reinsurance companies are required to maintain reserves to cover estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims, incurred as at the end of each accounting period, net of estimated related recoveries. As part of the reserving process, the companies review with the concerned insurers and co-insurers available historical data and try to anticipate the impact of various factors such as change in laws and regulations and judicial decisions that may tend to affect potential losses from claims, changes in social and political attitudes that may increase exposure to losses and trends in mortality and morbidity, or evolution in general economic conditions. Another factor of uncertainty resides in the fact that some of the activities of reinsurance companies are “long-tail” in nature, in particular workers compensation, general liability or those linked to environmental pollution or asbestos. For these type of claims, it has, in the past, been necessary to revise estimated potential loss exposure and, therefore, the related loss reserves. Source: http://www.scor.com/www/fileadmin/uploads/publics/SCOR_DDR_2008_EN.pdf

Consulting Firms Summary Table

SAP Global 1. Economic Risks Regionally and globally, the fields in which SAP does business were subject to powerful economic forces during 2008. Global markets, especially capital and credit markets, fluctuated strongly. As a result of the changes in these markets and the related growing sense of insecurity among investors and consumers, there is a much greater risk that businesses will be held back for a sustained period. Consumer hesitancy or limited availability of finance may constrict the business operations of customers and consequently impede business operations. The consequences may include restrained or delayed investments, late payments, bad debts, and even insolvency among customers and business partners. 2. Natural Disasters, Cyber Attacks, Terrorism, Pandemic Natural disasters, cyber-attacks, terrorism, disease pandemics, and other factors beyond control may influence normal business operations. Such conditions can damage the local, regional, and even the world economies and affect investment decisions as well as those of customers. For example, a catastrophic event affecting the corporate headquarters at the German state of Baden-Württemberg could have a highly material impact on SAP Global's operations. Catastrophic events at other key SAP centers, such as Buenos Aires, São Paulo, Shanghai, Prague, Bangalore, Dublin, Paris, Ra’anana (Israel), Tokyo, Mexico City, London, Singapore, or at our U.S. locations in New York, Palo Alto (California), or Newtown Square (Pennsylvania), could also affect our operations, if not as seriously. The area where our headquarters is located is generally free of catastrophic natural exposures although the risks of cyber-attacks, terrorism, global pandemic, or an accident involving one of the nearby nuclear power plants does exist. Our other key development and infrastructure locations may have additional regional natural catastrophe exposures. A catastrophic event that results in the loss of a significant portion of our human resources or the destruction or disruption of operations in our headquarters or other key locations could affect our ability to provide normal business services and generate expected business revenues. However, data redundancies and daily information backup worldwide ensure that our key IT infrastructure and critical business systems should not materially be adversely affected. 3. International Business Risk SAP Global products and services are currently marketed in more than 120 countries worldwide. Sales in these countries are subject to risks inherent in international business operations. Such risks include, for example, the general economic or political conditions in individual countries, the conflict and overlap between differing tax structures, regulatory constraints such as import and export restrictions, competition law regimes, and legislation governing the use of the Internet and the development and delivery of software and services. In Brazil, India, China, and elsewhere, certain regulatory constraints in the form of, for example, special levies on cross-border royalty payments and bureaucratic import-control processes still impede international goods traffic and business operations. 4. Competition Risk Competitors may gain market share because of acquisitions, the spread of new development models such as service-oriented architecture (SOA) technologies, and the popularity of new delivery and pricing models, notably software as a service. If such competitors successfully integrate their new acquisitions, the value proposition of integrated package solutions from SAP may be undermined. SOA may lead to a shift in purchasing patterns, encouraging more custom development, which would benefit vendors of development software. 5. Product Risk To achieve full customer acceptance, new products and product enhancements can require long development and testing periods. Such efforts are subject to multiple risks, for example, scheduled market launches can be delayed, or products may not completely satisfy stringent quality standards, entirely meet market needs, or comply with local standards. Furthermore, new products and product enhancements may not be sufficiently technologically advanced, still contain undetected errors, or be unready for high volume data processing. 6. Business Alliance Risk SAP Global has entered into cooperative agreements with a number of leading suppliers of computer software and hardware and technology service providers to ensure that selected products they offer are compatible with SAP software products. As such, a decision by these partners to cease cooperating with us when such

agreements or partnerships expire or come up for renewal could adversely affect the marketing of and demand for our software products. 7. Inability to Retain Qualified Talent SAP Global's highly qualified employees and managers provide the foundation for developing and selling new products, marketing and providing services for existing products, successfully leading and executing SAP’s business processes, and thus for securing our continued success in business. Ensuring that our workforce feels a long-term commitment to SAP is of utmost importance to us, as is attracting new, highly qualified employees. Despite the decision to reduce the number of positions worldwide in light of the economic crisis, retention of our well-qualified and experienced professionals is equally important for us. 8. Regulation Requirement Risk As a stock corporation domiciled in Germany that issues securities listed on a U.S. stock exchange, SAP Global is subject to both German and U.S. governance-related regulatory requirements. The requirements of the law have become significantly more onerous in recent years, notably with the implementation of the Sarbanes-Oxley Act and more rigorous application of the Foreign Corrupt Practices Act in the United States. We cannot exclude the possibility that we may have to answer for failures to comply with the law if, for example, an employee is found to have acted fraudulently, negligently, or in an anticompetitive way. 9. Sustainability Risk For SAP Global, business sustainability is a standard that guides our engagement in new business opportunities – holistically encompassing profitable growth, environmental value, and societal benefit. We therefore address sustainability risks, especially relating to climate change, corporate integrity, human resources management, the ethical behavior of suppliers, the accessibility, user-friendliness, and safety of our products, privacy and data protection in connection with the use of SAP products, and the digital divide. The term “digital divide” refers here to the belief that people’s access to digital and information technology is dependent on social factors. If sustainability strategies fail to fulfill the requirements of our partners or customers or fail adequately to meet generally accepted standards, our profitability, business outlook, or good reputation could be adversely affected. We address the risks in these respects with suitable measures aimed at avoiding negative effects for our customers, employees, and investors, all of whom expect a reliable sustainability strategy from SAP. 10. Communication and Information Risks SAP Global have undertaken a range of measures in recent years to mitigate the risk that internal, confidential communications and information about sensitive subjects such as future strategies, technologies, and products are improperly or prematurely disclosed to the public. These measures include Group-wide mandatory security standards and guidelines relating to internal and external communications, technical precautions to prevent the transmission of confidential internal communications over external communication networks, and the provision of encrypted hardware equipment to employees who are frequently exposed to sensitive, confidential information. However, there is no guarantee that the protective mechanisms we have established will work in every case. Our competitive position could sustain serious damage if, for example, confidential information about the future direction of our product development became public knowledge, resulting in reduced revenue in the future. 11. Mergers and Acquisition Risk SAP Global regularly monitor the compliance with all of the financial reporting standards and any new pronouncements that are relevant to us. Findings of our monitoring activity or the pronouncement of new financial reporting standards may require us to change our internal revenue recognition or other financial reporting policies, to alter our operational policy to reflect new or amended financial reporting standards, or to restate our published financial reporting information. We cannot exclude the possibility that this may have a material impact on our assets, finances, or profit. 12. Liquidity Risk The primary aim is to maintain liquidity in the company at a level that is adequate to meet our obligations. High levels of liquid assets and marketable securities provide a strategic reserve, helping keep SAP flexible, sound, and independent. We have available a syndicated line of credit and other bilateral lines of credit on which we can draw if necessary. However, the crisis on the financial markets has considerably worsened refinancing conditions for banks and their borrowers. We cannot therefore exclude the possibility that the risk of increased financing expense could materially affect our assets, finances, or profit.

13. Exchange Rate Risk SAP Global management and external accounting is in euros. Nevertheless, a significant portion of our business is conducted in currencies other than the euro. Consequently, period-over-period changes in the euro rates for particular currencies can significantly affect our reported revenue and income. In general, appreciation of the euro relative to another currency has a negative effect while depreciation of the euro has a positive effect. We continually monitor our exposure to currency fluctuation risks based on balance-sheet items and expected cash flows and pursue a Group-wide foreign exchange risk-management strategy using, for example, derivative financial instruments as appropriate. As a result of various steps we have taken, management of our foreign currency risk is to a great extent centralized in the hands of SAP AG in Germany. 14. Hedging Risk When appropriate, SAP Global uses derivative instruments to hedge risks resulting from future cash flows associated with STAR and SAP SOP share-based compensation plans. However, we cannot exclude the possibility that the expense of hedging the STAR and SOP plans does not exceed the benefit achieved by hedging them or that a decision not to hedge may prove to be disadvantageous. 15. IT Security Risk SAP Global products include security features that are intended to protect the privacy and integrity of customer data. However, information systems and software applications are increasingly coming under attack for reasons ranging from criminal intent to personal financial gain. At the same time, an increasing number of applications are offered and supplied over the Internet to simplify cross-company processes. Despite our security features, SAP products may be vulnerable to attacks, and similar problems may be caused by attackers such as hackers bypassing the security precautions of our customers and misappropriating confidential information. Attacks by criminally motivated hackers or similar disruptions could jeopardize the security of information stored in and transmitted through the computer systems of our customers and lead to claims for damages against us from customers. 16. Licensing Risk SAP Global have acquired license rights in respect of numerous third-party technologies and incorporated them into our portfolio of products. We cannot rule out the possibility that the licenses for certain third-party technologies may be terminated against our interests or that we may be unable to favorably license third-party software for our products. The risk increases if we acquire intellectual property assets that have been subject to third-party technology licensing and product standards less rigorous than our own. This could lead to short-term replacement problems and to significantly higher development expenses. 17. Intellectual Property Risk There is a possibility that others will infringe on intellectual property rights. In view of the legal position regarding the protection of innovative software in different countries and of the losses to which we are exposed from infringements to intellectual property rights that cannot be effectively enforced; it is not always possible to adequately protect our innovations or to completely avoid such losses. Thus, for example, the law and the courts in some countries in which we market our software provide insufficient protection against copying or un-permitted use of our innovative software. 18. Physical Security Risk SAP Global attach great importance, as a software company, to securing our business operations against disruption and to safeguarding our assets. We have a number of measures in place to ensure that our data and information technology, our physical assets, and our organization are secure against attack from without and within. There is nevertheless a risk that someone might misuse or steal property, plant, or equipment or gain unauthorized access to our facilities and to sensitive material, and might use such material to SAP’s detriment. Source: http://www.sap.com/germany/about/investor/reports/gb2008/en/our-results/the-sap-group-ofcompanies.html Marsh & McLennan Companies 1. Legal/Regulatory Risk Consulting Companies are subject to a number of legal proceedings, regulatory actions and other contingencies. An adverse outcome in connection with one or more of these matters could have a material adverse effect on

business, results of operations or financial condition in any given quarterly or annual period. In addition, regardless of any eventual monetary costs, these matters could have a material adverse effect on MMC by exposing companies to negative publicity, reputational damage, harm to client or employee relationships, or diversion of personnel and management resources.

2. Reputational Risk One of our significant responsibilities is to maintain the security and privacy of our clients’ confidential and proprietary information and the personal data of their employees and plan participants. We maintain policies, procedures and technological safeguards designed to protect the security and privacy of this information. Nonetheless, we cannot entirely eliminate the risk of improper access to or disclosure of personally identifiable information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace. 3. Geographical Risk We do business worldwide. In 2007, 51 percent of MMC’s total operating segments revenue was generated from operations outside the United States, and over one-half of our employees are located abroad. We expect to expand our non-U.S. operations further. The geographic breadth of our activities subjects us to significant legal, economic, operational and market risks which include: • • • • • • • •

economic and political conditions in foreign countries; local investment or other financial restrictions that foreign governments may impose; potential costs and difficulties in complying, or monitoring compliance, with rules relating to trade sanctions administered by the U.S. Office of Foreign Assets Control, the requirements of the U.S. Foreign Corrupt Practices Act, or other U.S. laws and regulations applicable to business operations abroad; limitations that foreign governments may impose on the conversion of currency or the payment of dividends or other remittances to us from our non-U.S. subsidiaries; withholding or other taxes that foreign governments may impose on the payment of dividends or other remittances to us from our non-U.S. subsidiaries; the length of payment cycles and potential difficulties in collecting accounts receivable; engaging and relying on third parties to perform services on behalf of MMC; potential difficulties in monitoring employees in geographically dispersed locations; and potential costs and difficulties in complying with a wide variety of foreign laws and regulations (including tax systems) administered by foreign government agencies, some of which may conflict with U.S. or other sources of law.

4. Exchange Rate Risk MMC are subject to exchange rate risk because some of our subsidiaries receive revenue other than in their functional currencies, and because we generally must translate the financial results of our foreign subsidiaries into U.S. dollars. For example, most of MMC’s total operating segments revenue generated outside of the U.S. is denominated in currencies other than the U.S. dollar. As a consequence, significant changes in exchange rates may have a material effect on our reported financial results for any given period. 5. Competitive Risk As a global professional services firm, MMC experiences acute and continuous competition in each of its operating segments. Our ability to compete successfully depends on a variety of factors, including our geographic reach, the sophistication and quality of our services, and our pricing relative to our competitors. If we are unable to respond successfully to the competition we face, our business and results of operations will suffer. In our consulting and risk consulting and technology segments, we compete for business and employee talent with numerous independent consulting firms and organizations affiliated with accounting, information systems, technology and financial services firms around the world.

6. Inability to retain qualified talent Across all of our businesses, our personnel are crucial to developing and retaining the client relationships on which our revenues depend. It is therefore very important for us to retain significant revenue-producing employees and the key managerial and other professionals who support them. Losing employees who manage or support substantial client relationships or possess substantial experience or expertise could adversely affect our ability to secure and complete client engagements, which would adversely affect our results of operations. In addition, if any of our key professionals were to join an existing competitor or form a competing company, some of our clients could choose to use the services of that competitor instead of our services. 7. Technology Change Risk To remain competitive in many of our business areas, we must identify the most current technologies and methodologies and integrate them into our service offerings. If we do not make the correct technology choices or investments, or if our choices or investments are insufficiently prompt or cost-effective, our business and results of operations could suffer. 8. Credit Rating Risk Both Moody’s and Standard & Poor’s downgraded MMC’s senior debt credit rating in late 2004 and S&P announced a further downgrade in December 2007. Currently, MMC’s senior debt is rated Baa2 by Moody’s and BBB- by S&P. These ratings are the next-to-lowest investment grade rating for Moody’s, and the lowest investment-grade rating for S&P. If we need to raise capital in the future (for example, in order to fund maturing debt obligations or finance acquisitions or other initiatives), any further credit rating downgrade could negatively affect our financing costs, and likely would limit our access to financing sources. Further, we believe that a downgrade to a rating below investment-grade could result in greater operational risks through increased operating costs and increased competitive pressures. 9. Employee Pension Risk MMC has significant pension obligations to its current and former employees, totaling approximately $10 billion at December 31, 2007. The magnitude of our worldwide pension plans means that our earnings are comparatively sensitive to factors such as equity and bond market returns, the assumed interest rates we use to discount our pension liabilities, rates of inflation and mortality assumptions. Variations in any of these factors could cause significant fluctuation in our earnings from year to year. 10. Mergers and Acquisitions Risk While we intend that our acquisitions will improve our competitiveness and profitability, we cannot be certain that our past or future acquisitions will be accretive to earnings or otherwise meet our operational or strategic expectations. Acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies and difficulties in integrating acquired businesses, and acquired businesses may not achieve the levels of revenue, profit or productivity we anticipate or otherwise perform as we expect. 11. Market Fluctuation Risk A significant portion of our risk and insurance services revenue consists of commissions paid to us out of the premiums that insurers and reinsurers charge our clients for coverage. We have no control over premium rates, and our revenues and profitability are subject to change to the extent that premium rates fluctuate or trend in a particular direction. The potential for changes in premium rates is significant, due to the general phenomenon of pricing cyclicality in the commercial insurance and reinsurance markets. In addition to movements in premium rates, our ability to generate premium-based commission revenue may be challenged by the growing availability of alternative methods for clients to meet their risk-protection needs. This trend includes a greater willingness on the part of corporations to “self- insure;” the use of so-called “captive” insurers; and the advent of capital markets-based solutions to traditional insurance and reinsurance needs. 12. Private Equity Risk Through its risk and insurance services subsidiary Risk Capital Holdings, MMC owns, among other investments, minority interests in certain private equity funds. Risk Capital Holdings records as revenue its proportionate share

of changes in the quarterly fair value of these funds’ underlying investments. These changes in value, the size and timing of which Risk Capital Holdings generally does not control, can have a significant effect on risk and insurance services revenue from one quarter to another. In turn, because a large proportion of Risk Capital Holdings’ revenues flow directly to net operating income in risk and insurance services, changes in the value of Risk Capital Holdings’ private equity fund investments can have a significant effect on segment operating income and margins from quarter to quarter. 13. General Economic Risk Demand for many types of insurance and reinsurance generally rises and falls as economic growth expands or slows. This dynamic affects the level of commissions and fees generated by Marsh and Guy Carpenter. To the extent our clients become adversely affected by declining business conditions, they may choose to limit their purchases of insurance coverage, which would inhibit our ability to generate commission revenue; and may decide not to purchase our risk advisory services, which would inhibit our ability to generate fee revenue. Moreover, a growing number of insolvencies associated with an economic downturn, especially insolvencies in the insurance industry, could adversely affect our brokerage business through the loss of clients or by hampering our ability to place insurance and reinsurance business. 14. Inadequate Pricing Risk The profitability of our consulting and risk consulting and technology businesses depends in part on ensuring that our consultants maintain adequate utilization rates (i.e., the percentage of our consultants’ working hours devoted to billable activities). In recent periods, we have maintained a utilization rate that is high by our historical standards. We cannot be certain that we will maintain this level of utilization in future periods, particularly if economic growth slows. If the utilization rate for our consulting professionals were to decline, our profit margin and profitability could suffer. In addition, the profitability of our consulting and risk consulting and technology businesses depends on the prices we are able to charge for our services. If we are unable to achieve and maintain adequate billing rates for our consultants, our profit margin and profitability could suffer. Source: http://www.mmc.com/investors/documents/10K_2007.pdf Ernst & Young 1. Credit Crunch related Risk The credit crunch and its aftershocks pose existential threats to leading global firms in asset management, real estate, insurance and banking, while capital-intensive sectors such as life sciences and power and utilities are under pressure from a tighter credit environment. 2. Regulatory Risk Regulatory risk – last year’s number one threat – remains near the top of the list. This risk may not have such an obvious impact as the global credit crunch, but regulatory risks continue to be keenly felt at leading firms in sectors such as life sciences, telecoms, oil and gas and power utilities. Furthermore, uncertainty regarding the regulatory response to the global financial crisis has caused this risk to become more important in asset management, banking and insurance. 3. Fall in Consumer Confidence The global crisis and house price declines have delivered a shock to consumer confidence and sparked capital flight from emerging markets, raising the specter of a retraction in developed economies becoming a truly global recession. 4. Radical Greening Risk Environmental and sustainability challenges continue to escalate, most dramatically in carbon-intensive sectors such as automotive, real estate, oil and gas, and power and utilities. The change of administration in the US raises the possibility of concerted government regulation. 5. Competition Risk New competitors are emerging from adjacent markets and distant geographies. National oil companies now compete with the majors in oil and gas; banking, insurance and asset management companies now compete for

the same customers; as do internet, telecom and media companies; and emerging market companies are more competitive in the automotive sector. 6. Cost cutting Risk With the global economy slowing, cost containment is now crucial to survival in sectors such as automotive, media, and consumer products. It is impacting both suppliers and consumers. 7. Talent Retention Risk What was the “war for talent” is now more complicated: attracting talent is still important, but so is retaining key talent during a downturn and (especially in banking) the intensifying debate over the competition structures that are misaligned with risk management or longer-term returns. 8. Business Alliance Risk Tightening credit conditions have lessened the pace of M&A activity. Yet alliances and partnerships remain crucial to the business strategies of leading firms in sectors such as telecoms, life sciences, utilities and media. Furthermore, the financial crisis has led to sudden and dramatic ‘rescue mergers’ for which due diligence must be undertaken after the fact. 9. Business model redundancy In sectors such as asset management, lie sciences, media, and telecoms, technological change and industry transitions are making long-established business models obsolete, forcing industry-leading firms to reinvent their corporate strategies and structures. 10. Reputational risks Not only the reputations of firms but those of entire industries are increasingly under threat. Environmental and climate concerns threaten oil and gas and utilities companies; pressure to provide wider access to life-saving drugs threaten funding for innovation in life sciences and the credit crunch is weakening public tryst in banking and asset management companies. Source: http://www.ey.com/GL/en/Services/Assurance/Top-10-business-risks-for-2009 IBM Business Consulting 1. Market and credit risk Financial institutions are finding it increasingly difficult to manage the risks they face in a landscape of ever more sophisticated financial products, combined with the growing burden of regulation. The credit crunch of 2007 and the resulting global market turmoil have placed massive stress on risk officers. Alongside these external pressures, equally severe internal pressures are being felt as management require information that is faster, deeper and more accurate to help improve their decision making. 2. Operational risk management Operational risk management has become a greater priority for financial institutions for three main reasons. First, banks need to meet new regulatory requirements, in particular Basel II and its European manifestation, the Capital Requirements Directive, to set aside enough capital to cover themselves against possible losses due to inadequate or failed internal processes, people and systems, or from external events. Second, senior managers in all financial organisations, not just banks, have realised that there is a sound business case for taking more formal steps to protect the organisation from operational errors and costs. Third, increased volumes during recent periods of volatility have stressed platforms and people in technology and operations – highlighting areas of operational weakness. 3. Financial crime Financial crime is a major problem for banks, insurers and other financial institutions. Trading conditions today require a sharp focus on minimising operational costs, so getting fraud losses under control will be a key factor. In addition to the accumulated costs of the losses incurred, the risk to the enterprise of a breach which results in a fine or a publicised loss is a constant concern. The requirement to comply more fully with anti-money laundering regulations is now extending beyond banks to insurers, trade financiers and financial markets. 4. Solvency II Risk

European insurers have started to think carefully about the implications of the proposed “Solvency II” Directive, which will comprehensively reform the prudential supervision of insurance and reinsurance in Europe. Its main objective is to strengthen protection for policyholders by encouraging insurers to improve their risk management techniques and to align their capital more closely to the risks they take. Under Solvency II, firms will be able to use their own internal model to quantify the level of risk they face and the level of capital required to support those risks, rather than use the European Standard Formula. Using their own model may produce a more accurate assessment of their risk and potentially result in lower capital requirements. This internal model must be approved by the relevant regulator. To gain approval, insurers will have to demonstrate that the model is based on sound statistical techniques, uses current, credible information to support assumptions, covers all material risks and meets calibration tests and documentation requirements. They will also have to demonstrate to the regulator that the internal model is used in the management and decision-making of the business. Source: http://www-304.ibm.com/jct03004c/easyaccess/fileserve?contentid=126874 The Boston Consulting Group 1. Supplier Prices for the Short to Medium Term The drastic decline in demand for many discretionary products that are made in low-cost countries, such as electronics, clothing and footwear, has led to overcapacity in most manufacturing segments. Many efficient suppliers are being forced to shutdown, leaving only the fittest to survive. The factories that continue to compete in the market will focus on remaining open until demand picks up again. As a result, weak demand and an abundance of capacity will make suppliers more willing to accept prices closer to their marginal cost. 2. Supplier Prices for the Long Term When the global demand picks up, global buyers will find a devastated supply base. Depending on the duration of the global crisis and its impact on individual sectors, the number and capacity of suppliers could be significantly reduced, with only the most adept suppliers remaining. As a result, these survivors will likely incur capacity problems almost immediately when the global economies start to recover, and inflated prices will likely return. To make matters worse, consumer products companies maybe unable to find the capacity they will need to fill orders at a critical time during the economic recovery. New capacity takes time to develop, and new suppliers require even lengthier lead times, largely to complete the qualification process that ensures their product quality, safety, and adherence to acceptable social practices. To minimize these disruptions, companies should act to protect and manage their future supply base. 3. High Risk of Currency Fluctuations The global economic crisis has led to dramatic and unprecedented swings in exchange rates. Outside of China, the currencies of most Asian low cost countries (LCCs) have depreciated against the U.S. dollar and have fluctuated markedly against the euro. In many of the countries with devalued currencies, this trend has created new sourcing opportunities for purchases denominated in dollars. Currency fluctuations had also occurred in developed countries; in the month of October 2008 alone, the euro depreciated more than 8 percent against the dollar, the British pound depreciated about 8 percent, and the Japanese yen appreciated about 6 percent. The considerable fluctuation in global currencies has made it difficult to assess the full potential for achieving future savings through sourcing from low cost countries. Source: http://www.bcg.com/impact_expertise/publications/files/Sourcing_Consumer_Products_in_Asia_March_2009.pdf