The Hartford 2012 Annual Report Download - page 12

Table of Contents
Risk Exposures and Quantification
The Company quantifies its enterprise insurance and financial risk exposures using multiple lenses including statutory, economic and, where appropriate,
U.S. GAAP. ERM leverages various modeling techniques and metrics to provide a view of the Company's risk exposure in both normal and stressed
environments. ERM regularly monitors the Company's risk exposure as compared to defined statutory limits and provides regular reporting to the ERCC.
In order to quantify group capital levels the Company uses an Economic Capital Model (“ECM”) to quantify the value of risk management across the
business lines and to advance its risk-based decision-making and optimization across risk and business. The Company also uses the ECM to inform the
attribution of risk capital to each line of business. The Company categorizes its main risks as follows in order to achieve a consistent and disciplined
approach to quantifying, evaluating, and managing risk:
•Insurance Risk
•Operational Risk
•Financial Risk
•Business Risk
Insurance Risk
The Company defines insurance risk as its exposure to loss due to property, liability, mortality, morbidity, disability, longevity and other perils and risks
covered under its policies, including adverse development on loss reserves supporting its products and geographic accumulations of loss over time due to
property or casualty catastrophes.
Operational Risk
The Company defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Financial Risk
Financial risk is broadly defined by the Company to include liquidity, interest rate, equity, foreign exchange, and credit risks, all of which have the potential
to materially impact the Company's financial condition. Financial risk also includes exposure to events that may cause correlated movement in the above risk
factors.
Business Risk
The Company manages its business risk at all levels of the organization. The Company categorizes its business risk as strategic risk and management risk.
Strategic risk is defined as the risk to the defined company objectives from adverse developments in the Company's strategy vis-à-vis changing market
conditions and competitor actions. Management risk is defined as the risk to defined company objectives from the ineffective or inefficient execution of the
Company's strategic and business decisions. Enterprise strategic and management risks are assessed through strategic, business and operating plan reviews,
as well as through management self-assessment processes and benchmarking.
For further discussion on risk management, see Part II, Item 7, MD&A - Enterprise Risk Management.
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Insurance companies are subject to comprehensive and detailed regulation and supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency that must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on
investments; establishing premium rates; claim handling and trade practices; restrictions on the size of risks which may be insured under a single policy;
deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of companies; annual and other reports
required to be filed on the financial condition of companies or for other purposes; fixing maximum interest rates on life insurance policy loans and minimum
rates for accumulation of surrender values; and the adequacy of reserves and other necessary provisions for unearned premiums, unpaid losses and loss
adjustment expenses and other liabilities, both reported and unreported.
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