The Hartford 2015 Annual Report Download - page 12

12
In order to quantify group capital levels the Company uses an Economic Capital Model (“ECM”) to quantify the value of diversification
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 capital attribution across the businesses. 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
Additionally, the Company manages its legal and management risks across the enterprise. Management risk includes strategic risk, the
risk of ineffective or inefficient execution of the Company's strategy, as well as tax risk and reputational 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 natural catastrophes, casualty catastrophes, terrorism and pandemic events.
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.
For further discussion on risk management, see Part II, Item 7, MD&A - Enterprise Risk Management.
Regulation
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; 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.
Most states have enacted legislation that regulates insurance holding company systems such as The Hartford. This legislation provides
that each insurance company in the system is required to register with the insurance department of its state of domicile and furnish
information concerning the operations of companies within the holding company system that may materially affect the operations,
management or financial condition of the insurers within the system. All transactions within a holding company system affecting
insurers must be fair and equitable. Notice to the insurance departments is required prior to the consummation of transactions affecting
the ownership or control of an insurer and of certain material transactions between an insurer and any entity in its holding company
system. In addition, certain of such transactions cannot be consummated without the applicable insurance department’s prior approval. In
the jurisdictions in which the Company’s insurance company subsidiaries are domiciled, the acquisition of more than 10% of The
Hartford’s outstanding common stock would require the acquiring party to make various regulatory filings.
Certain of the Company’s life insurance subsidiaries sold variable life insurance, variable annuity, and some fixed guaranteed products
that are “securities” registered with the SEC under the Securities Act of 1933, as amended. Some of the products have separate accounts
that are registered as investment companies under the Investment Company Act of 1940, as amended (the “1940 Act”), and/or are
regulated by state law. Separate account investment products are also subject to state insurance regulation. Moreover, each separate
account is generally divided into sub-accounts, each of which invests in an underlying mutual fund that is also registered as an
investment company under the 1940 Act (“Underlying Funds”). The Company offers these Underlying Funds and retail mutual funds
that are registered with and regulated by the SEC.