1. 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires Session/séance : PD-22 (Valuation) CLIFR Update Speaker(s)/conférencier(s) : Edward Gibson, Rebecca Rycroft

2. 2 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Agenda Mortality Improvement Currency (Foreign Exchange) Risks Long – Term Equity Returns Term of the Liability/Segregated Funds Group Life and Health Calibration of Interest Rate Models Universal Life Income Taxes 2009 Fall Letter

3. 3 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Status Changes to Standards of Practice Notice of Intent published June 2008 Exposure Draft Hope to have approved at December ASB meeting Promulgation of Improvement Rates Promulgation of rates will be done by ASB Will have the force of Standards Research Paper/Educational Note Will support promulgated rates and levels of margins

4. 4 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Changes to Standards of Practice – current CLIFR Draft Insurance Mortality (2350.06 and 2350.07) Maximum reduction based on promulgated rates where improvement reduces liabilities Minimum increase based on promulgated rates where improvement increases liabilities (at appropriate level of aggregation) Low and high margins per 1000 for adverse deviation remain at 3.75/ex and 15/ex

5. 5 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Changes to Standards of Practice – current CLIFR Draft Annuity Mortality (2350.011 and 2350.12) Minimum increase in liabilities based on promulgated rates where improvement increases liabilities Low and high margins per 1000 for adverse deviation changed to 2% and 8% respectively applied to best estimate

6. 6 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Proposed Base Rates Improvement rates will be the same for males and females Products where improvement decreases liabilities Maximum improvement rates are equal to 50% of “base” rates Maximum duration of improvements is 25 years Products where improvement increases liabilities Minimum improvement rates are 150% of “base” rates Minimum duration of improvements is 25 years

7. 7 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Proposed Annuity Valuation Rates

8. 8 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Rates Hardy Study versus Proposed Base

9. 9 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Rates Hardy Study versus Proposed Base

10. 10 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Rates Hardy Study versus Proposed Base

11. 11 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Rates Hardy Study versus Proposed Base

12. 12 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement: Life Expectancies Issue Age*405060 80% of CIA Table 81.682.483.8 50% of Scale 82.783.384.5 100% of Scale 83.784.285.2 150% of Scale 84.885.185.9 Mod AA Scale 84.584.485.0 * For a Male Non-Smoker

13. 13 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement: Life Expectancies* * For a Male Non-Smoker Maximum for Life Insurance Minimum for Annuities

14. 14 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Proposed Annuity Margins Proposed Range is 2% to 8% Life Insurance MfADs produce lower PfADs Mortality improvement previously not permitted for insurance MfAD needed only for missestimation of mean MfAD for deterioration now included with mortality improvement Proposed range approximates life margin at age 60

15. 15 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Mortality Improvement Effective Date Expected to be Oct. 2010 There will likely be additional capital requirements from OSFI

16. 16 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Status Notice of Intent to Revise Standards published November 15, 2007 Exposure Draft for Revised Standards published May 22, 2009 Comment Period to June 30th, 2009 Final Standard approved at August ASB meeting – effective Oct. 15, 2009 Educational Note being finalized consistent with proposed changes to Standards

17. 17 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Proposed Changes to Standards of Practice (2340.17-2340.19) Base scenario assumption developed from currency forward rates or risk-free interest rate differentials Consistent with previous fall letter guidance and earlier CLIFR proposal PfAD developed from adverse scenario reflecting historical volatility Earlier proposal was 5%-50% MfAD reflecting how well economies were integrated Minimum MfAD of 5%

18. 18 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Proposed Changes to Standards of Practice (2340.17-2340.19) Changes to approach for MfAD reflect feedback received Combination of forward rates for base scenario plus high end margin could be unduly conservative Base scenario is more of a “risk neutral” approach Being combined with “real world” type margin

19. 19 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Proposed Changes to Standards of Practice (2340.17-2340.19) Proposed approach parallels that for interest rates Base scenario using forward rates Additional scenario to develop PfAD Minimum PfAD of 5% parallels +/- 10% interest rate scenarios

20. 20 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Educational Note – Additional Guidance Guidance applies to unhedged currency risk in valuation Actuary must look at underlying cash flows to assess whether or not currency risk exists E.g. common equity of companies that transact business in several currencies Practical application in CALM

21. 21 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Educational Note – Additional Guidance Construction of Adverse Scenario Examine volatility over periods consistent with expected time over which mismatch expected to last Suggest use of one standard deviation of change in exchange rate for unbiased measure If strong economic evidence that exchange rates will move, use mean plus one standard deviation if directionally consistent

22. 22 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Educational Note Example 1 US/Canada Currency (Foreign Exchange) Risk

23. 23 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Liability Example (at Sept. 30, 2008) Liability of $1000 Canadian payable at the end of 10 years Assets backing liability are $U.S. 10 year risk free rates at valuation date US: 3.83% Canada: 3.72% Exchange rate at valuation date 1 USD buys 1.059 CAD Assume underlying USD asset earns risk free rate at valuation date

24. 24 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Implied movement in exchange rates over 10 years From risk free rates (Base Scenario): 1.059  1.048 From one Standard Deviation of.17 over 10 year periods (Adverse Scenario): 1.059 .877

25. 25 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Results: Liability in CAD Continuation of current exchange rate $686.71 Base currency scenario$694.02 Adverse scenario$829.36 5% minimum margin$730.48 Liability booked$829.36 PfAD$135.34 PfAD as % of base scenario liability: 19.5%

26. 26 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Educational Note Example 2 Canada/Jamaica

27. 27 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Liability Example (at Sept. 30, 2008) Liability of 1000 JAD payable at the end of 10 years Assets backing liability are CAD 10 year risk free rates at valuation date Jamaica: 13.0% (assumed) Canada: 3.72% Exchange rate at valuation date 1 CAD buys 72.40 JAD Assume underlying CAD asset earns risk free rate at valuation date

28. 28 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Implied movement in exchange rates over 10 years From risk free rates (Base Scenario): 72.40  170.6 From mean of 1.22 minus one Standard Deviation of.587 over 10 year periods (Adverse Scenario) 72.40  118.4

29. 29 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Currency (Foreign Exchange) Risk Results: Liability in JAD Continuation of current exchange rate $694.02 Base currency scenario$294.59 Adverse scenario$424.20 5% minimum margin$310.09 Liability booked$424.20 PfAD$129.61 PfAD as % of base scenario liability: 44.0%

30. 30 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Long-Term Equity Returns Development of an Educational Note for establishing investment return assumptions for non-fixed income assets Expect to publish Educational Note in early 2010 Expansion of guidance in previous Fall Letters

31. 31 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 General Update Segregated Funds Exposure Draft Practice-Specific Standards for Insurers, Subsection 2320 – Term of the Liability Approved by ASB and published in February 2009 Comment period ended March 31 2009 No comments received Final Standard approved July 15 with an effective date of October 15, 2009

32. 32 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 General Update Segregated Funds CLIFR’s view is that the current Standards of Practice imply a different determination of the term of the liability for fully guaranteed contracts compared to those with no material guarantees The change clarifies that The term of the liability for both types of contracts would end at the balance sheet date if the liability would otherwise be negative Extension to recover DAC The term of the liability would be extended beyond that date to the date that maximizes the liability, at an appropriate level of aggregation

33. 33 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 General Update Segregated Funds CLIFR’s view is that the current Standards of Practice guidance on term of the liability needed to be adjusted to recognize the impact of hedging The change allows both the value of the liability and the value of its associated hedge to be considered when applying the term of the liability constraints.

34. 34 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 General Update Segregated Funds CLIFR is participating in new ASB “designated group” to potentially move some of the educational material in the Educational notes and other guidance into the SOP Key areas Stochastic modeling principles Addition of “Whole Contract” and “Bifurcated Method” Stochastic model calibration criteria Assumptions for additional policyholder options

35. 35 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Group Life and Health Valuation of Group Life and Health Policy Liabilities Revising May 2000 Research Paper On Group Life and Health valuation considerations Currently in translation and expected to be published in the next couple of months

36. 36 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Group Life and Health Similar content to original Research Paper Updated to reflect current standards and Group Practices Some additional guidance provided on CALM impact of 3855 Clarification and expansion of section on ERR

37. 37 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Calibration of Stochastic Interest Rate Models Phase 1 – Long term interest rates Has been approved by CLIFR Received Practice Council approval in November Will be published in early 2010 Phase 2 – Short and medium term interest rates Includes correlation between short, medium, and long-term interest rates Expected completion in 2010

38. 38 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Calibration of Stochastic Interest Rate Models Later phases Credit spreads Other markets Correlation of interest rates with equities Correlation of interest rates with currencies

39. 39 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Calibration of Stochastic Interest Rate Models Two significant events since most of work on Phase 1 was completed Financial crisis Publication of calibration criteria by the AAA

40. 40 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Calibration of Stochastic Interest Rate Models Financial Crisis Long-term rates are the lowest seen in a half century A combination of extremely low rates and high rate volatility that appears unique in modern financial history CLIFR believes that recent events confirm the appropriateness of the calibration approach The actuary should be cautious if liabilities are sensitive to short term exposure to high volatility

41. 41 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Calibration of Stochastic Interest Rate Models In May 2009, the AAA published A fully parameterized stochastic model, and Stochastic scenario sets AAA will also provide a tool to generate any number of scenarios with any initial yield curve

42. 42 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Calibration of Stochastic Interest Rate Models AAA vs. CIA approach AAA used a different approach to develop the criteria Criteria derived in the current low rate environment may be broadly consistent for some products (such as products with exposure to low long term interest rates) This may not be true for all products or all interest rate environments Calibration Criteria from other countries To use other countries calibration criteria need to demonstrate that they are broadly consistent with the criteria in the CIA educational note

43. 43 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 Tax note Future Income and Alternative Taxes Educational Note Tax changes substantively enacted in March 2009 Note will be updated to be consistent with federal tax changes Expected to be published in early 2010

44. 44 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter Status Published November 11, 2009

45. 45 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 1 Experience Studies Expect to refer to 2001-2004 Annuitant Mortality Experience (March 2009) 2005-2006 Mortality Study – Canadian Standard Ordinary Life Experience (September 2009) LTD termination study to be published this year with 1988-1997 experience

46. 46 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 2 Insurance Mortality Similar to last year Any mortality improvement offset in MfAD Additional guidance Best practice to incorporate mortality improvement from mid point of the study to valuation date

47. 47 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 3 Annuity Mortality Similar to last year just changed effective date of new mortality improvement rates (October 15, 2010)

48. 48 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 4 Scenario Assumptions – Interest Rates Repeat reminder to test premiums for default risk at 50% and 200% of those at balance sheet date Note the lower bound used in the prescribed scenarios is dropping Situations where stochastic results can be used

49. 49 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 4 Can hold CTE(60) to CTE(80) of the stochastic results if: Reserves are not sensitive to short- and medium-term interest rates Stochastic interest rate model meets the Phase 1 calibration criteria Stochastic interest rate model doesn’t include spreads. If spreads are included then must hold at least Scenario 9 (old guidance)

50. 50 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 5 Value of Minimum Interest Guarantees and Embedded Options Guidance unchanged from previous years Still appropriate in continued low economic environment May not be captured by deterministic scenarios, consider stochastic testing

51. 51 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 5 (old) Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments Deleted Still valid, but has appeared enough times

52. 52 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 6 Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes Tax legislation now substantively enacted Previous guidance on what to do in the interim now withdrawn Reminder of application of 5 year grade in period

53. 53 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 6 HST proposals (ON & BC): The actuary would discuss these proposals with the organization’s accountant and auditor to determine whether or not it would be appropriate to reflect the proposals in the 2009 year- end valuation.

54. 54 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009 2009 Fall Letter – Section 7 Equity Returns Reintroduced from 2007 Fall Letter Guidance on long term assumption for deterministic valuation Impact of 2008 results on 30 year average return Review 25% to 40% range for the assumed change in value of non-fixed income assets for the valuation