2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

IFRS Conversion 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Overview Contract classification Embedded derivatives Reinsurance presentation Segregated fund presentation Insurance disclosures Non-insurance related changes Existing guidance/resources

Overview 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Phase I vs Phase II Jan 1, 2011 (with 2010 comparatives) – Insurance contracts continue current CGAAP treatment (except for changes below) – Investment contracts: IAS 39 – Service contracts: IAS 18 Embedded derivatives: separately fair valued, unless exempt Reinsurance: treated as asset on BS / impairment test – No income statement impact expected

Overview (cont’d) 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Seg fund presentation: – No concept of “off balance sheet” under IFRS – Seg Funds will come on-balance sheet Disclosures: – Extensive additional requirements – Need to be able to provide most of this for 2010 comparative

IFRS: Double conversion for Insurers Insurance Contracts: CALM Insurance and Investment Contracts: Actuarial Liabilities Investment Contracts: IAS 39 Phase I January 1, 2011: Phase II January 1, 2013 (or later): Insurance Contracts: new IFRS standards (Discussion Paper) Current CGAAP: Embedded Derivatives: IAS 39 Fair Value option Service Contracts: IAS 18

Contract Classification Generally, the following types of contract would be classified as Insurance: Life insurance plans (term, T100, Par Life, Whole life, Universal Life YRT and Level COI) Endowment products Critical Illness/Health/Disability contracts Long Term Care Group Life and Health insurance (excluding ASO contracts)  BUT must consider contractual hold harmless provisions and/or other terminal accounting provisions Reinsurance contracts: Life, A&H, P&C Payout immediate/deferred annuities (life contingent)

Contract Classification (cont’d) Insurance Contracts (cont’d): Most seg fund/VA products with guarantees  Must ensure that benefits on death can be “significantly different” (higher or lower) than non-DB benefits Most accumulation products/deferred annuities with Book Value Death Benefit in deferral period Accumulation products/deferred annuities with contractual guaranteed annuitization rates  Provided guaranteed rates represent a “scenario of commercial substance”

Contract Classification (cont’d) Generally, the following types of contracts would be classified as Investment: Annuity certains (no life contingency) Accumulation products with no “non-financial” guarantees/options Savings / wealth products without guarantees  Example: Mutual Funds These could also have a “Service” component  Unbundling, IAS 18 would apply

Contract Classification (cont’d) Service Contracts: Group ASO Some FinRe reinsurance arrangements with limited or no risk transfer Some mutual funds or other investment products where we are simply a conduit to third party funds, and/or where we do not retain the right to choose Investment Managers? Service component embedded in Investment Contracts  To the extent “investment management” services are being performed under the contract, acquisition costs associated with providing investment management services can be capitalized under IAS 18 where those costs are “direct and incremental” to the contract.

Classification: Outstanding issues Accumulation products with annuitization guarantee rates: is guarantee “significant” in all cases? Group contracts with hold harmless provisions Business agreements which stipulate profit sharing arrangement on underlying insurance business

Embedded Derivatives (EDs) 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Definition (for reference)  IAS 39.9: “A derivative is a financial instrument with all three of the following characteristics: –its value changes in response to the change in a specified underlying variable. –it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts; and –it is settled at a future date.”

EDs (cont’d) 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Definition (for reference)  An embedded derivative is defined in IAS as follows: –is a part of a combined (hybrid) contract, which also contains non-derivative components –combined contract includes an identifiable condition to modify the cash flows otherwise payable; and –modification of cash flows is in response to a market factor or non-financial variable that is not specific to a party to the contract

Embedded Derivatives 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 “Embedded derivatives” in Insurance Contracts must be separately measured at Fair Value under IAS 39, unless: – The Embedded Derivative feature itself meets definition of Insurance, or – The Embedded Derivative is “closely related” to the host contract Economic risks in ED is similar in nature to the risks in host contract ED cannot be measured independently (without reference) to the host contract IAS 39 AG30 and AG33 provide specific examples of EDs that are / are not considered closely-related

Examples of exempt EDs 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Insurance EDs: Seg Fund Guaranteed… … Minimum death benefit (GMDB) … Minimum income benefit (for life) (GMIB) … Minimum accumulation benefit (GMAB) LTC with CPI-indexing Closely-related EDs: Unit-linked VUL (off balance sheet) [IAS39 AG33(g)] Minimum guaranteed interest floors [IAS39 AG33(b)]

EDs: Outstanding issues 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Index-linked UL: – closely-related or not? – If not, what would be measurement implications? Seg Fund guarantees: – Most are exempt because they are life contingent – Term certain “GMWB” feature: closely related or not? Reinsured GMIB contracts Credit derivatives/Modco arrangements

Reinsurance ceded 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Contract classification: Reinsurance contracts are assessed separately Direct business is assessed independently from any ceded risk

Reinsurance ceded (cont’d) 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Reinsurance ceded shown as asset on Balance Sheet –No measurement implications, i.e. no expected impact on earnings –Balance sheet presentation will change  Gross liability vs. reinsurance ceded on the asset side  Need a reasonable way to allocate net liability into gross (direct liability) and ceded (asset) –Must be based on underlying cash flows –Reasonable assumption about related assets Increased disclosure requirements

Reinsurance ceded (cont’d) 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Impairment of reinsurance asset  Reduce the carrying amount and recognize the impairment loss in earnings if: 1.May not receive all amounts due under terms of contract, as a result of an event occurring after initial recognition of the reinsurance asset 2.The event has a reliably measurable impact on the amounts due from the reinsurer Impairment of reinsurance assets is considered under CALM per SOP

Seg Fund Presentation 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 No concept of “on / off” balance sheet under IFRS Seg Funds will come on balance sheet – Generally agreed that one line summary presentation is appropriate Income statement presentation: expected to remain as per current CGAAP – Deposits do not constitute “income” – Only net fee income and expenses will flow through

Insurance Disclosures 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Insurance disclosures: – Risks before and after reinsurance – Sensitivity analysis, focus on impact on future cashflows vs policy liability – Concentration of risks – Claims development table: comparison of actual to previously estimated 5 yrs historical on adoption, growing to 10 yrs historical Some examples from Europe Investment contracts disclosures

Insurance Disclosures 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Disclosures on reinsurance: – Gain/loss on buying reinsurance – Reconciliation in reinsurance asset Extensive disclosure (although not prescribed format) on embedded derivatives, including those that are exempt – For exempt EDs, overview of measurement approach and objectives, and limitations vs Fair Value measurement Reconciliation of DAC balance

2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Other “Phase I” Non-Insurance Related Changes for 2011 Consolidation of “off balance sheet” investment Real estate accounting Hedge accounting Accounting for private equity investments Income taxes IFRS 1 – Transitional elections –Re-set cumulative translation adjustment (CTA) –Pensions (reflect cumulative unrecognized actuarial gain/loss) –Business Combinations

Source materials and references 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 IFRS 4, core text, but specifically Appendices IAS 39: Examples of Embedded Derivatives

Guidance/resources 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 CIA website: new Ed Notes and Research papers CIA website: Industry group paper on contract classification IASP papers (IAA) CIA past webcast presentations and meeting materials