CIA Annual Meeting LOOKING BACK…focused on the future

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Current Developments International (IAIS, UK, US) Canada (OSFI) Current Developments International (IAIS, UK, US) Canada (OSFI)

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future International Association of Insurance Supervisors (IAIS) Technical Committee Solvency and Actuarial Issues Subcommittee International Association of Insurance Supervisors (IAIS) Technical Committee Solvency and Actuarial Issues Subcommittee

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Framework for Insurance Supervision

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future BCBS Framework Pillar ICapital Pillar IISupervision Pillar IIIMarket Disclosure (influence on FSA, APRA, OSFI, …) BCBS Framework Pillar ICapital Pillar IISupervision Pillar IIIMarket Disclosure (influence on FSA, APRA, OSFI, …)

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Solvency & Actuarial Issues Subcommittee Framework for Insurance Supervision Cornerstones for the Assessment of Insurance Solvency Suitable Forms of Capital Asset and Liability Management Use of Internal Models Stress testing Solvency & Actuarial Issues Subcommittee Framework for Insurance Supervision Cornerstones for the Assessment of Insurance Solvency Suitable Forms of Capital Asset and Liability Management Use of Internal Models Stress testing

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Related IAIS Activities and Papers Disclosures Valuation of insurance liabilities Insurance accounting Supervision of reinsurers Related IAIS Activities and Papers Disclosures Valuation of insurance liabilities Insurance accounting Supervision of reinsurers

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Primary Future IAIS Project Capital requirements Primary Future IAIS Project Capital requirements

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future UK - Individual Capital Assessment All insurance companies must identify and document major risks Calculate ICA on realistic basis Focus on risk mitigation and controls Discuss privately with FSA FSA will issue Individual Capital Guidance UK - Individual Capital Assessment All insurance companies must identify and document major risks Calculate ICA on realistic basis Focus on risk mitigation and controls Discuss privately with FSA FSA will issue Individual Capital Guidance

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future UK - Individual Capital Assessment Projection PeriodConfidence Level 1 year99.5% 2 years98.5% 3 years97.5% … Normally, a three to five year time horizon is expected UK - Individual Capital Assessment Projection PeriodConfidence Level 1 year99.5% 2 years98.5% 3 years97.5% … Normally, a three to five year time horizon is expected

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future UK - Individual Capital Assessment Full description of Methodology and process Key assumptions Details on choice of parameters Quantitative results of stress tests and scenario analyses Management actions assumed in the derivation of ICA Impact assessment of management actions UK - Individual Capital Assessment Full description of Methodology and process Key assumptions Details on choice of parameters Quantitative results of stress tests and scenario analyses Management actions assumed in the derivation of ICA Impact assessment of management actions

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future UK - Individual Capital Assessment No standard methodology Discuss anticipated future refinements Compare to regulatory capital requirements Discuss management involvement, risk management, use of ICA results UK - Individual Capital Assessment No standard methodology Discuss anticipated future refinements Compare to regulatory capital requirements Discuss management involvement, risk management, use of ICA results

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future US - Principles-based Valuation & Capital AAA has several task forces working to assist NAIC Valuation of Universal Life – germ of SVL II C3-Phase 2 – application of Canadian segregated fund stochastic methodology to variable annuities, valuation and capital Actuarial peer review US - Principles-based Valuation & Capital AAA has several task forces working to assist NAIC Valuation of Universal Life – germ of SVL II C3-Phase 2 – application of Canadian segregated fund stochastic methodology to variable annuities, valuation and capital Actuarial peer review

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Canada - Evolution of MCCSR MCCSR has evolved considerably since its introduction Introduction of lapse component Treatment of participating business Asset risk pass-through Segregated fund guarantees – internal models Changed treatment of negative reserves, CSV deficiencies Updating of mortality component Canada - Evolution of MCCSR MCCSR has evolved considerably since its introduction Introduction of lapse component Treatment of participating business Asset risk pass-through Segregated fund guarantees – internal models Changed treatment of negative reserves, CSV deficiencies Updating of mortality component

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Canada - Evolution of MCCSR Continuing work on mortality component Refinement of treatment for negative reserves, CSV deficiencies Priority is adjustment for impending accounting changes – fair value Canada - Evolution of MCCSR Continuing work on mortality component Refinement of treatment for negative reserves, CSV deficiencies Priority is adjustment for impending accounting changes – fair value

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Canada - Evolution of MCCSR Issues - CLHIA Risk diversification and correlation Integrated risk assessment – total balance sheet approach More company-specific methods – internal models, use of own data, factors etc. Canada - Evolution of MCCSR Issues - CLHIA Risk diversification and correlation Integrated risk assessment – total balance sheet approach More company-specific methods – internal models, use of own data, factors etc.

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Canada - Evolution of MCCSR Issues – OSFI Extend coverage to new risk areas Operational risk Reinsurance counterparty risk Foreign exchange risk Align MCCSR more closely to Basel II framework Canada - Evolution of MCCSR Issues – OSFI Extend coverage to new risk areas Operational risk Reinsurance counterparty risk Foreign exchange risk Align MCCSR more closely to Basel II framework

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future OSFI’s “Blue Sky” Paper – 24 February 2005 Conditions on future MCCSR changes Risks captured at a level of confidence broadly equivalent to capital rules for other financial institutions New assumptions should be supported by statistically valid data Changes should promote or incorporate sound risk management OSFI’s “Blue Sky” Paper – 24 February 2005 Conditions on future MCCSR changes Risks captured at a level of confidence broadly equivalent to capital rules for other financial institutions New assumptions should be supported by statistically valid data Changes should promote or incorporate sound risk management

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future OSFI’s “Blue Sky” Paper – 24 February 2005 Conditions on future MCCSR changes Level of protection should not be compromised by changes to accounting or actuarial standards Integrated approach with prudent reserve and capital components Sensitive to insurers’ experience where possible OSFI’s “Blue Sky” Paper – 24 February 2005 Conditions on future MCCSR changes Level of protection should not be compromised by changes to accounting or actuarial standards Integrated approach with prudent reserve and capital components Sensitive to insurers’ experience where possible

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future MCCSR for Holdcos Draft Guideline A-2 Generally, MCCSR risk metric applies for Canadian operations and foreign operations that are not in significant foreign life subsidiaries For significant foreign life subsidiaries, a charge on excess capital MCCSR C1 factors for on- and off- balance sheet items for holdco and unregulated subsidiaries MCCSR for Holdcos Draft Guideline A-2 Generally, MCCSR risk metric applies for Canadian operations and foreign operations that are not in significant foreign life subsidiaries For significant foreign life subsidiaries, a charge on excess capital MCCSR C1 factors for on- and off- balance sheet items for holdco and unregulated subsidiaries

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future MCCSR for Holdcos Further requirements with respect to Capital management policies and procedures Intercompany risk mitigation techniques Stress testing Disclosure MCCSR for Holdcos Further requirements with respect to Capital management policies and procedures Intercompany risk mitigation techniques Stress testing Disclosure

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Work in Progress CIA has established a Solvency Framework Sub-committee OSFI and CLHIA will establish an oversight group OSFI is gearing up – now have four FCIAs in OSFI’s Capital Division Work in Progress CIA has established a Solvency Framework Sub-committee OSFI and CLHIA will establish an oversight group OSFI is gearing up – now have four FCIAs in OSFI’s Capital Division

CIA Annual Meeting Session 5709 Emerging Solvency Frameworks LOOKING BACK…focused on the future Canada - Evolution of MCCSR A Work in Progress It will happen It won’t happen overnight Thank you for your attention Canada - Evolution of MCCSR A Work in Progress It will happen It won’t happen overnight Thank you for your attention