2008 General Meeting Assemblée générale 2008 Toronto, Ontario 2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Insurance Assets – IFRS 4 Non-Insurance Financial Assets - IAS 39 Insurance Liabilities – IFRS 4 Non-Insurance Financial Liabilities, Including Investment Contracts IAS 39 Key standards for insurance “IFRS 4: Insurance Contracts and IAS 39: Financial Instruments are the key standards that will apply to insurance contracts”

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Contract classification defines accounting treatment Phase I Investment contracts Discretionary Participation Investment contracts Insurance contracts * Subject to certain modifications Existing Accounting* Amortised Cost -or- Fair Value Contract classification - Why is it important?

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Classification flowchart Is there significant insurance risk present in the contract? Is there a deposit component to the contract? If so, is the deposit component independent of the insurance cash flows? Are any elements of the benefit driven by discretionary participation Insurance features present in contract Classified as an investment contract Deposit component Yes No Insurance and deposit components of contract must, if not recognised, be unbundled and valued separately Yes No Insurance component Product is an Investment Contract without discretionary participation features Product is an Insurance Contract Product is an Investment Contract with discretionary participation features Yes No

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Service contract Separate servicing elements from financial liability Consideration whether maintenance expenses and fees fall under servicing element or financial liability Financial liability (IAS 39)Servicing elements (IAS 18) Account ValueFees (b/o spread, IMF etc.) Options/GuaranteesTransaction costs Surrender penalties

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Investment Contract Liability measurement options No + Amortised Cost Fair Value Entire Contract Method of valuation Contains Embedded Derivatives Yes Host at Amortised Cost Derivative at Fair Value Amortised Cost

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Fair value definition “Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction” (IAS 32 paragraph 11)

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Fair value considerations Active Market – quoted price –Bid price for asset –Offer price for liability No Active Market – use valuation techniques –Reference to the current fair value of another instrument that is substantially the same –Valuation technique commonly used by market participants which has been shown to reliably price actual transactions –Makes maximum use of market inputs –Include own credit standing

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Fair value components IAS 39 states the following components should be considered –Time value of money (basic or risk free) Swap curve can be used for practical reasons – adjustment for risk must be made –Credit risk –Foreign currency exchange prices –Commodity price –Equity prices

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Amortised cost definition “… the amount at which the financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount ….” (IAS 39 paragraph 9 paraphrased)

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 The effective interest method gives a liability where the initial amount is grown by the effective interest rate to the maturity period. The effective interest rate exactly discounts the estimated future cash payments or receipts through maturity to the initial amount. –If cash flows cannot be reliably measured – contractual cash flows are used Effective interest method

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Initial amount The initial amount (IA) is made up of: –Fair value at issue – initial premium Minus –Transaction costs Implicitly creates deferred acquisition cost

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Methodology –Effective interest rate remains the same –Update assumptions for current expectations –Recalculate liability as discounted future cash flows Changes in liability flow through income statement –Amortisation of liability –Changes due to experience being different from expected –Changes due to changing expectation of the future Re-measurement

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Amortised cost or fair value IssueFair ValueAmortised Cost Fair value disclosure requirement fulfilled  Embedded derivatives already fair valued  Consistent with Phase II expectation for insurance  Consistent with trading assets  Consistent with AFS assets  ½ Smoother profit recognition  Methodology Defined  Minimal implementation effort 

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Example 1 – GIC Cashable with surrender penalty Fixed term Fixed Interest Rate

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Considerations: Asset Accounting Available for sale versus fair value through P&L Portfolio management and systems needs ALM Investment selection

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Considerations: Profit Emergence DAC Loss at issue

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Considerations: Valuation Systems Methodology System feeds

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Considerations: Product Accounting Premiums Claims Fees Interest Admin to G/L feed

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Considerations: Capital Impacts Asset classification changes Insurance risk calculations Watch for regulatory changes

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Considerations: Product Design Consider product design to improve: –Loss at issue –Contract classification –Earnings emergence

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Considerations: Expense Design Increase or decrease commissions to allow more items to be included in DAC Expense study needed to obtain accurate allocation of costs

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Example 2: Equity Indexed Universal Life UL contract Crediting rate is the TSE 300 return minus 200 bps