1. 2007 General Meeting Assemblée générale 2007 Montréal, Québec 2007 General Meeting Assemblée générale 2007 Montréal, Québec Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. 2007 General Meeting Assemblée générale 2007 2 Fall Letter Segregated Fund Guidance Mortality Improvements Equity Calibration of Interest Rate Models Group Life & Health Agenda

3. 2007 General Meeting Assemblée générale 2007 3 CLIFR Committee –Chair – Ty Faulds –Vice Chair – Les Rehbeli –Members – Wally Bridel, Nathalie Bouchard, Tim Cavallin, Sylvain Côté, Alexis Gerbeau, Edward Gibson, Dale Mathews, Jean Mongrain, Hélène Pouliot, Sheldon Selby, Mary Stock, Whitman Wu CLIFR Update

4. 2007 General Meeting Assemblée générale 2007 4 CLIFR Update Guidance this Fall –Guidance for the 2007 Valuation of Policy Liabilities of Life Insurers (207088) –Notice of Intent regarding a change to the treatment of foreign exchange rates in the Standards of Practice – Practice-Specific Standards for Insurers Section 2300 Life and Health Insurance (207104) –Considerations in the Valuation of Segregated Fund Products (207109)

5. 2007 General Meeting Assemblée générale 2007 5 CLIFR Update Upcoming Guidance –Education Note Currency Risks Use of currency forwards –if not available »use of interest rate differentials MfAD ranges from 5% to 50% Considering application to non-fixed assets –Fall Letter Supplement on Finance Proposal (Fair Value Accounting) Extending current guidance to include changes related to tracking properties –Would exercise caution before reducing liabilities relative to pre 3855

6. 2007 General Meeting Assemblée générale 2007 6 CLIFR Update Other Recent Guidance –Implications of CICA Handbook Section 3855 – Financial Instruments on Future Income and Alternative Taxes: Update to Fall Letter (207029), April 2007, –Best Estimate Assumption for Expenses (206134), November 2006, –Approximations to Canadian Asset Liability Method (CALM) (206133), November 2006, –Valuation of Universal Life Policy Liabilities (206148), November 2006, –Margins for Adverse Deviations (206132), November 2006, –Use of Actuarial Judgment in Setting Assumptions and Margins for Adverse Deviations (206147), November 2006,

7. 2007 General Meeting Assemblée générale 2007 7 CLIFR Update Recent Guidance –Standards of Practice – Practice-Specific Standards for Insurers, Subsections 2320 and 2330 (206120) October 2006, –CALM Implications of AcSB 3855 Financial Instruments – Recognition and Measurement (206077), June 2006, –Standards of Practice – Practice-Specific Standards for Insurers, Section 2100 (206075) June 2006, –Technical Amendments – Standards of Practice – Practice-Specific Standards for Insurers, Part 2000 (except section 2100) (206070), May 2006.

8. 2007 General Meeting Assemblée générale 2007 8 CLIFR Update Guidance Under Development –Mortality Improvement –Calibration of Interest Rate Models –Treatment of Income tax –Group Life and Health –Equity Returns

9. 2007 General Meeting Assemblée générale 2007 9 Insurance and Annuity mortality –Essentially unchanged from last year –Developing guidance on the level of mortality improvement –Life Any mortality improvement offset in MfAD –Annuity Continue the recommended alternative to the AA scale Detailed in Appendix A 2007 CLIFR Fall Letter

10. 2007 General Meeting Assemblée générale 2007 10 2007 CLIFR Fall Letter Scenario Assumptions – Interest Rates –Slight Modification to last year –Guidance on the interpretation of the new SoP’s 2320 and 2330 Illustrated in Appendix B, updated to June 2007, slight change to grading –Wide range of practice possible due to lack of calibration criteria on stochastic testing Additional Guidance when using stochastic testing –parameters appropriate to Canadian life insurance financial reporting –encompass the nine prescribed scenarios –review parameters if tVx lower than CTE 80% –tVx ≥ prescribed scenario #9 –Ed Note targeted for 2008 release

11. 2007 General Meeting Assemblée générale 2007 11 2007 CLIFR Fall Letter Lapse Study – Universal Life and T100 –Slight Modification to last year –2003 UL Level COI lapse study appropriate for the first 5 policy durations –Lapse Experience under Universal Life Level Cost of Insurance Policies (207086) released in October Appropriate for the first 10 durations Both lack UL-specific drivers Similarity with stand-alone T-100 –Lapse Experience under Term-to-100 Insurance Policies (207085) released in October

12. 2007 General Meeting Assemblée générale 2007 12 2007 CLIFR Fall Letter Long-Term Equity Return –Guidance unchanged from last year –Canadian market historical period – Begins in 1956 –Other mature markets historical period – consistent with recommendation for Canadian market –Less stable or emerging markets limit the risk premiums (net of MAD) to the assumed Canadian equities Example in Appendix C

13. 2007 General Meeting Assemblée générale 2007 13 2007 CLIFR Fall Letter Value of Minimum Interest Guarantees and Embedded Options and Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments –Guidance unchanged from last year

14. 2007 General Meeting Assemblée générale 2007 14 2007 CLIFR Fall Letter Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes –Slight Modification to last year –Finance proposal not substantively enacted as of this meeting Department of Finance has introduced draft changes New development – tracking properties –Guidance on the new tax timing differences from finance proposal included in the Supplement to last years fall letter

15. 2007 General Meeting Assemblée générale 2007 15 Fall Letter and Published Educational Notes Section 1220 of the Standards –.01 The actuary should be familiar with relevant educational notes and other designated educational material. –.03 A practice which the notes describe for a situation is not necessarily the only accepted practice for that situation and is not necessarily accepted actuarial practice for a different situation. Available on CLIFR Website

16. 2007 General Meeting Assemblée générale 2007 16 Sub-Committee of CLIFR formed late in 2005 Mandate –Review areas where additional guidance could be provided to ensure compliance with standards and to narrow the range of practice Published November 2007 Considerations in the Valuation of Segregated Fund Products Background

17. 2007 General Meeting Assemblée générale 2007 17 Considerations in the Valuation of Segregated Fund Products Contents of note –Methodology – Bifurcated versus Whole Contract –Term of the Liability Hedging –DAC Recoverability Testing –Level of Aggregation –Discounting and C3 PfAD –Policyholder Behaviour –Provision for Adverse Deviation

18. 2007 General Meeting Assemblée générale 2007 18 Considerations in the Valuation of Segregated Fund Products Methodology – Bifurcated vs. Whole Contract –Bifurcated Revenue is allocated between recoverability testing of the DAC and the liability for the guarantee. Allocation does not change from period to period. Policy liability for the guarantee is calculated separately using revenue based on this allocation.

19. 2007 General Meeting Assemblée générale 2007 19 Considerations in the Valuation of Segregated Fund Products Methodology – Bifurcated vs. Whole Contract - Whole Contract –Total policy liability is determined using all net cash flows available. –Several Variations of method –Some don’t consider DAC separately »Could cause unamortized DAC to increase »Inconsistent with Section 2320.24 of SOP

20. 2007 General Meeting Assemblée générale 2007 20 Considerations in the Valuation of Segregated Fund Products Methodology – Considerations At this time CLIFR is not recommending one method over the other. Both methods consistent with standards. Currently the whole contract method is more commonly used. When the direction of international standards becomes clearer we will move in that direction.

21. 2007 General Meeting Assemblée générale 2007 21 Considerations in the Valuation of Segregated Fund Products Term of the Liability –Section 2320.27 “…the term of the liability ends at the balance sheet date for….the general account portion of a deferred annuity with segregated fund liabilities but without guarantees;” –Section 2320.23 “The actuary would extend such term solely to permit recognition of cash flow to offset acquisition or similar expenses whose recovery from cash flow that would otherwise be beyond such term was contemplated by the insurer in pricing…

22. 2007 General Meeting Assemblée générale 2007 22 Considerations in the Valuation of Segregated Fund Products Term of the Liability Add Guarantee: –2320.22 => term ends at the earlier of: First renewal or adjustment date at or after B/S date at which there is no constraint Renewal / adjustment date after the B/S date which maximizes policy liabilities

23. 2007 General Meeting Assemblée générale 2007 23 Considerations in the Valuation of Segregated Fund Products Term of the Liability – what to conclude CLIFR’s view is that term of the liability –ends at the balance sheet date if the liability would otherwise be negative and –the term would be extended beyond the balance sheet date to the date which maximizes the liability –Corollary is that the liability for the guarantee is floored at zero SOP implies the above interpretation applies only to contracts with no material constraints –Fully guaranteed contracts would have term equal to the life of the contract CLIFR may recommend changes to the standards for the fully guaranteed contracts

24. 2007 General Meeting Assemblée générale 2007 24 Considerations in the Valuation of Segregated Fund Products Hedging Application of zero floor can disrupt the parity between the asset and liability sides of the balance sheet –Hedge assets can start with fair value of zero but this value will go up or down with market movement. –Change in fair market value of derivatives flows through investment income and would be expected to be offset by a change in the liability. –This balance can be disturbed by the zero floor on the liability side. –Result can be inconsistent with direction of market movement.

25. 2007 General Meeting Assemblée générale 2007 25 Considerations in the Valuation of Segregated Fund Products Hedging CLIFR believes it would be appropriate to consider both sides of the balance sheet in this situation. Negative liability could be acceptable subject to constraints on the amount of profit capitalized, consistent with unhedged position. Situation viewed as an unforeseen situation in the context of General Standards Section 1330.01 –“ Deviation from a particular recommendation or other guidance in the standards is accepted actuarial practice for an unusual or unforeseen situation for which the standards are inappropriate.”

26. 2007 General Meeting Assemblée générale 2007 26 Considerations in the Valuation of Segregated Fund Products DAC Recoverability Testing Should be tested at least annually. Assumptions should include margins. CTE level between CTE60 and CTE80 If full amount is not recoverable, actuary –reduces unamortized DAC to recoverable amount –reduces remaining future write-down amounts proportionately

27. 2007 General Meeting Assemblée générale 2007 27 Considerations in the Valuation of Segregated Fund Products DAC Recoverability Testing Amortization period for DAC (length of write-down pattern) –Should be consistent with the extended term for DAC recoverability established at inception per SOP Section 2320.24. –Once established it is locked in. –Extended term for DAC recoverability will differ from the amortization period over time. Extended term adjusts to reflect only enough revenue to recover DAC.

28. 2007 General Meeting Assemblée générale 2007 28 Considerations in the Valuation of Segregated Fund Products Level of Aggregation SOP Section 2320.09 presents CALM as an aggregate methodology. –“ The actuary would usually apply the Canadian asset liability method to policies in groups which reflect the insurer’s asset liability management practice for allocation of assets to liabilities and investment strategy.” Section 2320.22 defines term of the liability at the policy level. Some judgment required. Level of aggregation is an important consideration for term of the liability / application of zero floor.

29. 2007 General Meeting Assemblée générale 2007 29 Considerations in the Valuation of Segregated Fund Products Level of Aggregation CLIFR’s view is that term of the liability can be applied at the segment level. –Test on an ongoing basis for term which maximizes the liabilities. –Term could change more frequently if segment contains diverse cohorts, e.g. when a block reaches maturity date. May want to aggregate at a cohort level where cohorts are homogeneous with respect to key risk characteristics. –Finer splits into cohorts expected to increase total liability. –Extreme case is seriatim level which CLIFR feels to be inappropriate.

30. 2007 General Meeting Assemblée générale 2007 30 Considerations in the Valuation of Segregated Fund Products Discounting and C3 PfAD Using CALM for guarantee reserves is impractical. Implies using stochastic or deterministic interest rate scenarios along each stochastic fund return path. Common approximation is discounted cash flow method. Discount rate should be related to current statement value of supporting assets. Under 3855, if assets are designated as Held for Trading (HFT), yield would reflect fair value and discount rate should vary from period to period.

31. 2007 General Meeting Assemblée générale 2007 31 Considerations in the Valuation of Segregated Fund Products Discounting and C3 PfAD C3 PfAD is usually estimated as an adjustment to the Discount Rate. Theoretically should be calculated or justified by CALM testing. In practice tested after the fact on representative cash flows. Often not a material issue because of the size of the liabilities. Note the situation where no invested assets (e.g. DAC exceeds liability for guarantee). Use borrowing strategy with appropriate cost assumption

32. 2007 General Meeting Assemblée générale 2007 32 Considerations in the Valuation of Segregated Fund Products Policyholder Behaviour – Summary Policyholder behaviour an important assumption for segregated funds: Consider interrelationships, particularly reaction to the scenario

33. 2007 General Meeting Assemblée générale 2007 33 Considerations in the Valuation of Segregated Fund Products Policyholder Behaviour – Guiding Principles Option exercise correlated with in-the- moneyness Anti-selection –Assume behaviour against insurer’s interests –Amplified exercise of more valuable options PH sophistication & perceived financial interest in policy –Need not assume 100% efficiency

34. 2007 General Meeting Assemblée générale 2007 34 Considerations in the Valuation of Segregated Fund Products Provision for Adverse Deviation The term of the liability for segregated fund products has resulted in different interpretations as to the period over which the calculation extends. Distortions can result if related to general account liabilities. SOP Section 1110.39: “Provision for adverse deviations is the difference between the actual result of a calculation and the corresponding result using best estimate assumptions.” –This suggests there can be a PfAD only if there is a difference between the actual reserve and the best estimate reserve.

35. 2007 General Meeting Assemblée générale 2007 35 Considerations in the Valuation of Segregated Fund Products Provision for Adverse Deviation Examples –Recoverability margin for DAC would not be a PfAD. –If reserve for guarantees is floored at zero, difference between this and calculated negative reserve would not be a PfAD. –These amounts could be disclosed separately as additional segregated fund margins.

36. 2007 General Meeting Assemblée générale 2007 36 CLIFR Topics: Update on Mortality Improvement Sub-committee Goal: Propose mortality improvement basis for annuity and life insurance valuation Sub-Committee Members: – Marc-Andre Belzil, Jacques Boudreau, Edward Gibson, Claude Normand, Helene Pouliot, Les Rehbeli, Mario Robitaille

37. 2007 General Meeting Assemblée générale 2007 37 Update Overview Current draft of proposal: – Establish a “minimum reserve” prescribed basis for valuation of life insurance and for annuity business – Appointed Actuary may establish different basis (i.e. different best estimate and different MfAD levels), as long as subsequent reserves are at least as high as those established under the prescribed basis – For other countries, use experience if available, or Canadian basis if experience isn’t available

38. 2007 General Meeting Assemblée générale 2007 38 Update Overview Current draft of “minimum reserve” prescribed basis: – Best estimate improvement scales would be the same for life insurance and for annuity business – Mortality Improvement assumption would have its own MfAD (insurance and annuity MfADs would be in opposite directions, special consideration for death supported insurance policies) – Mortality improvement rates based on Hardy’s paper (Data from 1921 to 2002)

39. 2007 General Meeting Assemblée générale 2007 39 Historical Mortality Improvement Rates: Hardy Study (1921-2002) vs. Proposed Best Estimate

40. 2007 General Meeting Assemblée générale 2007 40 Draft Proposal For Mortality Improvement Population data over maximum duration better source than insurance or annuity study data (which are less reliable and have more influences, such as underwriting improvements over time) Rates will be the same for males and females (more on this shortly) Improvement rates for first 25 years only, then set to 0% Introduce concept of “hedge” credit for companies with blends of insurance and annuity business

41. 2007 General Meeting Assemblée générale 2007 41 Draft Proposal For Mortality Improvement Why unisex rates? – Menard/Wade Report released in May 2007 – Uses population data – Shows mortality improvement rates over various time periods – For longer durations (e.g. 70 years) female rates higher than male rates; for shorter durations (e.g. 10 years) the converse is true

42. 2007 General Meeting Assemblée générale 2007 42 Mortality Improvement, Menard/Wade 1931-2001 vs. Proposed Best Estimate

43. 2007 General Meeting Assemblée générale 2007 43 Mortality Improvement, Menard/Wade 1966-2001 vs. Proposed Best Estimate

44. 2007 General Meeting Assemblée générale 2007 44 Mortality Improvement, Menard/Wade 1991-2001 vs. Proposed Best Estimate

45. 2007 General Meeting Assemblée générale 2007 45 Draft Proposal for Valuation Life Insurance mortality improvement: – Maximum improvement rates are equal to 50% of best estimate rates (effectively a 50% MfAD on the improvement rate) – Maximum duration of improvements is 25 years – Special consideration for death supported policies Annuities mortality improvement – Minimum improvement rates are 150% of best estimate rates – Minimum duration is 25 years

46. 2007 General Meeting Assemblée générale 2007 46 Mortality Improvement Rates

47. 2007 General Meeting Assemblée générale 2007 47 Annuity Valuation Mortality Improvement Rates

48. 2007 General Meeting Assemblée générale 2007 48 Additional Comments Proposed change for life insurance business would require a change in the Standards of Practice – currently 100% of mortality improvement must be in MfADs Proposed change for annuities would be simpler but sub-committee feels it is better to implement both at the same time, as they are inter-related – therefore no proposed changes for 2007 valuations

49. 2007 General Meeting Assemblée générale 2007 49 Additional Comments Proposed change has had limited review from CLIFR, but has not yet been endorsed and is still in early draft stage – Comments from the industry are very welcome Limited testing (2 to 3 companies) indicates material increases to annuity reserves (3% to 5%) and material decreases to life insurance reserves (1% to 2%, but highly dependent on business mix) – We invite CIA members to conduct further testing and to send us your results

50. 2007 General Meeting Assemblée générale 2007 50 Concerns Expressed Reserve basis is too aggressive for annuities (improvement rates are too low) – Basis is more conservative than current approach – Annuity experience sub-committee research indicates very little mortality improvement Reserve basis is too aggressive for life insurance (improvement rates are too high) – Sub-committee thought about different basis for insurance; but research indicates a more aggressive basis, particularly for males (see graphs)

51. 2007 General Meeting Assemblée générale 2007 51 Historical Mortality Improvement Rates for Males: Hardy Study (1921-2002) vs. Proposed Best Estimate

52. 2007 General Meeting Assemblée générale 2007 52 Historical Mortality Improvement Rates for Females: Hardy Study (1921-2002) vs. Proposed Best Estimate

53. 2007 General Meeting Assemblée générale 2007 53 CLIFR Topics: Update on Equity Returns Sub-committee Goal: Develop Educational Note for establishing investment return assumption for non-fixed income assets Sub-Committee Members: – David Campbell, Edward Gibson, Leonard Pressey, Jim Snell

54. 2007 General Meeting Assemblée générale 2007 54 Applicable Standards Outlined in paragraph 2340 of the SOP (Non-fixed income assets: investment return).11 The actuary’s best estimate of investment return on a non-fixed income asset would not be more favourable than a benchmark based on historical performance of assets of its class and characteristics..12 The low and high margins for adverse deviations in the assumptions of common share dividends and real estate rental income are respectively 5% and 20%.

55. 2007 General Meeting Assemblée générale 2007 55 Applicable Standards Paragraph 2340 of the SOP.13 The margin for adverse deviations in the assumption of common share and real estate capital gains is 20% of the best estimate plus an assumption that those assets change in value at the time when the change is most adverse. That time would be determined by testing, but usually is the time when their book value is largest. The assumed change as a percentage of market value –of a diversified portfolio of North American common shares is 30%, and –of any other portfolio is in the range of 25% to 40% depending on the relative volatility of the two portfolios.

56. 2007 General Meeting Assemblée générale 2007 56 Applicable Standards Paragraph 2340 of the SOP.14 Whether the assumed change is a gain or loss depends on its effect on benefits to policyholders. A capital loss may reduce policy liabilities as a result of that effect.

57. 2007 General Meeting Assemblée générale 2007 57 Historical Benchmark Recommended Historical Period: – Canada: 1956 to current (within one year of valuation date) – Other: As long as reasonably available Recommended approach: – Stochastic Reserves Arithmetic Mean – Deterministic Reserves Log Regression Mean (previously geometric mean)

58. 2007 General Meeting Assemblée générale 2007 58 Historical Benchmark Log Regression Mean – Unbiased estimator of the underlying assumption (as is the geometric mean) – Less volatile (over time) estimator of the mean than is the geometric mean – How is it determined?

59. 2007 General Meeting Assemblée générale 2007 59 Historical Benchmark Log Regression Mean –Start with a table of historical total return month- end or year-end index values –Calculate the linear regression slope of a set of data points where “x” is the year/month and “y” is the natural logarithm of the total return index level at that month-end or year-end –Log Regression mean return is equal to “exp(slope)-1”

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62. 2007 General Meeting Assemblée générale 2007 62 Historical Benchmark Other Key Discussion Point: –Current low interest rate environment seems to be creating a “reserve arbitrage opportunity” –Should the equity return benchmark also be tied to (i.e. limited by) the benchmarks in the interest rate scenarios? Little evidence to support a correlation between interest rates and equity returns

63. 2007 General Meeting Assemblée générale 2007 63 SOP Paragraph 2340.13 –The assumed change as a percentage of market value of a diversified portfolio of North American common shares is 30%, and of any other portfolio is in the range of 25% to 40% depending on the relative volatility of the two portfolios. –1 st bullet is supported by CTE analysis –2 nd bullet is not supported by CTE analysis Specifically, 40% is insufficient for highly volatile markets (e.g. Malaysia)

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69. 2007 General Meeting Assemblée générale 2007 69 SOP Paragraph 2340.13 From a CTE perspective, a 40% market drop is insufficient for highly volatile markets (e.g. Malaysia). A potential rule of thumb is to have a drop that is 2 x the historical volatility of the underlying index.

70. 2007 General Meeting Assemblée générale 2007 70 CLIFR Updates Calibration of Interest Rate Models Working Group Group Life and Health Education Note

71. 2007 General Meeting Assemblée générale 2007 71 CLIFR Calibration of Interest Rate Models Working Group Objective –It is desirable to have a set of calibration standards that can be applied consistently to as wide a range of interest-sensitive insurance and investment products as possible, including both long and short term products. Mandate –The working group has been formed to investigate and develop methodologies and standards for the calibration of interest rate models for determining policy liabilities to be held by life insurance companies.

72. 2007 General Meeting Assemblée générale 2007 72 CLIFR Calibration of Interest Rate Models Working Group General Principles –Be sufficiently robust to narrow the range of practice, but allow the actuary to apply reasonable judgement to specific circumstances; –Be applied to the set of scenarios produced, not to the model parameters or inputs; –Be applied to not only the near term, but also the steady state portions of the scenarios produced;

73. 2007 General Meeting Assemblée générale 2007 73 CLIFR Calibration of Interest Rate Models Working Group General Principles (continued) –Be applied to more than one point on the yield curve including a mix of short, medium, and long-term points; –Promote development of scenario sets that measure exposure to yield curve shocks as well as long-term paths of declining as well as rising interest rates, consistent with history; –Look at average rate distributions corresponding to extended periods of time as well as rate distributions at selected points in time.

74. 2007 General Meeting Assemblée générale 2007 74 CLIFR Calibration of Interest Rate Models Working Group Canadian Long Rates - 1936-2007

75. 2007 General Meeting Assemblée générale 2007 75 CLIFR Calibration of Interest Rate Models Working Group Derivation of Initial Calibration Points –Review historical experience –Capture highs and lows –Not limited only to Canadian historical experience –Long term horizon (steady state = the point where the distribution of model generated interest rates reaches stability)

76. 2007 General Meeting Assemblée générale 2007 76 CLIFR Calibration of Interest Rate Models Working Group Our Approach to Interpreting the Data –Guided by history with judgement applied –Discussed and considered what is different today versus the past –Discussed what may be different in the future –Calibration focused in the tails (i.e., ≤10 th percentile and ≥90 th percentile)

77. 2007 General Meeting Assemblée générale 2007 77 CLIFR Calibration of Interest Rate Models Working Group 13.50%97.5 th 12.00%95 th 10.00%90 th Right tail 3.40%10 th 2.95%5 th 2.60%2.5 th Left tail Long ratePercentileLong horizon Draft Calibration Criteria

78. 2007 General Meeting Assemblée générale 2007 78 CLIFR Calibration of Interest Rate Models Working Group Second step was model testing –Do reasonably parameterized models satisfy the calibration criteria? –Want to be able to satisfy the criteria with some model forms –Testing different model forms (Vasicek, CIR, Brennan-Schwartz, Multiplicative Shock) –Single and multiple regimes –Unconstrained and constrained Initial testing on single regime models: –Criteria can be satisfied, but some model forms fit noticeably better than others

79. 2007 General Meeting Assemblée générale 2007 79 CLIFR Calibration of Interest Rate Models Working Group Initial Results (preliminary) – steady state distributions

80. 2007 General Meeting Assemblée générale 2007 80 CLIFR Calibration of Interest Rate Models Working Group Next steps –Complete testing on long rate, long horizon –Determine calibration criteria for short and medium rates at the long horizon –Determine calibration criteria for shorter term horizons Work is expected to be completed in 2008.

81. 2007 General Meeting Assemblée générale 2007 81 Group Life and Health Education Note Status Revising the May 2000 Research paper on Group insurance valuation considerations Plan to release Education Note in Spring 2008 Working Group reviewing over 2006-2007 Similar content to original Research paper – Updated to reflect current Standards – Updated to reflect current Group practices – Some additional sections added, to provide guidance on CALM, impact of 3855

82. 2007 General Meeting Assemblée générale 2007 82 Group Life and Health Education Note Scope Provides guidance to actuaries valuing group life and health policy liabilities –Includes supplemental information to the Standards of Practice Application –employee, association and creditor groups Benefits typically covered : –short & long-term disability, medical & dental, term life (including group conversion benefits), other Various financial arrangements –Refund Accounting,Hold Harmless, ASO, Other

83. 2007 General Meeting Assemblée générale 2007 83 Group Life and Health Education Note Challenges under CALM Variety of Benefits and Financial Arrangements Customization in contracts TPAs – record keeping and administrative practices vs valuation data requirements Refund Accounting for large groups –Difference between statement and policyholder valuation bases Lack of reliable experience data Materiality considerations play an important role

84. 2007 General Meeting Assemblée générale 2007 84 Group Life and Health Education Note CICA 3855 Some implications for Group valuation Long term assets supporting short term liabilities Some approximations used to determine ERR provisions pre-3855 may require modification to adjust for excesses of market value over book value.

85. 2007 General Meeting Assemblée générale 2007 85 Group Life and Health Education Note Term of the Liability Differentiate between term of active lives and term of claim liabilities Active Lives –Next “rate adjustment date” or rate guarantee period (e.g., LTD benefits) –Actuary would be cautious if extending period reduces policy liabilities and would select longer term if such action increases policy liabilities. Claim Liabilities –Extend to end of claim-paying period

86. 2007 General Meeting Assemblée générale 2007 86 Group Life and Health Education Note LTD and Waiver of Premium Considerations LTD Termination Rates: –1987 Basic GLTD, Muirhead or 1985 CIDA Table (for individually underwritten business) –CDT64 table is outdated and may not be appropriate without significant modification. Waiver of Premium termination rates –1970 Kreiger table with substantial modification based on company experience reduce mortality rates, increase recovery rates Small insurers issues: consider LTD valuation assumptions Exercise caution in applying LTD tables since the insurer’s definitions of disability may be significantly different

87. 2007 General Meeting Assemblée générale 2007 87 Group Life and Health Education Note Liability for Future Claims Claims that have not been incurred as at the valuation date but will be incurred before the end of the term of the liability. Examples –Paid-Up Life –LTD: Need to consider incidence of disability rates –Creditor Insurance Term of the liability is to the end of the insured loan and subject to any renewal guarantees May exhibit individual and group characteristics

88. 2007 General Meeting Assemblée générale 2007 88 Group Life and Health Education Note Liability for Future Experience Rating Refunds Future ERR cash flows determined by applying the policyholder accounting formula for term of the liability. –Using statement liability assumptions including MfAD Accounting formula can be rearranged to produce cash flows based on: –Policyholder vs. statement PfAD release (non-Interest PfAD) –Interest credited vs. required on policyholder liability –Profit and Risk charge adjustments, if actuary has concerns about the adequacy of risk charges Approximations sometimes used –Based on the relationship between reported policyholder reserves and the corresponding statutory (GAAP) reserves

89. 2007 General Meeting Assemblée générale 2007 89 Group Life and Health Education Note Deficit Recoveries Deficit represents negative policyholder experience balance net of any funds the insurer has a contractual right to offset. Section 2130.29 - the actuary would test the appropriateness and recoverability of the receivable amount Note outlines specific considerations in determining the amount of deficit deemed recoverable In practice, recoverable deficits only reflected to extent of collateral (Hold Harmless, CFR, etc).

90. 2007 General Meeting Assemblée générale 2007 90 Group Life and Health Education Note Other Topics Covered IBNR methodologies Asset Considerations Provisions for ASO contracts Stop Loss DAC Reinsurance International Issues Tax Issues