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2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver

Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver. Modelling standards. 2007 Annual Meeting Assemblée annuelle 2007. Will be released as a Research Paper this summer

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2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver

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  1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2007 Annual Meeting ●Assemblée annuelle 2007 Vancouver

  2. Modelling standards 2007 Annual Meeting Assemblée annuelle 2007

  3. Will be released as a Research Paper this summer General guidance is applicable to all models, but focused is on risk assessment models Fairly comprehensive list of considerations Not yet a “how to” model primer Expected to evolve as other Working Groups develop methodologies 2007 Annual Meeting Assemblée annuelle 2007 Risk Assessment Models

  4. Model Design Questions to consider early in the model building process Model Implementation Assumptions, IT systems, data and processes Model Validation Validation and calibration Governance Internal models for capital purposes are only appropriate when the risk management practices are adequate Reporting Results must be reported in a manner appropriate for the purpose and the intended stakeholder 2007 Annual Meeting Assemblée annuelle 2007 Contents

  5. Extreme scenarios Measuring tail risk with a valuation model may be like measuring time at the North Pole with a sundial Aggregating stand-alone results Must consider diversification, risk dependencies, risk interactions and risk concentrations Practical implementation of framework Nested stochastic framework requires approximations Need for “pervasive use” Capital models should be actively and regularly used for decision-making 2007 Annual Meeting Assemblée annuelle 2007 Capital Model Considerations

  6. ALM / Market risk working groupEarly modelling results 2007 Annual Meeting Assemblée annuelle 2007

  7. Summary An overview of some examples based on potential market risk “Advanced” methods Very simple product – but some complex messages Scope - risks arising as a result of companies’ investment and matching strategies: Interest rates (risk free) Equity markets Real estate values Foreign exchange rates Inflation 2007 Annual Meeting Assemblée annuelle 2007

  8. Potential ‘Advanced’ methodologies One year projection period Real world terminal value at various CTE levels Risk neutral terminal value Run-off 2007 Annual Meeting Assemblée annuelle 2007

  9. Product and investment strategies Simple GIC – 1 benefit cashflow, 5 years from now ALM strategies Matched - 5yr zero coupon bond Short - 3yr zero coupon bond (On maturity of the bond, a 2yr bond will be purchased.) Long - 7yr zero coupon bond. (After 5 years, the bond will be sold to provide the funds needed to make the payment to the policyholder) 2007 Annual Meeting Assemblée annuelle 2007

  10. 2007 Annual Meeting Assemblée annuelle 2007 Summary of cashflows

  11. 2007 Annual Meeting Assemblée annuelle 2007 Results * Capital is expressed as (TBSR – Best Estimated Liability) / Best Estimated Liability

  12. 2007 Annual Meeting Assemblée annuelle 2007 One year real world (CTE0)

  13. 2007 Annual Meeting Assemblée annuelle 2007 One year real world method (CTE50)

  14. 2007 Annual Meeting Assemblée annuelle 2007 One year risk neutral method

  15. 2007 Annual Meeting Assemblée annuelle 2007 Interest rate distribution

  16. 2007 Annual Meeting Assemblée annuelle 2007 Interest rate distribution

  17. 2007 Annual Meeting Assemblée annuelle 2007 Run-Off method

  18. Sensitivity tests Results were reproduced for the same product using the same ESG, but with different starting yield curves. Historical dates chosen were: July 1989 – high interest rates and inverted yield curve May 1992 – steep upward sloping yield curve 2007 Annual Meeting Assemblée annuelle 2007

  19. 2007 Annual Meeting Assemblée annuelle 2007 Sensitivity tests

  20. 2007 Annual Meeting Assemblée annuelle 2007 1989 Results

  21. 2007 Annual Meeting Assemblée annuelle 2007 1992 Results

  22. Conclusions Complex dynamics – even for this simple product and strategies Products and strategies can drastically affect ALM capital – modelled approaches can recognise this Choice of method can have a significant impact on capital - method and framework must be carefully evaluated and defined 2007 Annual Meeting Assemblée annuelle 2007

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