PD – 27 CLIFR Update 2008 General Meeting Assemblée générale 2008 Toronto, Ontario

1. Canadian Institute of Actuaries L’Institut canadien des actuaires PD – 27 CLIFR Update 2008 General Meeting Assemblée générale 2008 Toronto, Ontario

2. Agenda • General Update and Fall Letter – Ty • Equity Returns - Leonard • Group Life and Health - Whitman

3. General Update • CLIFR Committee • Chair – Ty Faulds • Vice-chair – Dale Mathews • Members – Wally Bridel, Nathalie Bouchard, Tim Cavalin, Alexis Gerbeau, Edward Gibson, Eric Jobin, Jean Mongrain, Leonard Pressey, Rebecca Rycroft, Sheldon Selby, Mary Stock, Whitman Wu

4. General Update • CLIFR – Effect of International Standards • Essentially in maintenance mode with respect to current standards • Avoiding significant new initiatives • Several existing initiatives still in progress • Trying to ensure existing initiatives are reasonably consistent with IFRS • Ready to assist ASB / PC with conversion to IFRS • Support to ASB on Discretionary Participating Features

5. General Update • Recent Publications – Educational Notes • Implications of Proposed Revisions to Income Tax Legislation (November 7, 2007 Department of Finance Proposal), January 2008 • Extended current guidance to include changes related to tracking properties • Consistent with earlier Educational Note of April, 2007 • Considerations in the Valuation of Segregated Fund Products, November, 2007

6. General Update • Recent Publications – Notices of Intent • Notice of Intent to Revise the Standards of Practice – Practice-Specific Standards for Insurers, Subsection 2320 – Term of the Liability • Notice of Intent Regarding a Change to the Treatment of Secular Trends for Insurance and Annuitant Mortality in the Standards of Practice – Practice-Specific Standards for Insurance, Subsection 2350 Life and Health Insurance

7. General Update • Current Initiatives • Mortality Improvements • Currency (Foreign Exchange) Risks • Segregated Fund Valuation • Universal Life • Calibration of Interest Rate Models • Equity Returns • Group Life and Health

8. General Update • Current Initiatives – Mortality Improvement • Goal: Propose mortality improvement basis for annuity and life insurance valuation • Draft educational note expected Early 2009 • Changes required to Standards of Practice – Notice of Intent published June, 2008 • Changes to Standards won’t be effective until 2009 • Exposure Draft in due process • Method of Promulgation of Mortality Improvement Assumptions likely to change in 2009

9. General Update • Current Initiatives – Mortality Improvement • Current Draft Proposal • “minimum reserve” prescribed for valuation of life insurance and annuity business • Base improvement scales would be the same for life and annuity business • Mortality improvement assumption would have its own MfAD • MfAD’s on base assumption before improvement • No change for Life • reduced for Annuitant mortality

10. General Update • Current Initiatives – Mortality Improvement • Current Draft Proposal • Improvement rates will be the same for males and females • Life Insurance • Maximum improvement rates are 50% of “base” rates • Maximum duration of improvements is 25 years • Annuities • Minimum improvement rates are 150% of “base” rates • Minimum duration of improvements is 25 years

11. General Update • Current Initiatives – Mortality Improvement • Promulgation of Improvement Rates • Paragraph 2350.11 “It is prescribed that the actuary’s best estimate includes a secular trend toward lower mortality as promulgated from time to time.” • Promulgation has been done via CLIFR Fall Letter • Process expected to be changed in 2008 – improvement rates considered part of standards • Process being developed with ASB

12. General Update • Current Initiatives - Currency Risks • Had proposed in Notice of Intent • Use of currency forwards for best estimate • If not available, use interest rate differentials • MfAD range from 5% to 50% • Feedback • Is this consistent with direction of International Standards? • Use of risk neutral Best Estimate plus a margin • Why expanding MfAD range • Working on Revisions

13. General Update • Current Initiatives – Segregated Funds • Notice of Intent published June, 2008 • Exposure Draft to be out shortly (in due process) • Changes to Standards won’t be effective until 2009 • CLIFR’s view is that the current Standards of Practice imply a different determination of the term of the liability for fully guaranteed contracts compared to those with no material guarantees. • The proposed change would clarify that • the term of the liability for both types of contracts would end at the balance sheet date if the liability would otherwise be negative. • Extension to recover DAC • The term of the liability would be extended beyond that date to the date that maximizes the liability, at an appropriate level of aggregation.

14. General Update • Current Initiatives – Segregated Funds • CLIFR’s view is that the current Standards of Practice guidance on term of the liability needs to be adjusted to recognize the impact of hedging • The proposed change would allow both the value of the liability and the value of its associated hedge to be considered when applying the term of the liability constraints.

15. General Update • Current Initiatives – Universal Life • Revising draft Educational Note to reflect finance proposal in area of tracking properties (Unit Trusts) • Timing dependent on passage of legislation • Note that a working group had been investigating changes to standards to address similar situations • Conclusion that current standards provide enough flexibility

16. General Update • Current Initiatives – Calibration of Interest Rate Models • Initial Phase focused on long end of the yield curve • Draft Calibration criteria for • steady state (long horizon) • Shorter term • Mean Reversion • Presented at AA Seminar • Draft Educational Note to be published • Working Group testing impact

17. General Update Draft Calibration Criteria – Steady State Long horizon is 60 years Long rate is 20 year bond

18. General Update Draft Calibration Criteria – Shorter Term: 2 and 10 year

19. General Update • Current Initiatives – Calibration of Interest Rate Models • Next phase: • Calibration criteria for short and medium term risk free rates • Correlation between short, medium and long rates • Later work could focus on: • Credit spreads • Correlation between equities and interest rates • Correlation between currencies and interest rates

20. General Update • Current Initiatives – Testing Impact of Calibration of Interest Rate Models • Assumed: • All assets supporting liabilities are risk free. • Only purchase risk free assets in the future. • results don’t depend on credit spread assumptions • Initial yield curve: June 2008, and June 2008 +/- 2% • allows the assessment of the sensitivity of results to yield curve movements

21. General Update Current Initiatives – Testing Impact of Calibration of Interest Rate Models • Payment Annuities (CF beyond 30 years supported by 30-year zero coupon)

22. General Update • Current Initiatives – Testing Impact of Calibration of Interest Rate Models • Results are similar for T100 • For an asset-liability profile exposed to the risk of low interest rates in 30 years: • Deterministic CALM ~ stochastic CALM as at June 2008. • Results are less volatile under stochastic CALM. • In particular, exposure to the risk of a downward shift in interest rates is greater with deterministic CALM because of scenario 9.

23. General Update Current Initiatives – Testing Impact of Calibration of Interest Rate Models • Minimum interest rates guarantee on term investment funds on universal life policies

24. General Update • Current Initiatives – Testing Impact of Calibration of Interest Rate Models • Results are similar for minimum interest rates guarantees on GIC. • When the payoff is an asymmetrical function of interest rates: • As at June 2008, stochastic CALM < deterministic CALM: • the assumption that current rates persist forever (sc 9) is more conservative than calibration criteria. • Results are much less volatile under the stochastic CALM. • For a downward shift of 2%: • deterministic CALM up by a factor of 2.9 • stochastic CALM up by a factor of 1.7

25. General Update Current Initiatives – Testing Impact of Calibration of Interest Rate Models • 5-year term deposit without minimum interest rates guarantee supported by a 10-year zero-coupon

26. General Update • Current Initiatives – Testing Impact of Calibration of Interest Rate Models • For a profile of asset-liability exposed to the risk of high interest rates in 5 years: • As at June 2008, stochastic CALM < deterministic CALM: • the increase in rates over the next 5 years in scenario 6 is much more conservative than calibration criteria. • In scenario 6, the 5-year rate goes from 3.5% to 8.4% in 5 years.

27. General Update • Current Initiatives – Testing Impact of Calibration of Interest Rate Models • Working Group also looking at a unified methodology for reinvestment strategy. • Under current SoP, reinvestment strategies for scenarios 0, 7, 8 and 9 can differ from those (prescribed) for scenarios 1 to 6. • For the application of the stochastic CALM, a unique reinvestment strategy to be applied consistently across all scenarios must be determined.

28. 2008 Fall Letter • Status • At Practice Council for Approval • Letter is getting shorter • Educational notes published or about to be published • Maintenance mode on existing standards

29. 2008 Fall Letter • Insurance Mortality • Unchanged • Any mortality improvement offset in MfAD • Changes to Standards of Practice related to mortality improvement would be effective in 2009

30. 2008 Fall Letter • Annuity Mortality • Unchanged • Continues previous recommended alternative to AA scale • Detailed in Appendix A • Changes to Standards of Practice related to mortality improvement would be effective in 2009 • Method for promulgation of rates of mortality improvement expected to change in 2009

31. 2008 Fall Letter • Scenario Assumptions – Interest Rates • Modified from last year • Refers to Phase I of development of Calibration Criteria expected to be published this year • In the context of stochastic testing, if policy liability is less than that required under worst prescribed scenario CLIFR recommends • that the actuary ensure that model generated rates are tested against draft calibration criteria, and • that rates ideally satisfy draft criteria, • in addition to guidance from previous years.

32. 2008 Fall Letter • Lapse Studies – Universal Life Level COI and Term to 100 • Modified to reflect • October 2007 study on lapse experience under Universal Life Level COI Policies • October 2007 Term to 100 lapse study • Long Term Equity Returns • Deleted in anticipation of Educational Note

33. 2008 Fall Letter • Value of Minimum Interest Guarantees and Embedded Options • Guidance unchanged from previous years • Low current economic environment • Not captured by deterministic scenarios

34. 2008 Fall Letter • Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments • Guidance unchanged from previous years • Concerns if liability valued without interest adjustment • Guidance on presentation in financial statements

35. 2008 Fall Letter • Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes • Guidance modified from last year • July, 2008 draft proposals released • essentially unchanged from November 2007 • comment period to September 15, 2008 • not substantively enacted at time of writing • If auditor / accountant agree for balance sheet tax provision to treat as if substantively enacted then policy liabilities would be calculated consistent with this position

36. 2008 Fall Letter • Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes • Otherwise • If current liabilities greater than post 3855 liabilities on both current and proposed basis, then appropriate to reflect draft legislation in 2008 year-end liabilities • However, actuary would not reduce liabilities relative to the liabilities in post-3855 environment with current tax rules.

37. 2008 Fall Letter • Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes • Considerations • Amount of time which has passed • Consistency of most recent draft with revisions published in November, 2007 • Difficulty in tracking liabilities on pre 3855 basis • Understanding that many insurers filed 2007 returns on basis of draft legislation