2008 General Meeting Assemblée générale 2008 Toronto, Ontario

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

2. PD- Life Hot Topics Luc Bergeron, FSA, FCIA vice président actuariat La Survivance

3. PD- Life Hot Topics • T100 / minimum funded UL with LCOI • Underpricing • Maximum funded UL with LCOI • Unintended exposure to assets • Stochastic modeling on Product features • It’s easy!

4. You ought to be able to explain why you're making the investment you're making We will only do with your money what we would do with our own.

5. T100 / min funded UL with LCOI • Assumptions used in pricing • 7% interest rate • 1 -1.5% ultimate lapse rate • Before age 60 a long time at 3-5% • Assumptions used in corporate • ALM + adverse scenarios -> 5% • Lapse own experience / CIA study

9. T100 / min funded UL with LCOI • Would you invest your money in that Product? • Why are the reinsurers no longer in it? • How do you get the message across? • Munich Re Pricing Survey • Invest in a 50-year bond, Yield >7%, after-tax

10. T100 / min funded UL with LCOI • Pricing Actuary (Product development Actuary) • Paid to identify anti-selective features • Assess price / risk reward • Maximise profit: Profit x sales • To sell it to your company • Now is a good time • Emphasis on profit is present • Exceptions • Loss leaders?

11. Maximum funded UL with LCOI • Pricing • LCOI pricing • Different funding level • Happy: natural hedge • Lower lapse: • Bad for the LCOI but • Good for investment spreads discounting (MERs) • That’s why • LCOI is cheaper than T100 and pays more compensation

12. Maximum funded UL with LCOI • Valuation – usual approach • Calculate reserve – blending everything Investment and Insurance components • Carve-out investment at 100% • Reminder invested as a long term liability • Sub-optimal approach • Example 5-yr GIC with a market spread of 1% (after margins) • Are you holding 100% as reserve? • Approx. 95% at issue, • gradually increasing to 100%at maturity

13. Maximum funded UL with LCOI • Valuation – better approach • Calculate reserve separately • Investment component – reserve 70% -95% of fund • Insurance component – long term liability • Keep lapse sensitivity analysis on components the same • Latter approach • More stable Income Statement results • In not doing so • Insurance component is invested 5% to 30% in assets reflecting the policyholder investment behaviour / strategy • IFRS “unbundled” will probably result in this treatment • An investment strategy for the investment component • And for the insurance component

14. Stochastic modeling – it’s easy • Not talking about the fancy stuff • Segregated-fund, market’s fluctuations, .. • Product features that are non-linear • Combo product • Return of premium

15. Stochastic modeling – it’s easy • Simple binomial process • In /out • Incidence rates: qx , qi, qw, … • qx=.001, qi = .02, qw = .10 • Random number generator • [1 , 999 ] • 1 = death, [2, 22[ = morbidity , [22, 122[ = lapse, [122, 999] = survival (if additive)

16. Stochastic modeling – it’s easy • Return of premium on a DI product • Payable after 10 years without claims • First 10 years – easy • A few things that are easier to model stochastically • The “cliff” moves as you become disabled • Claims decrease as you get closer to the “cliff” • Recovering to become active • ….

17. Stochastic modeling – it’s easy

18. Actuaries are the Warren Buffet’s of the liability side of an Insurance Company We should act like him: Understand what we are selling (our products and their ramifications) Be willing to invest in products we are promoting (If you were the Insurance Company would you invest in that product) Conclusion

19. PD- Life Hot Topics Questions? Luc Bergeron, FSA, FCIA vice président actuariat La Survivance