2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

1. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Canadian Institute of Actuaries L’Institutcanadien des actuaires

2. PD-11 (Life) CLIFR Update • Dale Mathews • Rebecca Rycroft

3. Agenda • Mortality Improvement • Currency (Foreign Exchange) Risks • Long – Term Equity Returns • Term of the Liability/Segregated Funds • Group Life and Health • Calibration of Interest Rate Models • Universal Life • Income Taxes • 2009 Fall Letter

4. Mortality Improvement • Status • Changes to Standards of Practice • Notice of Intent published June 2008 • Exposure Draft • Hope to have approved at October ASB meeting • Promulgation of Improvement Rates • Promulgation of rates will be done by ASB • Will have the force of Standards • Research Paper/Educational Note • Will support promulgated rates and levels of margins

5. Mortality Improvement • Changes to Standards of Practice – current CLIFR Draft • Insurance Mortality (2350.06 and 2350.07) • Maximum reduction based on promulgated rates where improvement reduces liabilities • Minimum increase based on promulgated rates where improvement increases liabilities (at appropriate level of aggregation) • Low and high margins per 1000 for adverse deviation remain at 3.75/ex and 15/ex

6. Mortality Improvement • Changes to Standards of Practice – current CLIFR Draft • Annuity Mortality (2350.011 and 2350.12) • Minimum increase in liabilities based on promulgated rates where improvement increases liabilities • Low and high margins per 1000 for adverse deviation changed to 2% and 8% respectively applied to best estimate

7. Mortality Improvement • Proposed Base Rates • Improvement rates will be the same for males and females • Products where improvement decreases liabilities • Maximum improvement rates are equal to 50% of “base” rates • Maximum duration of improvements is 25 years • Products where improvement increases liabilities • Minimum improvement rates are 150% of “base” rates • Minimum duration of improvements is 25 years

8. Mortality Improvement Proposed Annuity Valuation Rates

9. Mortality Improvement Rates Hardy Study versus Proposed Base

10. Mortality Improvement: Life Expectancies * For a Male Non-Smoker

11. Mortality Improvement: Life Expectancies* * For a Male Non-Smoker at 3 Issue Ages

12. Mortality Improvement • Proposed Annuity Margins • Proposed Range is 2% to 8% • Life Insurance MfADs produce lower PfADs • Mortality improvement previously not permitted for insurance • MfAD needed only for missestimation of mean • MfAD for deterioration now included with mortality improvement • Proposed range approximates life margin at age 60

13. Mortality Improvement • Effective Date • Expected to be Oct. 2010 • Possible additional capital requirements from OSFI

14. Currency (Foreign Exchange) Risk • Status • Notice of Intent to Revise Standards published November 15, 2007 • Exposure Draft for Revised Standards published May 22, 2009 • Comment Period to June 30th, 2009 • Final Standard approved at August ASB meeting – effective Oct. 15, 2009 • Educational Note being finalized consistent with proposed changes to Standards

15. Currency (Foreign Exchange) Risk • Proposed Changes to Standards of Practice (2340.17-2340.19) • Base scenario assumption developed from currency forward rates or risk-free interest rate differentials • Consistent with previous fall letter guidance and earlier CLIFR proposal • PfAD developed from adverse scenario reflecting historical volatility • Earlier proposal was 5%-50% MfAD reflecting how well economies were integrated • Minimum MfAD of 5%

16. Currency (Foreign Exchange) Risk • Proposed Changes to Standards of Practice (2340.17-2340.19) • Changes to approach for MfAD reflect feedback received • Combination of forward rates for base scenario plus high end margin could be unduly conservative • Base scenario is more of a “risk neutral” approach • Being combined with “real world” type margin

17. Currency (Foreign Exchange) Risk • Proposed Changes to Standards of Practice (2340.17-2340.19) • Proposed approach parallels that for interest rates • Base scenario using forward rates • Additional scenario to develop PfAD • Minimum PfAD of 5% parallels +/- 10% interest rate scenarios

18. Currency (Foreign Exchange) Risk • Educational Note – Additional Guidance • Guidance applies to unhedged currency risk in valuation • Actuary must look at underlying cash flows to assess whether or not currency risk exists • E.g. common equity of companies that transact business in several currencies • Practical application in CALM

19. Currency (Foreign Exchange) Risk • Educational Note – Additional Guidance • Construction of Adverse Scenario • Examine volatility over periods consistent with expected time over which mismatch expected to last • Suggest use of one standard deviation of change in exchange rate for unbiased measure • If strong economic evidence that exchange rates will move, use mean plus one standard deviation if directionally consistent

20. Currency (Foreign Exchange) Risk Educational Note Example 1 US/Canada

21. Currency (Foreign Exchange) Risk • Liability Example (at Sept. 30, 2008) • Liability of $1000 Canadian payable at the end of 10 years • Assets backing liability are $U.S. • 10 year risk free rates at valuation date • US: 3.83% • Canada: 3.72% • Exchange rate at valuation date • 1 USD buys 1.059 CAD • Assume underlying USD asset earns risk free rate at valuation date

22. Currency (Foreign Exchange) Risk • Implied movement in exchange rates over 10 years • From risk free rates (Base Scenario):1.059  1.048 • From one Standard Deviation of .17 over 10 year periods (Adverse Scenario): • 1.059  .877

23. Results: Liability in CAD Currency (Foreign Exchange) Risk PfAD as % of base scenario liability: 19.5%

24. Currency (Foreign Exchange) Risk Educational Note Example 2 Canada/Jamaica

25. Currency (Foreign Exchange) Risk • Liability Example (at Sept. 30, 2008) • Liability of 1000 JAD payable at the end of 10 years • Assets backing liability are CAD • 10 year risk free rates at valuation date • Jamaica: 13.0% (assumed) • Canada: 3.72% • Exchange rate at valuation date • 1 CAD buys 72.40 JAD • Assume underlying CAD asset earns risk free rate at valuation date

26. Currency (Foreign Exchange) Risk • Implied movement in exchange rates over 10 years • From risk free rates (Base Scenario):72.40  170.6 • From mean of 1.22 minus one Standard Deviation of .587 over 10 year periods (Adverse Scenario) 72.40  118.4

27. Results: Liability in JAD Currency (Foreign Exchange) Risk PfAD as % of base scenario liability: 44.0%

28. Long-Term Equity Returns • Development of an Educational Note for establishing investment return assumptions for non-fixed income assets • Expect to publish Educational Note in early 2010 • Expansion of guidance in previous Fall Letters

29. General Update • Segregated Funds • Exposure Draft Practice-Specific Standards for Insurers, Subsection 2320 – Term of the Liability • Approved by ASB and published in February 2009 • Comment period ended March 31 2009 • No comments received • Final Standard approved July 15 with an effective date of October 15, 2009

30. General Update • Segregated Funds • 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 change clarifies 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

31. General Update • Segregated Funds • CLIFR’s view is that the current Standards of Practice guidance on term of the liability needed to be adjusted to recognize the impact of hedging • The change allows both the value of the liability and the value of its associated hedge to be considered when applying the term of the liability constraints.

32. General Update • Segregated Funds • CLIFR is participating in new ASB “designated group” to potentially move some of the educational material in the Educational notes and other guidance into the SOP • Key areas • Stochastic modeling principles • Addition of “Whole Contract” and “Bifurcated Method” • Stochastic model calibration criteria • Assumptions for additional policyholder options

33. Group Life and Health • Valuation of Group Life and HealthPolicy Liabilities • Revising May 2000 Research Paper On Group Life and Health valuation considerations • Currently in translation and expected to be published in the next couple of months

34. Group Life and Health • Similar content to original Research Paper • Updated to reflect current standards and Group Practices • Some additional guidance provided on CALM impact of 3855 • Clarification and expansion of section on ERR

35. Calibration of Stochastic Interest Rate Models • Phase 1 – Long term interest rates • Has been approved by CLIFR • Expect to send to Practice Council for final approval in October • Publish late Fall 2009 • Phase 2 – Short and medium term interest rates • Includes correlation between short, medium, and long-term interest rates • Expected completion in 2010

36. Calibration of Stochastic Interest Rate Models • Later phases • Credit spreads • Other markets • Correlation of interest rates with equities • Correlation of interest rates with currencies

37. Calibration of Stochastic Interest Rate Models • Two significant events since most of work on Phase 1 was completed • Financial crisis • Publication of calibration criteria by the AAA

38. Calibration of Stochastic Interest Rate Models • Financial Crisis • Long-term rates are the lowest seen in a half century • A combination of extremely low rates and high rate volatility that appears unique in modern financial history • CLIFR believes that recent events confirm the appropriateness of the calibration approach • The actuary should be cautious if liabilities are sensitive to short term exposure to high volatility

39. Calibration of Stochastic Interest Rate Models • In May 2009, the AAA published • A fully parameterized stochastic model, and • Stochastic scenario sets • AAA will also provide a tool to generate any number of scenarios with any initial yield curve

40. Calibration of Stochastic Interest Rate Models • AAA vs. CIA approach • AAA used a different approach to develop the criteria • Criteria derived in the current low rate environment may be broadly consistent for some products (such as products with exposure to low long term interest rates) • This may not be true for all products or all interest rate environments • Calibration Criteria from other countries • To use other countries calibration criteria need to demonstrate that they are broadly consistent with the criteria in the CIA educational note

41. Tax note • Future Income and Alternative Taxes Educational Note • Tax changes substantively enacted in March 2009 • Note will be updated to be consistent with federal tax changes • Expected to be published in Fall 2009

42. 2009 Fall Letter • Status • Expect to send to Practice Council for final approval in October • Publish Fall 2009

43. 2009 Fall Letter – Section 1 • Experience Studies • Expect to refer to • 2001-2004 Annuitant Mortality Experience (March 2009) • 2005-2006 Mortality Study – Canadian Standard Ordinary Life Experience (September 2009) • LTD termination study to be published this year with 1997-1998 experience

44. 2009 Fall Letter – Section 2 • Insurance Mortality • Similar to last year • Any mortality improvement offset in MfAD • Additional guidance • Best practice to incorporate mortality improvement from mid point of the study to valuation date

45. 2009 Fall Letter – Section 3 • Annuity Mortality • Similar to last year • just changed effective date of new mortality improvement rates (October 15, 2010)

46. 2009 Fall Letter – Section 4 • Scenario Assumptions – Interest Rates • Repeat reminder to test premiums for default risk at 50% and 200% of those at balance sheet date • Note the lower bound used in the prescribed scenarios is dropping • Situations where stochastic results can be used

47. 2009 Fall Letter – Section 4 • Can hold CTE(60) to CTE(80) of the stochastic results if: • Reserves are not sensitive to short- and medium-term interest rates • Stochastic interest rate model meets the Phase 1 calibration criteria • Stochastic interest rate model doesn’t include spreads. • If spreads are included then must hold at least Scenario 9 (old guidance)

48. 2009 Fall Letter – Section 5 • Value of Minimum Interest Guarantees and Embedded Options • Guidance unchanged from previous years • Still appropriate in continued low economic environment • May not be captured by deterministic scenarios, consider stochastic testing

49. 2009 Fall Letter – Section 5 (old) • Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments • Deleted • Still valid, but has appeared enough times

50. 2009 Fall Letter – Section 6 • Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes • Tax legislation now substantively enacted • Previous guidance on what to do in the interim now withdrawn • Reminder of application of 5 year grade in period