PD 4 2007 Seminar for the Appointed Actuary Colloque pour l actuaire d sign 2007

1. PD 4 2007 Seminar for the Appointed Actuary Colloque pour l�actuaire d�sign� 2007

2. Appointed Actuary Committee � Current �Hot� Topics 1. Audit Guideline 43 2. CGAAP Valuation Disclosure 3. Bill C-57 4. IFRS and Impact on Role of Appointed Actuary 5. Embedded Value Disclosure 6. Source of Earnings Disclosure 7. Practice Certificates and CPD

3. Background CICA harmonizing rules AUG 43 changes reliance on experts Same as US GAAP auditing standard Result is that calculation of liabilities must be audited

4. Learnings from 2006 CALM does not fit the US audit model well Audit Approach Timing Resources Overlap with External Review

5. Audit Approach Risk Based audit approach Reserves under CGAAP are far more sensitive than under US GAAP Judgment of the audit specialist will be applied to testing End to end Follow one policy from admin to valuation Check assets and resulting asset cash flows Check operation of reinvestments

6. Audit Approach Be Ready Comprehensive documentation Process charts Internal reviews Agreed timetable and resourcing

7. Audit Approach 3855 interaction Reserves at Dec 31 on old basis Those for Jan 1, 2007 on new basis Software Validity Can one assume that 3rd party software is correct Home written software needs to be fully audited

8. Audit Approach Cost and Resources Auditor charges Internal actuarial resources Benefits Forces management to allow actuaries to do what should have been done � even without SOX

9. Overlap with External Review Different objectives Both cover methods and assumptions External review does not check calculations External review usually gives more detailed assumption assessment?

10. Moving Forward In 2007 the AUG 43 work is starting earlier Move to a more integrated audit approach coordinating SOX and Aug 43 Likely increasing focus on auditing experience studies Convergence of audit practices

11. CGAAP Valuation Disclosure Background Public reporting companies face ever increasing disclosure pressures for GAAP financial statements Policy liabilities are key component of this pressure dominant role on balance sheet �black box nature� Increased disclosure pressure coming from CICA disclosure requirements (financial statement notes) securities regulators analysts and other users of company statements (�SIP� or supplementary disclosure) Significant reputational risk to actuarial profession in this emerging area

12. CGAAP Valuation Disclosure Areas of Increased Disclosure Pressure Provisions for Adverse Deviation Sensitivity of policy liabilities to changes in actuarial assumptions Impacts of changes in methods and assumptions (�Basis Changes�) Movement in policy liabilities Disclosure of specific components of policy liabilities liabilities for segregated fund guarantees allowance for credit losses Company practices for level of disclosure and how disclosure is done, including fundamental definitions (eg. what is PfAD?) are quite different

13. Provisions for Adverse Deviations Key Question:What is the Definition of a PfAD?

14. Provisions for Adverse Deviations CLIFR Definition: The PfAD is the difference between the aggregate policy liability that results from performing the valuation calculation using best estimate assumptions, and the same calculation performed with assumptions using margins Implications: prescriptions on expecteds are part of best estimate assumptions (eg. annuity mortality improvement) prescriptions on net assumptions with discretion in components can be either best estimate or mfad (eg. life insurance mortality improvement) method conservatism is always part of best estimate (eg. term limitation impacts including segregated funds)

15. Provisions for Adverse Deviations Is this definition most useful to external users? significant disconnect from embedded value where method conservatism from term limitation is significant source of value to external users, the �term� distinctions can appear capricious As good practice, companies should follow CLIFR definitions in disclosing PfAD where companies wish to disclose additional conservatism, it should be distinguished from PfAds would also be useful to disclose mortality improvement impact on PfADs

16. Provisions for Adverse Deviations Good PfAD disclosure cannot concentrate just on the aggregate �amount� or level of PfAD on a company balance sheet Users need to understand levels of PfAD relative to mix of businesses and risks changes in levels of PfADs over time stability or level of actual experience relative to best estimate assumptions

17. Provisions for Adverse Deviations There are a number of PfAD Disclosures a company could make to improve context of PfAD disclosure PfAD by Risk Catergory PfADs by Type of Business PfADs relative to total liability expected liability value of future policy benefits/expenses (ie. exclude PV future premiums) PfAD Movement Analysis

18. Sensitivity of Policy Liabilities to Changes in Assumptions Public reporting companies are required to disclose sensitivity to changes in key assumptions in the financial statement notes and/or MD&A The scope of disclosure is generally consistent and covers insurance assumptions policyholder behaviour assumptions expense assumptions fixed income return assumptions non-fixed income return assumptions However, the details of how companies perform these sensitivities is not consistent Company explanations of how sensitivities performed also can be vague Inconsistencies and vagueness are not useful to users, and ultimately can damage actuarial credibility

19. Sensitivity of Policy Liabilities to Changes in Assumptions - Inconsistencies Level of Experience Change Assumed There is significant variation in level of change assumed in the testing Companies do not present logic for level of adverse change assumed � users want to have a frame of reference Profession should have guidelines to establish level of adverse change that should be assumed � where companies use different assumptions there should still be a logic consistency

20. Sensitivity of Policy Liabilities to Changes in Assumptions - Inconsistencies Insurance Risks Does change impact shown assume same directional change for all business (eg. insurance and annuities) or vary by block used on what direction is adverse? What testing and grouping should be used for morbidity risks (eg. how are critical illness, LTC, LTD, short term benefits are incorporated in testing)? What level of experience should be tested?

21. Sensitivity of Policy Liabilities to Changes in Assumptions - Inconsistencies Policyholder Behaviour Risks Should testing only cover lapse/surrender risk or all policyholder behaviour risks (eg. also include items such as premium persistency)? Should policyholder behaviour testing combine all policyholder behaviour risks or look at some risks separately?

22. Sensitivity of Policy Liabilities to Changes in Assumptions - Inconsistencies Expense Assumptions Level of adverse change tested How should sensitivity be defined (eg. how should inflation assumption be treated)?

23. Sensitivity of Policy Liabilities to Changes in Assumptions - Inconsistencies Fixed Income Assumptions How should sensitivity be defined? Change only in initial market curve used for reinvestment ratesbut not URR Change in ultimate reinvestment rate Change in both initial curve and URR Should (1) and (2) be disclosed separately? Should change in spread assumption over treasuries and/or C1 loss allowance levels also be stress tested?

24. Sensitivity of Policy Liabilities to Changes in Assumptions - Inconsistencies Non-Fixed Income Assumptions What level of change should be tested? Should equities be tested separately from other non-fixed interest (eg. real estate)? How should non-traditional non-fixed interest be tested (eg. infra-structure, structured finance, private equities)? Should testing focus on (1) market correction impact, (2) change in long term return assumption, or both?

25. Impact of Changes in Valuation Methods and Assumptions Other Issues Are impacts pre or post tax? How are future tax timing impacts incorporated? Should both favourable and unfavourable movement impacts be shown? [company practices vary] Are impacts on all policy liabilities or only shareholder impacts?

26. Impact of Changes in Valuation Methods and Assumptions Current disclosure practices are generally weak Under current GAAP standards, required minimum disclosure is simply net consolidated impact of changes in methods and assumptions, and companies provide limited details beyond this OSC recently required one company to develop more extensive disclosure for MD&A inclusion substantive disclosure of basis change impact by category of change with discussion of reasons for changes Good disclosure practices could include basis change impact by reporting segments disclosure of key underlying components of the changes numbers and rationale for changes

27. CGAAP Valuation Disclosure Follow-Up/Next Steps Appointed Actuary Committee is forming working group to focus on valuation disclosure working group will consist of representatives from public reporting companies initial focus will be on disclosure of sensitivity to changes in assumptions Second focus will be on PfAD disclosure

28. Brief Update � Bill C-57 Appointed Actuary Committee has set up working groups to develop professional guidance to support new opinion requirements on par and adjustable policies under Bill C-57 �Fairness� opinions will be a particular issue However, work has been suspended until OSFI supporting guidelines become available and ICA changes become enacted act changes appeared to be finalized in early 2007 but have not yet been gazetted OSFI has not released any draft supplemental guidance requirements

29. Brief Update � IFRS and Impact on Role of Appointed Actuary IFRS has no direct role for an Appointed Actuary in determination of policy liabilities Given dual role as statutory accounts, OSFI may still want some opinion/role for an Appointed Actuary to certify liabilities Regardless of formal requirements under IFRS, companies will need some co-ordinating function given it is a principles based regime

30. Brief Update � Embedded Value Original CIA Guidance Note on embedded value is still only �exposure draft� after several years Note should be updated, but not a current priority significant debate would be needed on whether to incorporate emerging �market consistent� embedded value concepts limited number of companies doing embedded value disclosure and no strong push from them to update guidance Lack of consistency and detail in disclosure are key weaknesses of current Canadian company embedded value work

31. Brief Update � Source of Earnings Disclosure Working Group under Doug Brooks is underway to revise SOE disclosure education note Intent is not to substantially revise the note, but close gaps that have become apparent unique group business considerations issues addressed in OSFI Guideline D-9

32. Brief Update � Practice Certificates and CPD Appointed Actuary Committee is supportive of Practice Certificate requirement recognize required part of good governance �hygiene� in modern environment need to ensure process to obtain certificates, particularly renewal is not overly burden some Does �one size fit all� approach make sense Appointed Actuary Committee is concerned about CPD implications for actuaries outside Canada performing �work� to support CGAAP valuation potentially, any actuaries outside Canada who are member of mutually recognized organizations who perform any CGAAP valuation or DCAT work will be required to meet full Canadian CPD practically, not feasible, particularly for multi nationals

33. Questions & Answers