2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver

1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2007 Annual Meeting ●Assemblée annuelle 2007 Vancouver John Have Group Life and AD&D MCCSR IP-18 & IP-27

2. Working Group Previous formulae Current formulae Some issues Proposed solutions ER surplus credits Your input 2007 Annual Meeting Assemblée annuelle 2007 GL MCCSR - Contents

3. Committee on Risk Management and Capital Requirements initiated Work Group to review Group Approximations Wally Bridel – Munich Re Daniel Mayost - OSFI Les Rehbeli – Oliver Wyman (Mercer) John Have – Have Associates 2007 Annual Meeting Assemblée annuelle 2007 GL MCCSR – Task Force

4. From .0005 x Insured amount x Stats Fact To Volatility + Catastrophic Components where V(olatility) = 2.5 x Std Dev next yr’s claims Phase In Period Dec 2005 +12 quarters ending Sep 2008 2007 Annual Meeting Assemblée annuelle 2007 The GL MCCSR Change

5. Active GL .0005 x Net Insured Amt (guar <=1yr) (.001 and .002 for longer guar) AD&D – 30% of GL WP mortality – above using .002 WP morbidity – new claim and ongoing -> morbidity MCCSR Adjustments X .15 if hold harmless agreement reduce ER policy component by surplus 2007 Annual Meeting Assemblée annuelle 2007 GL MCCSR – Prior Formulae

6. Mortality Component XStats Factor 1.25 at $1 million 1.00 at $10 million .60 at $1 billion Based on total individual / group mortality component 2007 Annual Meeting Assemblée annuelle 2007 GL MCCSR – Prior Formulae

7. Volatility for Specfic SET S = 2.5 x A x B x E / F A – Std Dev next yr’s exp claims B – Max(ln(D1),1) of exp claims - for prem guar period E – Net amt at risk (Face – Reserve) F – Face Amt 2.5 is CTE(95%) ≈ Normal Dist 97.5% + margin (ie: ongoing risk) 2007 Annual Meeting Assemblée annuelle 2007 GL MCCSR Current Volatility

8. 2007 Annual Meeting Assemblée annuelle 2007 GL MCCSR Current Volatility b - certificate amount q - certificate mortality rate If b and q unknown use: C - next year’s net claims n – number of lives

9. 2007 Annual Meeting Assemblée annuelle 2007 AD&D MCCSR Current Volatility E - AD&D net amount G – GL net amount If no comparable GL use: C - next year’s net claims n – number of lives

10. 2007 Annual Meeting Assemblée annuelle 2007 Combined Volatility Combined Volatility component for all basic death and AD&D products. - Both Group and Individual SETs

11. 2007 Annual Meeting Assemblée annuelle 2007 MCCSR Current Catastrophic Catastrophic Component for each SET E – net amount at risk F – face amount Use .10 if rate guaranteed > 1year

12. 2007 Annual Meeting Assemblée annuelle 2007 MCCSR Current Adjustments X .15 if hold harmless agreement .05 if Fed or Prov Government Reduce ER policy component by surplus to maximum of E – AP for GL and AD&D for ER policy G – AP for all GL and AD&D policies

13. 2007 Annual Meeting Assemblée annuelle 2007 MCCSR Approx Issues Does not scale properly with mortality level since the factor 39 assumes a certain level of mortality. If mortality rate doubles, A should increase by factor of not 2.

14. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q Set 1 - q ≈ 1 since q is small. Then using avg q we have then with avg q = C / F

15. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b Set 1-q ≈ 1 since q is small. Since no detail, use average q or average b instead. Then Where K is factor necessary to increase volatility lost by using averages.

16. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b Summing this becomes With N = nq, C = bnq and F = nb

17. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b OR bFace is average insured amount bClaim is average claim amount And K is evaluate from camparison SET

18. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b Limitation on the use of K: If number lives exceed comparison set must use intercompany value of K. Intercompany value of K can be developed by using detailed GL bill data from 5-6 large insurers. Allowed for both GL and AD&D

19. 2007 Annual Meeting Assemblée annuelle 2007 Approximation Solutions Proposed Effective Date Jan 1, 2008

20. Does it properly reflect reduction is capital needs?? John Have: There are many types of ER formulae using various types of risk sharing methods. An extra $1 of claim, over expected, is not always offset by $1 from ER surplus. May need to develop metric to test the sensitivity of an extra, say, 5-10% of claims on an INSURER’s capital. 2007 Annual Meeting Assemblée annuelle 2007 Cuurent ER Surplus Credits

21. 2007 Annual Meeting Assemblée annuelle 2007 Your Input?

22. 2007 Annual Meeting Assemblée annuelle 2007 Appendix Detail Proposed Formula Derivations

23. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q Set 1 - q ≈ 1 since q is small. Use avg q.

24. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q Which gives you

25. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b Since N = nq and C = bnq With AC, NC and CCderived from comparison SET

26. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b Other term Can be restated as follows: Using C = bnq and b = F / n

27. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b Other term Can also be restated as follows: Using C = bnq and b = C / N

28. 2007 Annual Meeting Assemblée annuelle 2007 Solutions - no Detail q or b OR BFace is average insured amount bClaim is average claim amount And K is evaluate from camparison SET