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. Agenda • IFRS Background • IFRS 4 Phase I – Insurance Contracts • IFRS 1 – First-time Adoption of IFRS

3. IFRS Background

4. Recent IFRS Developments Where are we now • Transition from Canadian GAAP to IFRS • On February 13, 2008 the AcSB confirmed that the use of IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. • Canadian Securities Administrators • On February 13, 2008, the CSA announced its proposal to allow domestic issuers to early-adopt IFRS for financial years beginning on or after January 1, 2009.

5. Recent IFRS Developments Where are we now • Office of the Superintendent of Financial Institutions Canada • On April 25, 2008, OSFI issued a letter to all Federally Regulated Financial Institutions which clarified: • All FRFIs will be considered publicly accountable enterprises and required to adopt IFRS in 2011; • Early adoption of IFRS will not be permitted; and • A progress review will be required from each FRFI on a semi-annual basis. • On Oct 31, 2008, OSFI issued a letter to Federally Regulated Insurers which clarified: • Do not expect companies to make changes to accounting policies for insurance contracts relating to IFRS 4 – Insurance Contracts on initial adoption (other than impacts related to product classifications) • Actuarial standards should continue being used under IFRS 4 Phase I • Update from Auditors Advisory Meeting • Currently working on revised Capital model

6. Timeline for IFRS Adoption – 5 Key Dates First external quarterly IFRS financial statements including comparatives 1 Disclose IFRS implementation plan and qualitative impact analysis 3 Opening IFRS balance sheet and transition adjustments 5 First full year of IFRS income statement (internal only) 2 Disclose IFRS quantitative impact analysis 4 1 3 2 5 4 Fiscal 2007 Fiscal 2008 Fiscal 2009 Fiscal 2010 Fiscal 2011 Q1 Q1 Q2 Q 3 Q4 Q2 Q 3 Q4 IFRS transition date New IFRS standards Filing date of IFRS accounts 2009 and 2010 statements filed under local standards Training and knowledge of IFRS IFRS statements are published with comparatives for 2010 Preparation of convergence plan Statements restated under IFRS but to be filed in 2011 IFRS convergence plan disclosure IFRS detailed plan disclosure Project Structure and Governance (budget implications, resourcing, etc.) Assess System Change Impact and Implementation

7. IFRS 4 – Phase I

8. High Impact Standards - IFRS 4 – Life Insurance 

9. Phased approach for insurance Phase I – Implemented 2005 • There is a phased approach to insurance contracts. • Phase I implements some components of the insurance project in 2005 • Phase II will be new insurance measurement standard IFRS INSURANCE PROJECT Phase II – Implement by 2013?

10. Key standards for insurance “IFRS 4: Insurance Contracts and IAS 39: Financial Instruments are the key standards that will apply to insurance contracts” Non-Insurance Financial Assets - IAS 39 Non-Insurance Financial Liabilities, Including Investment Contracts IAS 39 Insurance Liabilities – IFRS 4 Insurance Assets – IFRS 4

11. IASB Phase I • Phase I: IFRS 4, Insurance Contracts, issued in 2004 • Interim standard • Allows insurers to retain existing accounting policies, with some modifications, for: • Contracts which meet its definition of insurance • Investment contracts with discretionary participation features • Investment contracts – IAS 39 • DAC amortization model • Onerous contracts

12. IFRS 4 - Insurance Contracts Assets Liabilities All Insurance Contracts and Investment Contracts with Discretionary Participation Features Other Investment Contracts and All Service Contracts IAS 39 and some aspects in IAS 32 and IAS 18 IAS 39 for Invested Assets IFRS 4 Status Quo Phase I (2005) Phase II Phase II (2013??)

13. Issues • Contract classification • Embedded derivatives • Insurance contract measurement • Disclosure Requirements

14. Contract classification - Why is it important? Contract classification defines accounting treatment Discretionary Participation Investment contracts Phase I ExistingAccounting* Insurance contracts Investment contracts ExistingAccounting* Amortised Cost-or-Fair Value • Subject to certain modifications

15. Contract classification • Tends to be a more complicated issue for Life and Health Insurance as a number of products may have been created primarily for investment purposes • Due to the somewhat liberal definitions in IFRS 4 – Insurance Contracts, most of the Life and Health Insurance contracts are expected to meet the insurance contract threshold (but an insurer still needs to conduct an analysis of its contracts!)

16. Classification flowchart Are any elements of the benefit driven by discretionary participation Classified as an investment contract Product is an Investment Contract with discretionary participation features Yes No Deposit component Product is an Investment Contract without discretionary participation features No Is there significant insurance risk present in the contract? Insurance and deposit components of contract must, if not recognised, be unbundled and valued separately Insurance component Yes Yes Is there a deposit component to the contract? If so, is the deposit component independent of the insurance cash flows? Insurance features present in contract Product is an Insurance Contract No

17. Definition of insurance “A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.” IFRS 4.Appendix A

18. Insurance versus financial risk • Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. • Insurance risk is risk, other than financial risk, transferred from the holder of a contract to the issuers • If both financial risk and significant insurance risk are present, contract is classified as insurance. IFRS 4.Appendix A

19. Significant insurance risk • ‘Significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance.’ • Additional benefits must be for pre-existing risk and do not include: • Charges that would be made on cancellation or surrender • Loss of ability to charge policyholder for future services • Possible reinsurance recoveries (these are classified separately) IFRS 4.Appendix B22 - B28

20. Significant insurance risk • Additional benefits include timing risk • Whole life contract (payment known, timing unknown) has additional benefits • Contract where death benefit is equivalent to maturity benefit (I.e. maturity benefit adjusted for time value of money) does not have additional benefits • Classification on a contract by contract basis • Contracts entered into simultaneously with the same policyholder count as one contract • Products may be classified homogeneously on materiality grounds IFRS 4.Appendix B22 - B28

21. Quantitative measures • No quantitative guidance given • Rules of thumb currently being adopted for internal consistency • Benefit paid on death exceeds benefits payable on survival by more than x% (term assurance) • Plausible scenario exists under which the death benefit exceeds the survival benefit by x% or more at any time during the policy term (guaranteed minimum death benefit in unit-linked contract) • Benefit payable on survival exceeds the benefit payable on death by more than x% (Pure Endowment, life contingent annuity)

22. Testing for significant insurance risk

23. Change in level of insurance risk • Once insurance, always insurance, but can go from investment to insurance • Investment may change to insurance through: • Switch between funds, first fund has no insurance risk – second fund has insurance risk • Take up of option to increase insurance risk IFRS 4.Appendix B.29-30 INVESTMENT INSURANCE

24. Unbundling Are any elements of the benefit driven by discretionary participation Classified as an investment contract Product is an Investment Contract with discretionary participation features Yes No Product is an Investment Contract without discretionary participation features Deposit component No Is there significant insurance risk present in the contract? Insurance and deposit components of contract must, if not recognised, be unbundled and valued separately Insurance component Yes Yes Is there a deposit component to the contract? If so, is the deposit component independent of the insurance cash flows? Insurance features present in contract Product is an Insurance Contract No

25. When do you unbundle? • Unbundling is required when: • The insurer’s existing accounting policies do not require recognition of the deposit component • The insurer can independently measure the deposit component from the insurance component • Unbundling is allowed when the insurer can independently measure the deposit component from the insurance component • Consistent treatment of unit-linked products where some contracts have rider benefits IFRS 4.10 - 12

26. Embedded derivatives in Insurance Contracts • Certain embedded derivatives have to be separated from insurance contracts, investment contracts with Discretionary Participation Features and investment contracts without Discretionary Participation Features measured at amortised cost • If separated, measured under IAS 39: • Fair value • Changes in fair value through profit and loss IFRS 4.7-9

27. Embedded derivative flowchart

28. Insurance contract measurement • During Phase I, existing accounting policies apply with certain modifications • Prohibited – certain accounting policies are prohibited as they do not meet the IFRS framework • Mandated – certain accounting policies must be implemented if they are not already in the existing accounting policies • Allowed to continue, but not start – certain accounting policies that do not meet the IFRS framework can continue, but cannot be implemented. • Can be started – certain accounting policies can be introduced. • Existing accounting policies are those in the current financial statements

29. Prohibited policies • The following accounting policies are prohibited • Setting up catastrophe provisions • Setting up claims equalisation provisions • Offsetting of reinsurance assets and direct liabilities IFRS 4.14

30. Mandated policies • The following accounting policies are mandated if they are not already present • Liability adequacy testing • Impairment of reinsurance assets IFRS 4.14

31. Policies that may continue • The following accounting policies may continue but companies may not switch to these where they are not already applied • Using an undiscounted liability basis • Measuring future investment management fees at a value greater than the acquisition costs • Using non-uniform accounting policies for subsidiaries • Using excessive prudence in the valuation of liabilities IFRS 4.25

32. Policies that may be started • The following accounting policies can be started subject to certain restrictions • Use of current market discount rates • Use of shadow accounting • Use of asset based discount rates • Only if part of a comprehensive accounting policy which makes financial statements more relevant and reliable

33. Insurance disclosure requirements • Principle 1 - Explanation of recognised amounts An insurer shall disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts • Principle 2 – Nature and extent of risks arising An insurer shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts • IFRS 7 (S.3862): Financial Instruments incorporates similar risk disclosures to financial instruments

34. Life Insurance Contracts Bifurcation or TBD? Insurance Not Insurance Variable Universal Life Individual Insurance Universal Life Term Par Fixed Payout Annuity Life Contingent Payout Annuities Annuities Fully Insured Plan Experience Rated Refund Administrative Services Only Group Insurance

35. IFRS 1 – Insurance Contracts Implications: • A first-time adopter may apply the transitional provisions in IFRS 4. • That standard limits an insurer to changing ‘its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. • An insurer shall judge relevance and reliability by the criteria in IAS 8.’185 • As noted above OSFI does not want companies to initially change their existing accounting policies

36. Questions?