2006 General Meeting Assemblée générale 2006 Chicago, Illinois

1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 General Meeting Assemblée générale 2006 Chicago, Illinois

2. Bill C-57 and the ActuaryLe Projet de Loi C-57 et L’ActuaireNick Bauer Al Edwards PD-22 TR-22

3. Outline of Presentation • Bill C-57 Requirements • Status of Changes • New OSFI Par Guidelines • Potential Issues • CIA Response • Fairness? • Discussion • Conclusion

4. Bill C-57 Overview • Introduce several new governance requirements for companies and actuaries with respect to: • participating business • adjustable policies • New actuarial opinions on fairness required (CIA guidance and/or standards will be needed) • Emphasis on Disclosure to Policyholders • Significant influence from recent UK developments • Significant start-up work to develop policies and supporting processes

5. Before C-57 – Canadian Companies • Board Approves • Participating Policyholder Dividend Policy (165.2 (e)) • Investment Income Allocation Method (457 (b)) • Expense (including Tax) Allocation Method (458 (b)) • Declaration of Policyholder Dividends (464 (l)) • Actuary Opines • Allocation Methods Fair and Equitable (460) • 461 Payment does not affect Dividend Policy Compliance/Maintenance (461 (c)) • Policyholder Dividends comply with Dividend Policy (464.2) (all section references are to Insurance Companies Act of Canada)

6. After C-57 – Canadian Companies • Board Approves • Participating Policyholder Dividend Policy (165.2 (e)) • Investment Income Allocation Method (457 (b)) • Expense (including Tax) Allocation Method (458 (b)) • Declaration of Policyholder Dividends (464 (l)) • Policy for Management of Par Accounts (165.2 (e.1)) - new • Criteria for Changes to Adjustable Policies (165.2 (e.2)) - new (all section references are to Insurance Companies Act of Canada)

7. After C-57 – Canadian Companies • Actuary Opines • Allocation Methods Fair and Equitable (460) • 461 Payment does not affect Dividend Policy Compliance/Maintenance (461 (c)) • Policyholder Dividends comply with Dividend Policy (464.2) • Fairness of Dividend Policy (165.3.1) - new • Fairness of Par Management Policy (165.3.2) - new • Fairness of Adjustable Change Criteria (165.3.3) - new • Fairness of Proposed Policyholder Dividends (464.2) - new • Fairness of Changes Made to Adjustable Policies and Compliance with Criteria (464.1 (l)) - new (all section references are to Insurance Companies Act of Canada)

8. Participating Policyholders • Board to establish a policy regarding the management of each par account • Appointed actuary (AA) annual report to Board on (continuing) fairness to par policyholders of the dividend policy and the par account management policy • AA report to Board on the fairness to par policyholders of a proposed dividend • Board required to consider AA report before establish or amend either policy or declare dividend • These AA reports to be prepared in accordance with generally accepted actuarial practice with changes or directions from OSFI • Regulations for content of dividend policy, par account management policy, disclosure, etc.

9. Adjustable Policyholders • To be defined in the regulations; - expect will exclude Group, annuity, and participating policies • Board to establish criteria for changing the premium or charge for insurance, amount of insurance or surrender value for adjustable policies • AA annual report to Board on (continuing) fairness to adjustable policyholders of the criteria established • Board required to consider AA report before establish or amend criteria • AA annual report to Board on whether any changes made for adjustable policies during year comply with the criteria established and were fair to adjustable policyholders • If changes made to adjustable policies or on renewal, must provide “prescribed info” to those adjustable policyholders

10. Emphasis on Disclosure • Dividend policy and par account policy available free to participating policyholder or shareholder • Adjustable change criteria available free to adjustable policyholder • All available to any other person for reasonable fee • Company’s annual report to include summary of par policies and “prescribed info” • may include par sub account surplus and summary financial statements • Regulations expected

11. Bill C-57 Status • Amended Federal Insurance Companies Act; received Royal Assent Nov 2005 • Changes are not in effect until proclamation • Regulations needed in order to implement • Draft regulations from Finance for public exposure this fall • C-57 also has several items re corporate governance matters • Timing of implementation not yet clear • New “Policy” items include period of six months to comply after proclamation

12. New OSFI Par Guidelines • OSFI has developed new Par Guidelines; expect drafts to be released with C-57 draft regulations • Several items expected: • disclosure to policyowners of items not covered in Finance Regulations • more detail in allocation policies (investment income, expense, tax) • make ‘demutualization closed block” rules permanent • interpretations re Section 461 payments to shareholders

13. Potential Issues - General • What is “Fair” in context of “Fairness to Policyholders?” (Regulations and Guidelines will not define; challenge for CIA) • Appointed Actuary has qualified privilege (370.1) but not protection from civil liability (370.2) for new fairness opinions • Apply to • out-of-Canada business of Canadian companies? • fraternal benefit societies? • in-Canada business of foreign companies? • Quebec – AMF may develop similar regime? • Significant amount of work to implement – timing? • Degree of precision or averaging? • Will customers understand?

14. Potential Issues - Par • Fairness of par account management policy • Variations in par surplus philosophy – e.g. use surplus ratios to manage par account vs. “contribution from current generation” to manage dividend scale? • When charge extraordinary experience to surplus rather than affected policies? • Transactions with third parties (reinsurers?) • Transactions with shareholder or nonpar accounts? • Par account or accounts? or sub accounts? • Closed vs open blocks? • Update and expansion of allocation policies • Speculation on future reactions to future circumstances, e.g. windup

15. Potential Issues - Adjustable • Definition of adjustable policy is key • Act specifies subjects for criteria, but definition to be in regulations • Unilateral adjustment at company’s discretion? • Health products? Reinsurance? • Fairness • If heavy death claims - fair to increase charges for those who didn’t die? To cover future claims? To recover past losses? I.e, Measure fairness by lifetime, current or expected experience?? • Opinion on profit targets? • How do you demonstrate or prove fairness of actions? • Materiality considerations for small inactive blocks? • Degree of precision/averaging (e.g., policy size? Issue year? Product? Distribution?) • If have increased reserves because of low lapse rates - is it fair to increase charges? • Applies to in force adjustable policies as well as new sales

16. CIA Response • CIA task force reporting to AA Committee • to develop guidance for AA on report preparation including “generally accepted actuarial practice” • likely in form of Standards of Practice and educational notes • to comment on draft regulations and OSFI guidelines • to communicate to members • Working group structure • Adjustable Policies – Nick Bauer • Dividend Policies – Al Edwards • Par Account Management – Simon Curtis • May need to develop “actuarial” definitions for terms used in regulations • Need input on issues, practical problems, unidentified issues • Some issues mix actuarial and legal considerations

17. What Does “Fair” Mean? • Webster’s • marked by impartiality and honesty; free from self-interest, prejudice or favouritism • fair implies an elimination of one’s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests • Black’s Legal Dictionary • just; equitable; even-handed • equal, as between conflicting interests “Fair to policyholders” may mean - “it appropriately balances the interests of these policyholders and other stakeholders”.

18. To Assess “Fairness”– Objective Considerations • Agreement between parties? • “Rules” set out in advance? • Consistency over time? • Decisions based on objective information? • Are differences material? • Are there overriding constraints (e.g. laws, company solvency?)

19. To Assess “Fairness” – Subjective Considerations • Is the result reasonable? • Was discretion or judgment exercised reasonably? • Are individuals in same/different circumstances treated same/differently? • Are the decisions or actions arbitrary? • Are there circumstances that limit the ability to reflect differences?

20. Discussion • Questions ?? • Comments

21. Summary • C-57 “actuarial” requirements emphasize policyowner interests • Appointed Actuary fairness opinions required • Significant Start-up Work • CIA responding and preparing guidance • Coming Soon !