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2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008

Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008. Panel Discussion 2 – Update on Disclosure Ralph Ovsec September 25, 2008. History.

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2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008

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  1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008

  2. Panel Discussion 2 – Update on Disclosure Ralph Ovsec September 25, 2008

  3. History • We’re a Subgroup of the Committee on Appointed / Valuation Actuary • Formed in September 2007 • Subgroup Members: • Jim Doherty • Dale Mathews • Brian Phelps • Geoff Strowger • Frederic Tremblay • Ralph Ovsec

  4. Mandate • “Increase usability of financial statements by enhancing on a consistent basis the disclosure of sensitivities of liabilities to changes in assumptions” • Focus on disclosure by publicly traded life insurers • Disclosure of PfADs • Status • Wrapped up the first item, with only one outstanding item • Have started PfAD work and expect to have a preliminary report to the Committee by end-November

  5. Current Practice • Surveyed what each represented company is currently disclosing • All are disclosing sensitivities to the same items • However: • Sensitivities are not uniform with respect to: • Level of sensitivity • Application of the sensitivity • Level of disclosure • We aimed to standardize reporting and enhance disclosure

  6. Current Practice (cont’d) • At 2006 year end, a wide range of practice • Even the application was not clear

  7. Issues That Were Debated • Should we include pass-through products • Is market correction a C1 or C3 item • Is asset default a sensitivity item or only a disclosure item • What should be included in expense sensitivity • Should we disclose reserve impact only, or net of reserve impact and offsetting CALM asset movement

  8. What We Agreed On • There is pressure for more disclosure in Notes and MD&A • It is desirable to report sensitivities in a consistent manner • For comparability • For credibility • Sensitivities need to be meaningful

  9. What We Agreed On (cont’d) • Disclosure should include commentary on why that sensitivity was selected • Best Practice disclosure would include commentary on why that level of sensitivity is relevant • Most relevant measure is impact on shareholder surplus considering offsetting asset impact • i.e. after-tax earnings

  10. Where Are We • We’ve produced a report which was presented to the AA Committee • AA Committee has provided useful feedback • Report will take form of Guidance Note, or Research Paper • Expect to be released before year end • Paper will not be effective for this year end, but “early adoption is recommended”

  11. What’s Contained in the Report? • Sensitivity is impact on net shareholder income on after-tax basis, including asset offsets and income tax timing differences • Sensitivities reflect impact of pass-through features • Sensitivities featured: • Mortality / Morbidity • Expense • Policyholder behaviour • Movement in Financial markets

  12. Recommended Sensitivities

  13. Mortality / Morbidity • Mortality: +/- 2%, whichever is adverse • Morbidity: 5% adverse experience • Generally opposite direction for incidence and termination rates • Applies to all years • Calculated net of reinsurance • Represents a plausible change in base assumptions • Morbidity applies to those liabilities whose term is greater than zero

  14. Expense • Recommend 5% increase in operating expenses • Only those items associated with ongoing expenses (i.e. maintenance) • Includes: • Admin • Benefit expenses • Certain corporate and overhead expenses

  15. Expenses (cont’d) • Excludes: • Income taxes • Investment related expenses • Premium taxes • No impact on inflation • Why 5%? • Balance between historic maximum CPI increase since 1923 and 3% average over that period

  16. Policyholder Behaviour • Recommend + / - 10% • Impact is multiplicative • Test direction of impact to obtain adverse result • Covers all types of business • Want to keep calculation practical

  17. Investment Risk • +/- 100 bp immediate parallel change in yield curve • +/- 10% change in equities and real estate (i.e. correction) • +/- 100 bp reduction in future equity and real estate returns • Each disclosed separately

  18. Investment Risk (cont’d) • Impact is net of any accompanying asset value changes • Includes impact of future MER losses • Above assumes no change to URR • URR sensitivity continues to be under discussion • Should changes in government bond rates versus market spreads be separately disclosed

  19. Questions? Feedback?

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