LIFE INSURANCE CAPITAL Market and Credit Risk QIS

1. Sylvain St-Georges, FSA, FCIA November 19, 2009 LIFE INSURANCE CAPITALMarket and Credit Risk QIS

2. QIS – MARKET AND CREDIT • Introduction • Market Risk • Credit Risk • Participating Products • Closing Comments

3. INTRODUCTION • Main purpose: • Test the practicality of the methods • Estimate the potential impact • Approach based on shocks • Actual requirements will require calibration

4. MARKET RISK • Interest Rate Risk • Equity Risk • Real Estate Risk • Pass Through Products Risk • Currency Risk • Liability Market Options Risk • Asset Market Options Risk

5. Interest Rate Risk • Cash Flows • Risk Free Interest Rates • Interest Rate Shock Method • Additional Scenarios

6. Cash Flows • CALM cash flows • No reinvestment • Asset – fixed cash flows • Asset – non-fixed cash flows • Off-CALM assets and liabilities

7. Risk Free Interest Rates • Spot rates for Government of Canada Bonds • Provided rates for Canada and U.S.A. • Rates for the first 30 years

8. Interest Rate Shock Method • Economic impact of a sudden change in interest rates at time zero • Discount cash flows after 30 years to the year 30 using a flat 6% rate • Discount cash flows from years 0 to 30 to the year 0 using the prescribed interest rates • Net PV = Asset PV – Liability PV • Buffer = Net PV of the base scenario - min(Net PV of the test scenarios)

9. Interest Rate Shock Method • Tests (estimated 99.5% percentile) • Potential upward or downward change in 30 day T-bill rate over one year • Potential upward or downward change in 30 year spot rate over one year • Linear interpolation of shocks between these two rates • Shocks based on a simplified Cox-Ingersoll-Ross model fitted to historical data

10. Interest Rate Shock Method • Universal Life Products • Guaranteed credited rates considered • CFs consistent with the scenario interest rates, for example, account values • No adjustments due to anticipated changes in lapse rates and expense charges (considered in insurance risk)

11. Additional Scenarios • Additional information to assist in calibrating the metrics • Shocks based on a 95% confidence level

12. Equity Risk • Common shares (preferred shares included in the credit risk component) • Immediate shock (at time 0) • Equity index stocks – 20% decline • Managed equity portfolio – 30% decline

13. Real Estate Risk • Immediate shock (at time 0) • 20% decline

14. Pass Through Products Risk • Existing capital requirements • New threshold of CF<70% • Use of the CF based requirement is optional

15. Currency Risk • Immediate shock (at time 0) • Shock applied to the net mismatch of CFs in each currency • 20% rise or decline in currency’s value against the Canadian dollar

16. Liability Market Options Risk • Risk related to minimum interest rate guarantees reflected in the interest rate risk solvency buffer • Risk related to segregated fund guarantees is based on deterministic shocks • Additional segregated fund scenario requested for supplementary information

17. Liability Market Options Risk • Risk related to segregated fund guarantees – maximum of these two scenarios: • Equity market falls 30% and bond market falls 20% (no recovery) • Equity index is assumed to increase 100% over 44 months, then drop to 75% of its starting value and fixed income market drops 20% in the 45th month (no recovery)

18. Asset Market Options Risk • Products described in section 3.7 (Assets replicated synthetically and derivatives transactions) of MCCSR guideline • Current requirements

19. CREDIT RISK • Short Term Investments • Public Bonds • Private Bonds • Asset Backed Securities • Mortgages • Preferred Shares • Other Items

20. Short Term Investments • Current requirements • Current factors consistent with factors established for public bonds

21. Public Bonds • Factors set up by rating and remaining term to maturity • Factors established using the Basel Foundation IRB approach, except • 99.5% confidence level (instead of 99.9%) • A modified maturity adjustment appropriate for longer duration of bonds held by Canadian life companies

22. Public Bonds

23. Private Bonds • This category also includes leases and other loans • Factors based on the inferred rating from other issues by the same issuer • If it is not possible: factors are an average of the Public Bond BBB and BB factors for the equivalent term to maturity

24. Asset Backed Securities • Calculated as a separate category of assets • To be grouped according to maturity and rating of the issue, on a similar basis as set out for Public and Private Bonds

25. Mortgages • Commercial Mortgages • Factor: 6% (current: 4%, Basel: 8%) • Based on evidence from the 1990 real estate downturn • Single Family Residential Mortgages • Current factor • Some data from the industry seems to show numbers in line with the current factors

26. Preferred Shares • Current categorization • Factors consistent with Public Bonds factors

27. Other Items • Other items are: • Miscellaneous Items • Off-Balance Sheet Exposures • Securities Lent • Current requirements

28. PARTICIPATING PRODUCTS • The “gross” reduction is based on the maximum reduction in present value of future dividends • The reduction included in the other components is subtracted from the “gross” reduction • The “net” reduction is applied to the market and credit risk components

29. CLOSING COMMENTS • Worksheets should be completed and returned by December 11, 2009 • Submissions will be shared with Assuris and OSFI/AMF on a confidential basis • Interrogatories and Preparer Comments • Responses to questions required • Additional comments encouraged