008 Seminar for the Appointed Actuary Colloque pour

008 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 PD 11 (Life) – CLIFR Topics Colloque pour l’actuaire désigné 2008

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Agenda • • • General Update – Dale Calibration of Interest Rate Models – Wally 2008 Fall Letter - Dale

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • CLIFR Committee • • • Chair – Ty Faulds Vice-chair – Dale Mathews Members – Wally Bridel, Nathalie Bouchard, Tim Cavalin, Alexis Gerbeau, Edward Gibson, Eric Jobin, Jean Mongrain, Leonard Pressey, Les Rehbeli, Rebecca Rycroft, Sheldon Selby, Mary Stock, Whitman Wu

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • CLIFR – Effect of International Standards • Essentially in maintenance mode with respect to current standards • • Avoiding significant new initiatives Several existing initiatives still in progress Trying to ensure existing initiatives are reasonably consistent with IFRS Ready to assist with ASB / PC with conversion to IFRS • • Phase 1 – assist in reviewing current standards and identifying areas that need to change Work in progress on request from ASB re treatment of discretionary participation features

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Recent Publications – Educational Notes • Implications of Proposed Revisions to Income Tax Legislation (November 7, 2007 Department of Finance Proposal), January 2008 • • • Extended current guidance to include changes related to tracking properties Consistent with earlier Educational Note of April, 2007 Considerations in the Valuation of Segregated Fund Products, November, 2007

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Recent Publications – Notices of Intent • • Notice of Intent to Revise the Standards of Practice – Practice-Specific Standards for Insurers, Subsection 2320 – Term of the Liability Notice of Intent Regarding a Change to the Treatment of Secular Trends for Insurance and Annuitant Mortality in the Standards of Practice – Practice-Specific Standards for Insurance, Subsection 2350 Life and Health Insurance

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives • • Mortality Improvements Currency (Foreign Exchange) Risks Segregated Fund Valuation Group Life and Health Long – Term Equity Returns Universal Life Calibration of Interest Rate Models

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Mortality Improvement • Goal: Propose mortality improvement basis for annuity and life insurance valuation • • Draft educational note expected Winter 2008 Changes required to Standards of Practice – Notice of Intent published June, 2008 Changes to Standards won’t be effective until 2009 Method of Promulgation of Mortality Improvement Assumptions likely to change in 2009

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Mortality Improvement • Current Draft Proposal • • “minimum reserve” prescribed for valuation of life insurance and annuity business Appointed Actuary may establish different basis (i. e. different best estimate and different Mf. AD levels) • Resulting reserves must be at least as high as under prescribed basis

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Mortality Improvement • Current Draft Proposal • “Base” (or “Best estimate”) improvement scales would be the same for life and annuity business • • Use population studies from Mary Hardy’s paper (Data from 1921 to 2002) Mortality improvement assumption would have its own Mf. AD • Direction will depend on whether the business is “life supported” or “death supported”

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Mortality Improvement • Current Draft Proposal • • Improvement rates will be the same for males and females Life Insurance • • • Maximum improvement rates are equal to 50% of “base” rates Maximum duration of improvements is 25 years Annuities • • Minimum improvement rates are 150% of “base” rates Minimum duration of improvements is 25 years

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Mortality Improvement Rates Hardy Study versus Proposed Base

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Annuity Valuation Mortality Improvement Rates

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Mortality Improvement • “Other” Mortality Margins • • • Concern that total margin may be too high Mortality improvement margin covers deterioration How to provide for mis-estimation of starting point Looking at form of margin (% of q versus k/ex) Looking at range • -testing being requested on inforce blocks

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Mortality Improvement • Promulgation of Improvement Rates • • Paragraph 2350. 11 “It is prescribed that the actuary’s best estimate includes a secular trend toward lower mortality as promulgated from time to time. ” Promulgation has been done via CLIFR Fall Letter Process expected to be changed in 2008 – improvement rates considered part of standards Process being developed with ASB

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives - Currency Risks • • Significant feedback received on Notice of Intent Had proposed • Use of currency forwards for best estimate • • • If not available, use interest rate differentials Mfad range from 5% to 50% Feedback • • • Is this consistent with direction of International Standards? Use of risk neutral Best Estimate plus a margin Why expanding Mf. AD range

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives - Currency Risks • • CLIFR reconsidering given input Alternatives being considered • Continuation of current best estimate with • • • 5%-50% Mf. AD range and floor based on currency forwards Use of currency forwards • Choice of Mf. AD to take into consideration implied change in exchange rates reflect in best estimate

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Segregated Funds • Notice of Intent • CLIFR’s view is that the current Standards of Practice imply a different determination of the term of the liability for fully guaranteed contracts compared to those with no material guarantees. • The proposed change would clarify that – the term of the liability for both types of contracts would end at the balance sheet date if the liability would otherwise be negative. » Extension to recover DAC – The term of the liability would be extended beyond that date to the date that maximizes the liability, at an appropriate level of aggregation.

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Segregated Funds • Notice of Intent • CLIFR’s view is that the current Standards of Practice guidance on term of the liability needs to be adjusted to recognize the impact of hedging • The proposed change would allow both the value of the liability and the value of its associated hedge to be considered when applying the term of the liability constraints.

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Group Life and Health • • • Revising May 2000 Research Paper On Group insurance valuation considerations Plan to release educational note in the fall of 2008 Similar content to original Research Paper • • • Updated to reflect current standards and Group Practices Some additional guidance provided on CALM impact of 3855 Clarification and expansion of section on ERR

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Equity Returns • • • Development of an Educational Note for establishing investment return assumptions for non -fixed income assets Expect to publish Educational Note in Fall 2008 Expansion of guidance in previous Fall Letters

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Universal Life – – – Revising draft Educational Note to reflect finance proposal in area of tracking properties (Unit Trusts) Timing dependent on passage of legislation Note that a working group had been investigating changes to standards to address similar situations • Conclusion that current standards provide enough flexibility

008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Update • Current Initiatives – Calibration of Interest Rate Models