Segregated Fund Liability Capital Methodologies Task Force Josephine

Segregated Fund Liability & Capital Methodologies Task Force Josephine Robinson

Agenda • Background • Task Force Members • Mandate • 2007 Educational Note & Update • OSFI’s Concerns • Segregated Fund Policyholder Behaviour – Research Objective – Current Status – Next Steps

Background • OSFI and CIA meet bi-annually • OSFI investigating segregated fund capital and the approach that should be used to assess the level of capital • Indicated that they were reviewing methodology • CIA established Task Force • OSFI prepared to consider input

Task Force on Segregated Fund Liability and Capital Methodologies • Alexis Gerbeau (chairperson) • Christian-Marc Panneton • Byron Corner • Edwin Peh • Lynn Guo • Mike Schofield • Ricardo Mitchell • Allan Brender (observer) • Qi Sun (minute taker)

Mandate of Task Force • To explore alternative methodologies for determining actuarial liabilities and capital considering the total balance sheet requirements • To address the issue of the recognition of hedging in the determination of actuarial liabilities and regulatory capital for segregated fund guarantees • To identify at a high level all material risks that should be considered in the determination of the liabilities and capital • To identify areas where further guidance is required

Mandate of Task Force • Intention is to prepare a well-articulated recommended methodology – If no consensus or no methodology is clearly superior then documentation of various methodologies with advantages and disadvantages would be prepared

Mandate of Task Force • Intend to examine particular risks related to a hedging program such as basis risk, the uncertainty in future implied volatility and the liquidity risk in financial markets. – Currently insufficient guidance as to how to reflect this in the valuation

Time Frame • Target date of final report is the end of December 2009 • Areas that require additional review and quantification would be dealt with thereafter

November 2007 Educational Note Issues addressed 1. Valuation Method – Bifurcated or Whole Contract Approach 2. Term of the Liability • 3. Hedging Recoverability Testing for the Allowance for Acquisition Expenses • Choice of CTE Level

November 2007 Educational Note Issues addressed (cont’d) • Level of Aggregation • Discounting and C 3 Pf. AD • Policyholder Related Assumptions • Margins for Adverse Deviation • Sampling/Number of Scenarios

Update • 2002 Segregated Fund paper only dealt with the downside movement – Draft by the 2007 Task Force on Segregated Funds in their unpublished paper was focused on expanding on this issue

OSFI’s Concerns • Whether current approach captures all the risks and produces sufficient required capital • Last year’s crisis highlights that there continues to be unresolved issues in establishing required capital

OSFI’s Concerns • OSFI is concerned with the significant differences amongst companies; different models are used to model the same risk • OSFI is investigating alternative methodologies • OSFI will consider the work of the Task Force

Segregated Fund Policyholder Behaviour The Member Services Council established a subcommittee to investigate what analysis should be conducted for segregated funds policyholder behaviour • Subcommittee of the Research Committee • Will start with an empirical analysis of policyholder lapsation

Research Objective • Gather together data on lapses across relevant policyholder, distribution and product features characteristics – Will deliver a report and Excel tables for practitioners to perform additional analysis

Current Status • Currently working on the second iteration of the data request template • Preparing a notice of intent to obtain data for a segregated fund lapse experience study (incl. data guidelines, instructions and confidentiality agreement)

Next Steps • Data processing, analysis of results and construction of lapse tables based on experience – Data collection targeted for 2010 – Report and distribution to members