2009 Annual Meeting ● Assemblée annuelle 2009Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)

2009 Annual Meeting ● Assemblée annuelle 2009Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

PD -19

Update from the Committee on Life Insurance Financial Reporting (CLIFR)

- Dale Mathews- Angela Jonkhans

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Agenda

• Mortality Improvement• Currency (Foreign Exchange) Risks• Long – Term Equity Returns• Term of the Liability /Segregated Funds• Group Life and Health• Calibration of Interest Rate Models• Universal Life• Income Taxes• 2009 Fall Letter

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Mortality Improvement

• Status• Changes to Standards of Practice

• Notice of Intent published June 2008• Exposure Draft

– Hope to have approved at August ASB meeting

• Promulgation of Improvement Rates• Promulgation of rates will be done by ASB• Becomes part of Standards

• Research Paper / Educational Note• Will support promulgated rates and levels of

margins

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Mortality Improvement

• Changes to Standards of Practice – current CLIFR Draft• Insurance Mortality (2350.06 and

2350.07)• Maximum reduction based on promulgated

rates where improvement reduces liabilities• Minimum increase based on promulgated

rates where improvement increases liabilities (at appropriate level of aggregation)

• Low and high margins per 1000 for adverse deviation remain at 3.75/ex and 15/ex

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Mortality Improvement

• Changes to Standards of Practice – current CLIFR Draft• Annuity Mortality (2350.011 and 2350.12)

• Minimum increase in liabilities based on promulgated rates where improvement increases liabilities

• Low and high margins per 1000 for adverse deviation changed to 2% and 8% respectively applied to best estimate20

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Mortality Improvement

• Proposed Base Rates• Improvement rates will be the same for

males and females• Products where improvement decreases

liabilities• Maximum improvement rates are equal to 50%

of “base” rates• Maximum duration of improvements is 25

years

• Products where improvement increases liabilities

• Minimum improvement rates are 150% of “base” rates

• Minimum duration of improvements is 25 years

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Mortality Improvement Proposed Annuity Valuation Rates

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0 . 0 %

0 . 5 %

1 . 0 %

1 . 5 %

2 . 0 %

2 . 5 %

A t t a i n e d A g e

Imp

rove

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F e m a l e M o d A A

P r o p o s e dV a l u a t i o n

Mortality Improvement Rates

Hardy Study versus Proposed Base

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0 . 0 %0 . 5 %1 . 0 %1 . 5 %2 . 0 %2 . 5 %3 . 0 %3 . 5 %4 . 0 %4 . 5 %5 . 0 %

0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 0

A t t a i n e d A g e

Imp

rove

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F e m a l e

P r o p o s e d

A n n u i t y M i n i m u m

I n s u r a n c e *M a x i m u m

Mortality Improvement

• Proposed Annuity Margins– Proposed Range is 2% to 8%– Life Insurance MfADs produce lower

PfADs• Mortality improvement previously not

permitted for insurance• MfAD needed only for missestimation of

mean– MfAD for deterioration now included

with mortality improvement– Proposed range approximates life

margin at age 60

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Mortality Improvement

• Issues Discussed– Should some net release be required for

insurance?– Additional guidance that actuary review

mortality improvement for his/her blocks of insurance rather than just ignore

– Effective Date• May be later than yearend 2009• Possible additional capital requirements from

OSFI

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Currency (Foreign Exchange) Risk

• Status• Notice of Intent to Revise Standards

published November 15, 2007• Exposure Draft for Revised Standards

published May 22, 2009• Comment Period to June 30th, 2009

• Educational Note being finalized consistent with proposed changes to Standards

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Currency (Foreign Exchange) Risk

• Proposed Changes to Standards of Practice (2340.17-2340.19)• Base scenario assumption developed

from currency forward rates or risk-free interest rate differentials.

• Consistent with previous fall letter guidance and earlier CLIFR proposal

• PfAD developed from adverse scenario reflecting historical volatility

• Earlier proposal was 5%-50% MfAD reflecting how well economies were integrated

• Minimum MfAD of 5%

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Currency (Foreign Exchange) Risk

• Proposed Changes to Standards of Practice (2340.17-2340.19)• Changes to approach for MfAD reflect

feedback received• Combination of forward rates for base

scenario plus high end margin could be unduly conservative

• Base scenario is more of a “risk neutral” approach

• Being combined with “real world” type margin

• Proposed approach parallels that for interest rates

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Currency (Foreign Exchange) Risk

• Educational Note – Additional Guidance– Guidance applies to unhedged currency

risk in valuation– Actuary must look at underlying cash

flows to assess whether or not currency risk exists

• E.g. common equity of companies that transact business in several currencies

– Practical application

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Currency (Foreign Exchange) Risk

• Educational Note – Additional Guidance– Construction of Adverse Scenario

• Examine volatility over periods consistent with expected time over which mismatch expected to last

• Suggest use of one standard deviation of change in exchange rate for unbiased measure

• If strong economic evidence that exchange rates will move, use mean plus one standard deviation if directionally consistent

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Currency (Foreign Exchange) Risk

• Educational Note Example 1 U.S. /Canada

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Currency (Foreign Exchange) Risk

• Liability Example (at Sept. 30, 2008)• Liability of $1000 Canadian payable at

the end of 10 years• Assets backing liability are $U.S.• 10 year risk free rates at valuation date

• U.S.: 3.83%• Canada: 3.72%

– Exchange rate at valuation date• 1 USD buys 1.059 CAD

– Assume underlying USD asset earns risk free rate at valuation date

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Currency (Foreign Exchange) Risk

• Implied movement in exchange rates over 10 years– From risk free rates (Base Scenario):

1.059 1.048

– From one Standard Deviation of .17 over 10 year periods (Adverse Scenario):

1.059 .877

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Currency (Foreign Exchange) Risk

Results: Liability in CAD

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No change in exchange rates $686.71

Base scenario $694.02

Adverse scenario $829.36

5% minimum margin $730.48

Liability booked $829.36

PfAD $135.34

PfAD as % of base scenario liability: 19.5%

Currency (Foreign Exchange) Risk

• Educational Note Example 2 Canada / Jamaica

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6 . 9 0 0

1 1 . 9 0 0

1 6 . 9 0 0

2 1 . 9 0 0

2 6 . 9 0 0

3 1 . 9 0 0

3 6 . 9 0 0

4 1 . 9 0 0

4 6 . 9 0 0

5 1 . 9 0 0

5 6 . 9 0 0

6 1 . 9 0 0

6 6 . 9 0 0

7 1 . 9 0 0

1991

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Currency (Foreign Exchange) Risk

• Liability Example (at Sept. 30, 2008)• Liability of 1000 JAD payable at the end

of 10 years• Assets backing liability are CAD.• 10 year risk free rates at valuation date

• Jamaica: 13.0% (assumed)• Canada: 3.72%

– Exchange rate at valuation date• 1 CAD buys 72.40 JAD

– Assume underlying CAD asset earns risk free rate at valuation date

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Currency (Foreign Exchange) Risk

• Implied movement in exchange rates over 10 years– From risk free rates (Base Scenario):

72.40 170.6

– From mean of 1.22 minus one Standard Deviation of .587 over 10 year periods (Adverse Scenario):

72.40 118.4

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Currency (Foreign Exchange) Risk

Results: Liability in JAD

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No change in exchange rates $694.02

Base scenario $294.59

Adverse scenario $424.20

5% minimum margin $310.09

Liability booked $424.20

PfAD $129.61

PfAD as % of base scenario liability: 44.0%

Long-Term Equity Returns

• Development of an Educational Note for establishing investment return assumptions for non-fixed income assets

• Expect to publish Educational Note in Fall 2009

• Expansion of guidance in previous Fall Letters20

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General Update

• Segregated Funds• Exposure Draft Practice-Specific

Standards for Insurers, Subsection 2320 – Term of the Liability

• Approved by ASB and published in February 2009

• Comment period ended March 31 2009• No comments received• Recommendation to publish the draft

standard as the final standard has gone to ASB

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General Update

• Segregated Funds• 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.

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General Update

• Segregated Funds• 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. 20

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General Update

• Segregated Funds• CLIFR’s will participate in new ASB “designated

group” to potentially move some of the educational material in the Educational notes and other guidance into the SOP

• Key areas:• Stochastic modeling principles• Addition of “Whole Contract” and “Bifurcated Method”• Stochastic model calibration criteria• Assumptions for additional policyholder options 20

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General Update

• Valuation of Group Life and HealthPolicy Liabilities• Revising May 2000 Research Paper On

Group Life and Health valuation considerations

• CLIFR has voted on the Educational Note• Currently in translation and expected to

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General Update

• Valuation of Group Life and HealthPolicy Liabilities• 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 ERR20

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General Update

• Calibration of Interest Rate Models• Phase 1 – Educational note on calibration

of long term interest rates• Has been approved by CLIFR• Expect to send to Practice Council Summer 2009• Publish late Summer or Fall 2009

• Phase 2 – Calibration of short and medium term interest rates is underway

• Includes correlation between short, medium, and long-term interest rates

• Expected completion by end of 2009

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General Update

• Calibration of Interest Rate Models• Later phases

• Credit spreads• Other markets• Correlation of interest rates with equities• Correlation of interest rates with currencies

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General Update

• Calibration of Interest Rate Models• Two significant events since most of work

on Phase 1 was completed• Financial crisis• Publication of calibration criteria by the AAA

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General Update

• Calibration of Interest Rate Models• Financial Crisis

• Long-term rates are the lowest seen in a half century• CLIFR believes that recent events confirm the

appropriateness of the calibration approach in the following areas:

• Using long history that included the 1930s and 1940s• Supplementing historical information with judgment to

ensure extremes are appropriately reflected • Calibration directly to observed rates, rather than

indirectly with a model calibrated to historical rate changes is generally felt to be more robust.

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General Update

• Calibration of Interest Rate Models• Financial Crisis

• Recently we have seen a combination of extremely low rates and high rate volatility that appears unique in modern financial history.

• These conditions are reflected at most to a minor extent in the 2 and 10-year calibration criteria, but fully reflecting these could require volatility varying or regime switching models which are more complex than the tools used in developing the criteria in the note.

• The actuary would be cautious if liabilities are sensitive to short term exposure to high volatility.

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General Update

• Calibration of Interest Rate Models• In May 2009, the AAA published

• A fully parameterized stochastic model• Stochastic scenario sets, produced by the model and

which may be used directly• Sampling tool to draw subsets of the scenario sets

• AAA will also provide a tool to generate any number of

scenarios with any initial yield curve

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General Update

• Calibration of Interest Rate Models• There are similarities and differences between

the AAA and CIA approaches, and the actuary may find it of interest to review the AAA paper.

• In general, it may be acceptable to use criteria published relevant to another country if it can be demonstrated that they are broadly consistent with the criteria in the educational note (either the criteria themselves are broadly consistent, or the approach taken to develop the criteria is broadly consistent)

• AAA approach to develop the criteria is different• Criteria derived in the current low rate environment

may be broadly consistent for some products (such as products with exposure to low long term interest rates)

• This may not be true for all products or all interest rate environments.

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General Update

• Valuation of Universal Life Policy Liabilities and Future Income and Alternative Taxes Educational Notes• Tax changes substantively enacted in

March 2009• Notes will be updated to be consistent with

federal tax changes• Expected to be published in Fall 2009

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2009 Fall Letter

• Status– In development– Aiming for October publication– Still to go through due process– This presentation reflects CLIFR’s early

view of contents

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2009 Fall Letter

• Section 1 Experience Studies– Expect to refer to

• LTD termination study to be published this year with 1997 - 1998 experience

• 2005-2006 Individual Life Mortality Experience

• 2001-2004 Annuitant Mortality Experience

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2009 Fall Letter

• Section 2 Insurance Mortality– Similar to last year

• Any mortality improvement offset in MfAD

– Expect Exposure draft of changes to Standards and Promulgation of rates to be published in 2009 but effective date in 2010

– Additional guidance• Best practice to incorporate mortality

improvement to valuation date

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2009 Fall Letter

• Section 3 Annuity Mortality– Similar to last year– Expect Exposure draft of changes to

Standards and Promulgation of rates to be published in 2009 but effective date in 2010

– Additional guidance• Best practice to incorporate mortality

improvement to valuation date

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2009 Fall Letter

• Section 4 Scenario Assumptions – Interest Rates

– Expect Phase I criteria to be published• Prescribed scenario testing still required for

– Short and medium term rates– Situations that do not fit Phase I Framework

– Repeat reminder to test premiums for default risk at 50% and 200% of those at balance sheet date

– Additional guidance on reviewing C1 assumptions versus Corporate spreads in light of economic environment

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2009 Fall Letter

• Section 5 Value of Minimum Interest Guarantees and Embedded Options• Guidance unchanged from previous

years• Still Appropriate in continued low

economic environment• Not captured by deterministic

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2009 Fall Letter

• Section 5 (old) Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments• Expect to delete this section• Still valid, but has appeared enough

times

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2009 Fall Letter

• Section 6 Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes– Tax legislation now substantively

enacted– Previous guidance on what to do in

the interim now withdrawn– Reminder of application of 5 year

grade in period

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2009 Fall Letter

• Section 7 – Equity Returns • In light of recent market performance

expect to include• Guidance on long term assumption for

deterministic valuation• Impact of 2008 results on 30 year average

return

• Possibility some guidance around calibration of models for stochastic valuation

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