2008 General Meeting Assemblée générale 2008 Toronto, Ontario

1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2008 General Meeting Assemblée générale 2008 Toronto, Ontario

2. Key standards for insurance “IFRS 4: Insurance Contracts and IAS 39: Financial Instruments are the key standards that will apply to insurance contracts” Non-Insurance Financial Assets - IAS 39 Non-Insurance Financial Liabilities, Including Investment Contracts IAS 39 Insurance Liabilities – IFRS 4 Insurance Assets – IFRS 4

3. Contract classification - Why is it important? Contract classification defines accounting treatment Discretionary Participation Investment contracts Phase I Investment contracts ExistingAccounting* Insurance contracts ExistingAccounting* Amortised Cost-or-Fair Value • Subject to certain modifications

4. Classification flowchart Are any elements of the benefit driven by discretionary participation Classified as an investment contract Product is an Investment Contract with discretionary participation features Yes No Deposit component Product is an Investment Contract without discretionary participation features No Is there significant insurance risk present in the contract? Insurance and deposit components of contract must, if not recognised, be unbundled and valued separately Insurance component Yes Yes Is there a deposit component to the contract? If so, is the deposit component independent of the insurance cash flows? Insurance features present in contract Product is an Insurance Contract No

5. Service contract • Separate servicing elements from financial liability • Consideration whether maintenance expenses and fees fall under servicing element or financial liability

6. Investment Contract Liability measurement options Fair Value Entire Contract Derivative at Fair Value Yes + Method of valuation Contains Embedded Derivatives Host at Amortised Cost Amortised Cost Amortised Cost No

7. Fair value definition • “Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction” (IAS 32 paragraph 11)

8. Fair value considerations • Active Market – quoted price • Bid price for asset • Offer price for liability • No Active Market – use valuation techniques • Reference to the current fair value of another instrument that is substantially the same • Valuation technique commonly used by market participants which has been shown to reliably price actual transactions • Makes maximum use of market inputs • Include own credit standing

9. Fair value components • IAS 39 states the following components should be considered • Time value of money (basic or risk free) • Swap curve can be used for practical reasons – adjustment for risk must be made • Credit risk • Foreign currency exchange prices • Commodity price • Equity prices

10. Amortised cost definition “… the amount at which the financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount ….” (IAS 39 paragraph 9 paraphrased)

11. Effective interest method • The effective interest method gives a liability where the initial amount is grown by the effective interest rate to the maturity period. • The effective interest rate exactly discounts the estimated future cash payments or receipts through maturity to the initial amount. • If cash flows cannot be reliably measured – contractual cash flows are used

12. Initial amount • The initial amount (IA) is made up of: • Fair value at issue – initial premium • Minus • Transaction costs • Implicitly creates deferred acquisition cost

13. Re-measurement • Methodology • Effective interest rate remains the same • Update assumptions for current expectations • Recalculate liability as discounted future cash flows • Changes in liability flow through income statement • Amortisation of liability • Changes due to experience being different from expected • Changes due to changing expectation of the future

14. Amortised cost or fair value

15. Example 1 – GIC • Cashable with surrender penalty • Fixed term • Fixed Interest Rate

16. Considerations:Asset Accounting • Available for sale versus fair value through P&L • Portfolio management and systems needs • ALM • Investment selection

17. Considerations:Profit Emergence • DAC • Loss at issue

18. Considerations:Valuation Systems • Methodology • System feeds

19. Considerations:Product Accounting • Premiums • Claims • Fees • Interest • Admin to G/L feed

20. Considerations:Capital Impacts • Asset classification changes • Insurance risk calculations • Watch for regulatory changes

21. Considerations:Product Design • Consider product design to improve: • Loss at issue • Contract classification • Earnings emergence

22. Considerations:Expense Design • Increase or decrease commissions to allow more items to be included in DAC • Expense study needed to obtain accurate allocation of costs

23. Example 2:Equity Indexed Universal Life • UL contract • Crediting rate is the TSE 300 return minus 200 bps