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2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

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  1. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Canadian Institute of Actuaries L’Institutcanadien des actuaires

  2. PD-11 (Life) CLIFR Update • Dale Mathews • Rebecca Rycroft

  3. 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

  4. Mortality Improvement • Status • Changes to Standards of Practice • Notice of Intent published June 2008 • Exposure Draft • Hope to have approved at October ASB meeting • Promulgation of Improvement Rates • Promulgation of rates will be done by ASB • Will have the force of Standards • Research Paper/Educational Note • Will support promulgated rates and levels of margins

  5. 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

  6. 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 estimate

  7. 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

  8. Mortality Improvement Proposed Annuity Valuation Rates

  9. Mortality Improvement Rates Hardy Study versus Proposed Base

  10. Mortality Improvement: Life Expectancies * For a Male Non-Smoker

  11. Mortality Improvement: Life Expectancies* * For a Male Non-Smoker at 3 Issue Ages

  12. 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

  13. Mortality Improvement • Effective Date • Expected to be Oct. 2010 • Possible additional capital requirements from OSFI

  14. 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 • Final Standard approved at August ASB meeting – effective Oct. 15, 2009 • Educational Note being finalized consistent with proposed changes to Standards

  15. 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%

  16. 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

  17. Currency (Foreign Exchange) Risk • Proposed Changes to Standards of Practice (2340.17-2340.19) • Proposed approach parallels that for interest rates • Base scenario using forward rates • Additional scenario to develop PfAD • Minimum PfAD of 5% parallels +/- 10% interest rate scenarios

  18. 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 in CALM

  19. 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

  20. Currency (Foreign Exchange) Risk Educational Note Example 1 US/Canada

  21. 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 • US: 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

  22. 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

  23. Results: Liability in CAD Currency (Foreign Exchange) Risk PfAD as % of base scenario liability: 19.5%

  24. Currency (Foreign Exchange) Risk Educational Note Example 2 Canada/Jamaica

  25. 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

  26. 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

  27. Results: Liability in JAD Currency (Foreign Exchange) Risk PfAD as % of base scenario liability: 44.0%

  28. 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 early 2010 • Expansion of guidance in previous Fall Letters

  29. 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 • Final Standard approved July 15 with an effective date of October 15, 2009

  30. 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 change clarifies 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

  31. General Update • Segregated Funds • CLIFR’s view is that the current Standards of Practice guidance on term of the liability needed to be adjusted to recognize the impact of hedging • The change allows both the value of the liability and the value of its associated hedge to be considered when applying the term of the liability constraints.

  32. General Update • Segregated Funds • CLIFR is participating 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

  33. Group Life and Health • Valuation of Group Life and HealthPolicy Liabilities • Revising May 2000 Research Paper On Group Life and Health valuation considerations • Currently in translation and expected to be published in the next couple of months

  34. Group Life and Health • 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

  35. Calibration of Stochastic Interest Rate Models • Phase 1 – Long term interest rates • Has been approved by CLIFR • Expect to send to Practice Council for final approval in October • Publish late Fall 2009 • Phase 2 – Short and medium term interest rates • Includes correlation between short, medium, and long-term interest rates • Expected completion in 2010

  36. Calibration of Stochastic Interest Rate Models • Later phases • Credit spreads • Other markets • Correlation of interest rates with equities • Correlation of interest rates with currencies

  37. Calibration of Stochastic Interest Rate Models • Two significant events since most of work on Phase 1 was completed • Financial crisis • Publication of calibration criteria by the AAA

  38. Calibration of Stochastic Interest Rate Models • Financial Crisis • Long-term rates are the lowest seen in a half century • A combination of extremely low rates and high rate volatility that appears unique in modern financial history • CLIFR believes that recent events confirm the appropriateness of the calibration approach • The actuary should be cautious if liabilities are sensitive to short term exposure to high volatility

  39. Calibration of Stochastic Interest Rate Models • In May 2009, the AAA published • A fully parameterized stochastic model, and • Stochastic scenario sets • AAA will also provide a tool to generate any number of scenarios with any initial yield curve

  40. Calibration of Stochastic Interest Rate Models • AAA vs. CIA approach • AAA used a different approach to develop the criteria • 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 • Calibration Criteria from other countries • To use other countries calibration criteria need to demonstrate that they are broadly consistent with the criteria in the CIA educational note

  41. Tax note • Future Income and Alternative Taxes Educational Note • Tax changes substantively enacted in March 2009 • Note will be updated to be consistent with federal tax changes • Expected to be published in Fall 2009

  42. 2009 Fall Letter • Status • Expect to send to Practice Council for final approval in October • Publish Fall 2009

  43. 2009 Fall Letter – Section 1 • Experience Studies • Expect to refer to • 2001-2004 Annuitant Mortality Experience (March 2009) • 2005-2006 Mortality Study – Canadian Standard Ordinary Life Experience (September 2009) • LTD termination study to be published this year with 1997-1998 experience

  44. 2009 Fall Letter – Section 2 • Insurance Mortality • Similar to last year • Any mortality improvement offset in MfAD • Additional guidance • Best practice to incorporate mortality improvement from mid point of the study to valuation date

  45. 2009 Fall Letter – Section 3 • Annuity Mortality • Similar to last year • just changed effective date of new mortality improvement rates (October 15, 2010)

  46. 2009 Fall Letter – Section 4 • Scenario Assumptions – Interest Rates • Repeat reminder to test premiums for default risk at 50% and 200% of those at balance sheet date • Note the lower bound used in the prescribed scenarios is dropping • Situations where stochastic results can be used

  47. 2009 Fall Letter – Section 4 • Can hold CTE(60) to CTE(80) of the stochastic results if: • Reserves are not sensitive to short- and medium-term interest rates • Stochastic interest rate model meets the Phase 1 calibration criteria • Stochastic interest rate model doesn’t include spreads. • If spreads are included then must hold at least Scenario 9 (old guidance)

  48. 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 • May not be captured by deterministic scenarios, consider stochastic testing

  49. 2009 Fall Letter – Section 5 (old) • Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments • Deleted • Still valid, but has appeared enough times

  50. 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