CIA Annual Meeting

1. CIA Annual Meeting LOOKING BACK…focused on the future

2. Speaker • Lynne Patterson

3. Overview of our Risk Management Framework • Development of Economic Capital • Early Observations

4. Risk management philosophy & culture • Fundamental objective of risk management is to support shareholder value growth, while ensuring commitments to policyholders are met and our reputation and capital is protected. • It’s an integral component of our business decision making and operational processes; it’s not a separate process. • .

5. Risk management philosophy & culture • Business units own and take accountability for risks assumed in their operations, within global risk policy framework. • Corporate Risk Management sets out policies, establishes processes, defines exposure metrics, monitors exposures and champions new risk measurement and management techniques.

6. Risk management is an integral component of business management Business management process Risk & capital management framework Target risk-adj return, capital structure and risk budget Establishing group targets Business unit specific risk-adj return targets Establishing business unit objectives Risk-based capital allocation and rationing Business planning Integrated risk measurement framework and limit mgmt Plan execution Risk-adjusted return measurement methodology Performance monitoring

7. Risk metrics • Earnings at risk • To measure and manage volatility of earnings • Economic capital (EC) • To measure and manage capital adequacy

8. Risk adjusted return targets • Target returns established to support risk-based capital allocations • Capital allocation and rationing • Each business unit allocated its capital based on economic capital + share of aggregate excess local requirement (if any)

9. Risk measurement and limit management • Aggregate limits set for economic capital in relation to available capital • Risk specific economic capital limits set to ensure diversification and manage concentrations • Risk position monitored & managed against set limits

10. Risk adjusted return measurement • ROE’s and new business IRR’s determined using allocated capital • Risk-adjusted returns monitored and managed against established targets

11. Risk inventory Credit - In MCCSR Market and Asset/Liability - Replace with Product economic capital • Operational - Not explicit in MCCSR • Strategic - Continue to use KRI’s and scenario testing

12. Current profile of risks based on MCCSR • 75% of risk is credit and market/asset-liability Credit Interest rates Direct equity holdings Variable product guarantees & market based fees Real estate & other assets Claims Retention & other product risks

13. Approach we’re taking for EC: • Focus on credit and market/asset-liability first • Equity • Credit Diversification and concentration issues • Interest rate • Claims and policyholder behaviour risk to follow

14. Our economic capital principles are aligned with IAA/IAIS research paper and CIA’s emerging framework • We’ve applied these principles and developed more specific methodology and parameters • May need to be modified if specific industry standards or guidelines emerge differently

15. Economic capital is the amount of capital required to: • withstand adverse experience at a very high (tail) confidence level over a specified risk horizon, and • have sufficient assets at the end of the specified horizon to ensure all remaining obligations can be met given experience at a conservative (but not tail) confidence level

16. Horizon to measure tail risk is set at one year • But cover obligations to end of contract reflecting conservative experience scenario • Tail risk for adverse experience over the one year horizon set at CTE99 • Conservative experience scenario set at CTE60 • Recognition of risk of misestimation and/or deterioration of expecteds as well as volatility over long term

18. Total balance sheet approach, so degree of conservatism (pfads) in liabilities is taken into account • Diversification/concentration between and/or within risks and business units is considered when aggregating risks

19. Pass-through product features and risk mitigation strategies reflected • EC determined from stochastic scenario modeling or approximated from closed-form solutions (where suitable and where no dependencies)

20. Components of economic capital for equity risk : • Segregated fund guarantees • Asset based fees • Public equity holdings • What about equities held to support defined benefit pension plans?

21. Equity risk economic capital approach: • Modeled using stochastic scenarios • Scenarios integrated globally so diversification benefit given between markets and products • For guarantees and fees, policyholder behavior dynamically linked to market performance • Key drivers: • Scenario generator parameters • Policyholder behavior assumptions • CTE level over one year horizon and CTE level for remaining period of contract

22. Components of economic capital for credit risk: • Public bond holdings • Private debt holdings • Mortgage holdings • Will be adding reinsurance and other counterparties

23. Credit risk economic capital approach: • Considered choice of stochastic scenarios or BASEL II-like closed-form solution • Opted for closed-form solution based on distribution model embedded in Basel II AIRB capital approach for corporate exposures • Used CL approach • No diversification benefit between rating categories; some benefit within categories • Key drivers: • Our expected PD and LGD assumptions • Correlation factors within rating categories • CL over one year horizon and remaining term

24. Early observations: • EC very sensitive to relatively small changes in CTE or CL chosen, over both one year horizon and remaining term • Overall level of EC vs. MCCSR will be very dependent on CTE or CL levels ultimately utilized • Diversification benefits between risks can have very material impact, so overall level of EC vs. MCCSR will be very dependent on degree of diversification credit taken

25. Early observations: • Credit • EC more skewed to lower rated instruments than reflected in MCCSR • EC varies significantly by term to maturity and this is not reflected in MCCSR • Equity • EC related to asset-based fees isn’t material • For guarantees and fees, CTE99 over one year with CTE60 after one year is close to CTE 95 over the lifetime of the contract