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

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

2. Agenda Insurance contracts measurement – IFRS Phase II update IAS 39 (Financial Instruments) revisions Other IFRS Phase 2 updates 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

3. Background Remaining candidates for measurement approach IAS 37 model Fulfilment value with composite margin Margins Discount rates Timetable 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009 Insurance ContractsIFRS Phase 2 Update

4. Insurance ContractsIFRS Phase 2 Update Background May 2007 “Preliminary Views” Exit value approach 160+ responses FASB joined project in October 2008 Related IFRS developments Revenue recognition Credit risk IAS37 (Provisions, Contingent Liabilities) 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

5. Insurance ContractsIFRS Phase 2 Update Remaining candidates for measurement approach IAS 37 model Fulfilment value with composite margin Neither is ‘fair value’ IASB staff favours IAS 37 model IASB meeting tomorrow to decide FASB has tentatively chosen fulfilment value with composite margin 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

6. Insurance ContractsIFRS Phase 2 Update IAS 37 model Price you would rationally pay to be relieved of the obligations Fulfilment value How much it would cost you to fulfil the obligations In the absence of evidence to the contrary (e.g., could transfer to a third party at a lower amount), IAS 37 model would default to fulfilment value 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

7. Insurance ContractsIFRS Phase 2 Update Approaches have the same building blocks Current estimate of expected present value of future cash flows Time value of money An explicit margin Both are from the perspective of the insurer, so both include entity-specific cash flows Both look like PPM 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

8. Insurance ContractsIFRS Phase 2 Update Current estimate of expected present value of future cash flows: Current estimates means use all information available and update for new information Use market information where relevant “Expected present value” means probability-weighted (vs. present value of the best estimate of cash flows) Changes in estimates flow through profit or loss 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

9. Insurance ContractsIFRS Phase 2 Update Future premiums – which can be included? IASB leaning towards including future renewal premiums as part of the current contract (vs. customer intangible asset) Renewal/cancellation is an option the insurer is providing to policyholders Renewal premiums would be included up to the point where entity has an unconditional right to re-underwrite or re-price or cancel the contract Similar to our ‘term of the liability’ concept Whether excess premiums (e..g, UL) could be included or not is still up in the air 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

10. Insurance ContractsIFRS Phase 2 Update No front-ending of profits will be allowed in any case Consistent with IASB’s position on revenue recognition (not until contract is delivered) Margin to be calibrated to initial premium 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

11. Insurance ContractsIFRS Phase 2 Update Will be strain at issue Acquisition expenses are expensed when incurred (i.e., no DAC asset) IASB has decided to allow recognition of revenue to offset direct incremental acquisition expenses FASB has decided to allow no recognition of revenue to offset acquisition expenses 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

12. Insurance ContractsIFRS Phase 2 Update Margins - separate or composite? IAS 37 model includes separate margins for risk, service (if any), and ‘residual’ for elimination of day one gains Runoff pattern of residual margin undecided Fulfilment value includes a composite margin only Runoff pattern of composite margin undecided 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

13. Insurance ContractsIFRS Phase 2 Update Risk margin in IAS 37 model Value to the entity of not having to bear the risk in the expected cash flows Remeasured at each reporting date Further guidance expected from IAA Cost of capital appears to be the favourite Quantile approaches Margins for adverse deviations on assumptions 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

14. Insurance ContractsIFRS Phase 2 Update Discount rate “Consistent with observable current market prices, capturing the characteristics of the liability” Not connected to supporting assets Whether or not to take account of credit risk is under discussion Separate IASB paper on reflecting credit risk in liability measurement Consistent with pension liabilities Arguably could be included in residual or composite margin To be discussed at tomorrow’s meeting 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

15. Insurance ContractsIFRS Phase 2 Update Timetable Decision on measurement approach must be made tomorrow Discount rates, margins also on agenda Participating, unit-linked, index-linked, UL etc. Oct-Nov 2009 Disclosures Oct-Nov 2009 Exposure draft due December 2009 Comments due May 2010 Final standard June 2011 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

16. Financial InstrumentsIAS 39 Revisions Objective is to simplify accounting and reporting of financial instruments Three main phases: Classification and measurement Exposure draft July 2009; comments Sept 14 Adoption before Jan 1, 2012 Impairment of financial assets Exposure draft Oct 2009 ‘expected loss model’ comments requested June 2009 Hedge accounting Exposure draft Dec 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

17. Financial InstrumentsIAS 39 Revisions Classification and measurement Amortized cost for contracts with basic loan features and managed on a contractual yield basis No “tainting” provisions Subject to impairment test No need to separately report embedded derivatives Otherwise at fair value through profit and loss Fair value option is available for amortized cost assets if it eliminates or significantly reduces mismatch Optional classification of some equities (not held for trading) as fair value but with changes through OCI Gains/losses/dividends would never hit earnings No impairment test Classification at initial recognition; no subsequent reclassifications permitted 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

18. Financial InstrumentsIAS 39 Revisions Transitional issues Adds a step to the IFRS conversion process Early adoption of IAS 39 changes in time for Phase 1 conversion is simply not feasible Would need to classify all assets by end Q1 2010 to meet requirements of conversion Would increase the number of changes to actuarial liabilities Unlikely OSFI would allow different companies to use a different basis 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

19. Financial InstrumentsIAS 39 Revisions Transitional issues Under current IAS 39 (CICA 3855), most assets supporting actuarial liabilities are held at fair value Avoids mismatch since income on available-for-sale assets goes through OCI Under new IAS 39, many of those assets would be amortized cost CALM liability would change in tandem Fair value option would not apply (no mismatch with CALM) Under Phase II insurance contracts, would expect those assets to be fair value To improve matching 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

20. Financial InstrumentsIAS 39 Revisions Other issues Volatility of surplus assets Increased flexibility to trade assets between liabilities and surplus Need to redesignate assets when Phase II insurance contracts is adopted IASB staff has indicated this is likely Tax implications? Capital implications? 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

21. Phase IINon-insurance changes Fair Value Measurement (ED Q209) Similar to FAS 157 Includes recognition of credit risk Leases (ED Q210) Single asset and liability approach Operating lease accounting eliminated Liabilities and Equity (ED Q409) Clarify ‘residual interest’ in an entity Expect fewer instruments will be classified as equity 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009

22. Phase IINon-insurance changes Revenue Recognition (ED Q209) When performance obligations satisfied Insurance contracts unlikely to be directly in scope Financial Statement Presentation (ED Q210) By major activity (operating, investing, financing) rather than asset, liability, equity Post Employment Benefits (ED Q309) Includes pensions All gains/losses recognized immediately, with different possible approaches to presentation 2009 Seminar for the Appointed Actuary Colloque pour l’actuairedésigné 2009