Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006

PD 6 CLIFR Topics I September 21, 2006

General Update Update on CLIFR priorities Update on Interest Rate Calibration

CLIFR Priorities Fall 2006 Fall letter Educational notes / research papers Universal Life Use of Actuarial Judgment Margins for Adverse Deviations Guidance on valuation issues with CICA 3855 3855-related updates to other Ed. Notes (Expenses, Use of Approximations) GIFT Annuities (Research paper) Revisions to SOP 2320 and 2330

CLIFR Priorities 2007 / future Interest Rate Calibration Currency risks Guidance on Best Estimate and margins Revisions to SOP 2340 Mortality Improvement Reviewing best estimate and margins for mortality improvement, for both insurance and annuities Potential changes to SOP 2350

CLIFR Priorities 2007 / future Segregated Fund Valuation topics Equity returns Education Note Guidance on selection of proper historic period to establish best estimate Changes to standards arising from UL Ed Note Group Life and Health Education Note

Update on Interest Rate Calibration Composition of the Working Group Objective & Mandate Scope Timeline Overview of Calibration Framework

Composition of Working Group Ed Astrachan Michael Bean David Campbell CHAIR - TBD Arshil Jamal Christian-Marc Panneton Jason Wiebe

Objective It is desirable to have a set of calibration standards that can be applied consistently to as wide a range of interest-sensitive insurance and investment products as possible, including both long and short term products.  Mandate The working group has been formed to investigate and develop methodologies and standards for the calibration of interest rate models for determining reserves to be held by life insurance companies.

Scope Initially: potentially limited to a few specific products for which complete calibration criteria can be more readily determined Longer term: specification of calibration criteria for other interest-sensitive products as a future project, possibly for another working group. 

Timeline General Principles Outline of Framework 2006 Framework & Preliminary Calibration Criteria 2007 Additional Refinements

Calibration Framework: General Principles Calibration criteria should: Be sufficiently robust to narrow the range of practice, but allow the actuary to apply reasonable judgement to specific circumstances; Be applied to the set of scenarios produced, not to the model parameters or inputs; Be applied to not only the near term, but also the steady state portions of the scenarios produced;

General Principles (cont’d) Be applied to more than one point on the yield curve including a mix of short, medium, and long-term points; Promote the development of scenario sets that measure exposure to yield curve shocks as well as long-term paths of declining as well as rising interest rates, consistent with history; Look at average rate distributions corresponding to extended periods of time, as well as rate distributions at selected points in time.

Potential Quantitative Criteria Initial State & Steady State Yield Distributions Left & Right Tail Thickness Shape Distribution & Inversion Frequency Yield Curve Change Characteristics Average Yield Distribution Characteristics Correlation Characteristics Sampling Error Tolerance Other?