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

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 PD 6 CLIFR Topics I (Life) August Chow Actuarial Division, OSFI September 21, 2006

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Agenda (OSFI Perspective) Role of CIA and OSFI Valuation Interest Rates CTE Level on Segregated Funds Timing of Basis Changes External Reviews (E-15) Others

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Role of CIA and OSFI OSFI relies on CIA for professional standards and education Process has worked well for many years Periodic formal and informal meetings between OSFI and CIA Concerns are communicated to CIA for its considerations in standards and education

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Valuation Interest Rates Increase debate in recent times with respect to valuation interest rates and standards –CLIFR updating standards (SoP 2330) –February 2006 Bulletin article –Letter from the Appointed Actuary’s of the larger insurers

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Valuation Interest Rates OSFI concerns –Prescribed interest rates within standards were fixed and set more than a decade ago –Recent low interest rate and market reality reveal little or no conservatism in valuations that assume 5% ultimate reinvestment rates –Volatility tends to be more prominent in today’s lower interest rate environments

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Valuation Interest Rates OSFI concerns (cont’d) –Interest rates should be appropriate to the economic environment and not be picked to reduce volatility –Avoiding volatility should not be a guiding principle in revising CIA Standards –Stochastic models should not be biased to the goal of reducing volatility at the cost of inappropriate liabilities

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Valuation Interest Rates OSFI concerns (cont’d) –International Financial Reporting Standards (IFRS) are moving towards an approach which appears to be more conservative than CIA Standards –Public perceptions can result in credibility issues for CIA (valuation interest rate above current market levels)

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Valuation Interest Rates OSFI letter to CIA (March 24, 2006) –Economic reality should be of fundamental concern –Standards should maintain an appropriate degree of conservatism –Stochastic models are expected to be justified based upon their merits –Reduction of volatility should not be the driving rationale for changing standards –Public perceptions should be kept in mind

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Valuation Interest Rates Received response from CIA (May 17, 2006) –Revision of Standards –Emphasized ongoing work on stochastic modelling and calibration of interest rates OSFI is supportive of the work of CIA

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 CTE Levels on Segregated Funds OSFI concerns –Should CTE levels vary? –If yes, is there a sound objective or theoretical basis to support changes in CTE levels? –Does CIA have sufficient guidance with respect to changes in CTE levels?

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 CTE Levels on Segregated Funds OSFI engaged the services of a well known academic to review the issue on varying CTE levels A letter and a copy of the professor’s work was provided to CLIFR (May 2, 2006) Letter indicated that there is merit in moving the CTE level as the option moves in and out of the money

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 CTE Levels on Segregated Funds While there is merit in moving the CTE with the moneyness of the option, the dollar amounts should not decrease as the option moves into the money and vice versa CLIFR reviewed this issue in the educational note on Actuarial Judgement We are pleased to see wording in the educational note that reflects the comments above

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Timing of Basis Changes When should basis changes occur? –When a trend occurs? –When a study is completed? –When there are a number of changes that need to be reflected? OSFI concern –The Appointed Actuary makes many basis changes in a calendar year, but often the net amount of change in actuarial liabilities is close to zero

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Timing of Basis Changes OSFI to Chair of CLIFR (August 2, 2006) The issue is being addressed in the Fall 2006 CLIFR letter to the Appointed Actuary

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 External Reviews (E-15) Introduced by OSFI in 2003 Enhance the reliance process Provide an independent check of the work of the Appointed Actuary Narrow the range of results Education for the Appointed Actuaries

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 External Reviews (E-15) OSFI conducted a review of the reports received OSFI found the process effective Robust nature of review process –Subject to review at least tri-annually –Cultural change - treating actuarial liabilities as the “black box” is no longer acceptable

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 External Reviews (E-15) Findings generally fall into the following categories –AAR compliance –Methodology –Experience studies –Justification of margins –Documentation –Controls –DCAT

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 External Reviews (E-15) Some material issues raised by the external reviewer –Incorrect interpretation of MCCSR which resulted in under-reporting of capital –Adherence to professional standards (validation of CALM)

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 External Reviews (E-15) Strengthens and validates our reliance process Revised E-15 OSFI will revisit its E-15 requirements in the next couple of years to eliminate any areas of duplication with AuG-43

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Others Issues in the stochastic modelling of segregated funds –OSFI letter to the Chair of Actuarial Standard Board dated on August 8, 2006 Practice Certificate –2006 year-end Memorandum to the Appointed Actuaries