2006 General Meeting Assemblée générale 2006 Chicago, Illinois 2006 General Meeting Assemblée générale 2006 Chicago, Illinois Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2006 General Meeting Assemblée générale General Meeting Assemblée générale Bill C-57 and the Actuary Le Projet de Loi C-57 et L’Actuaire Nick Bauer Al Edwards PD-22TR-22

2006 General Meeting Assemblée générale General Meeting Assemblée générale Outline of Presentation Bill C-57 Requirements Status of Changes New OSFI Par Guidelines Potential Issues CIA Response Fairness? Discussion Conclusion

2006 General Meeting Assemblée générale General Meeting Assemblée générale Bill C-57 Overview Introduce several new governance requirements for companies and actuaries with respect to: –participating business –adjustable policies New actuarial opinions on fairness required (CIA guidance and/or standards will be needed) Emphasis on Disclosure to Policyholders Significant influence from recent UK developments Significant start-up work to develop policies and supporting processes

2006 General Meeting Assemblée générale General Meeting Assemblée générale Before C-57 – Canadian Companies Board Approves  Participating Policyholder Dividend Policy (165.2 (e))  Investment Income Allocation Method (457 (b))  Expense (including Tax) Allocation Method (458 (b))  Declaration of Policyholder Dividends (464 (l)) Actuary Opines  Allocation Methods Fair and Equitable (460)  461 Payment does not affect Dividend Policy Compliance/Maintenance (461 (c))  Policyholder Dividends comply with Dividend Policy (464.2) (all section references are to Insurance Companies Act of Canada)

2006 General Meeting Assemblée générale General Meeting Assemblée générale After C-57 – Canadian Companies Board Approves  Participating Policyholder Dividend Policy (165.2 (e))  Investment Income Allocation Method (457 (b))  Expense (including Tax) Allocation Method (458 (b))  Declaration of Policyholder Dividends (464 (l))  Policy for Management of Par Accounts (165.2 (e.1)) - new  Criteria for Changes to Adjustable Policies (165.2 (e.2)) - new (all section references are to Insurance Companies Act of Canada)

2006 General Meeting Assemblée générale General Meeting Assemblée générale After C-57 – Canadian Companies Actuary Opines  Allocation Methods Fair and Equitable (460)  461 Payment does not affect Dividend Policy Compliance/Maintenance (461 (c))  Policyholder Dividends comply with Dividend Policy (464.2)  Fairness of Dividend Policy ( ) - new  Fairness of Par Management Policy ( ) - new  Fairness of Adjustable Change Criteria ( ) - new  Fairness of Proposed Policyholder Dividends (464.2) - new  Fairness of Changes Made to Adjustable Policies and Compliance with Criteria (464.1 (l)) - new (all section references are to Insurance Companies Act of Canada)

2006 General Meeting Assemblée générale General Meeting Assemblée générale Participating Policyholders Board to establish a policy regarding the management of each par account Appointed actuary (AA) annual report to Board on (continuing) fairness to par policyholders of the dividend policy and the par account management policy AA report to Board on the fairness to par policyholders of a proposed dividend Board required to consider AA report before establish or amend either policy or declare dividend These AA reports to be prepared in accordance with generally accepted actuarial practice with changes or directions from OSFI Regulations for content of dividend policy, par account management policy, disclosure, etc.

2006 General Meeting Assemblée générale General Meeting Assemblée générale Adjustable Policyholders To be defined in the regulations; - expect will exclude Group, annuity, and participating policies Board to establish criteria for changing the premium or charge for insurance, amount of insurance or surrender value for adjustable policies AA annual report to Board on (continuing) fairness to adjustable policyholders of the criteria established Board required to consider AA report before establish or amend criteria AA annual report to Board on whether any changes made for adjustable policies during year comply with the criteria established and were fair to adjustable policyholders If changes made to adjustable policies or on renewal, must provide “prescribed info” to those adjustable policyholders

2006 General Meeting Assemblée générale General Meeting Assemblée générale Emphasis on Disclosure Dividend policy and par account policy available free to participating policyholder or shareholder Adjustable change criteria available free to adjustable policyholder All available to any other person for reasonable fee Company’s annual report to include summary of par policies and “prescribed info”  may include par sub account surplus and summary financial statements Regulations expected

2006 General Meeting Assemblée générale General Meeting Assemblée générale Bill C-57 Status Amended Federal Insurance Companies Act; received Royal Assent Nov 2005 Changes are not in effect until proclamation Regulations needed in order to implement Draft regulations from Finance for public exposure this fall C-57 also has several items re corporate governance matters Timing of implementation not yet clear New “Policy” items include period of six months to comply after proclamation

2006 General Meeting Assemblée générale General Meeting Assemblée générale New OSFI Par Guidelines OSFI has developed new Par Guidelines; expect drafts to be released with C-57 draft regulations Several items expected: –disclosure to policyowners of items not covered in Finance Regulations –more detail in allocation policies (investment income, expense, tax) –make ‘demutualization closed block” rules permanent –interpretations re Section 461 payments to shareholders

2006 General Meeting Assemblée générale General Meeting Assemblée générale Potential Issues - General What is “Fair” in context of “Fairness to Policyholders?” (Regulations and Guidelines will not define; challenge for CIA) Appointed Actuary has qualified privilege (370.1) but not protection from civil liability (370.2) for new fairness opinions Apply to  out-of-Canada business of Canadian companies?  fraternal benefit societies?  in-Canada business of foreign companies? Quebec – AMF may develop similar regime? Significant amount of work to implement – timing? Degree of precision or averaging? Will customers understand?

2006 General Meeting Assemblée générale General Meeting Assemblée générale Potential Issues - Par Fairness of par account management policy Variations in par surplus philosophy – e.g. use surplus ratios to manage par account vs. “contribution from current generation” to manage dividend scale? When charge extraordinary experience to surplus rather than affected policies? Transactions with third parties (reinsurers?) Transactions with shareholder or nonpar accounts? Par account or accounts? or sub accounts? Closed vs open blocks? Update and expansion of allocation policies Speculation on future reactions to future circumstances, e.g. windup

2006 General Meeting Assemblée générale General Meeting Assemblée générale Potential Issues - Adjustable Definition of adjustable policy is key −Act specifies subjects for criteria, but definition to be in regulations −Unilateral adjustment at company’s discretion? −Health products? Reinsurance? Fairness –If heavy death claims - fair to increase charges for those who didn’t die? To cover future claims? To recover past losses? I.e, Measure fairness by lifetime, current or expected experience?? –Opinion on profit targets? –How do you demonstrate or prove fairness of actions? –Materiality considerations for small inactive blocks? –Degree of precision/averaging (e.g., policy size? Issue year? Product? Distribution?) –If have increased reserves because of low lapse rates - is it fair to increase charges? Applies to in force adjustable policies as well as new sales

2006 General Meeting Assemblée générale General Meeting Assemblée générale CIA Response CIA task force reporting to AA Committee –to develop guidance for AA on report preparation including “generally accepted actuarial practice” –likely in form of Standards of Practice and educational notes –to comment on draft regulations and OSFI guidelines –to communicate to members Working group structure  Adjustable Policies – Nick Bauer  Dividend Policies – Al Edwards  Par Account Management – Simon Curtis May need to develop “actuarial” definitions for terms used in regulations Need input on issues, practical problems, unidentified issues Some issues mix actuarial and legal considerations

2006 General Meeting Assemblée générale General Meeting Assemblée générale What Does “Fair” Mean? Webster’s −marked by impartiality and honesty; free from self-interest, prejudice or favouritism −fair implies an elimination of one’s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests Black’s Legal Dictionary −just; equitable; even-handed −equal, as between conflicting interests “Fair to policyholders” may mean - “it appropriately balances the interests of these policyholders and other stakeholders”.

2006 General Meeting Assemblée générale General Meeting Assemblée générale To Assess “Fairness” – Objective Considerations Agreement between parties? “Rules” set out in advance? Consistency over time? Decisions based on objective information? Are differences material? Are there overriding constraints (e.g. laws, company solvency?)

2006 General Meeting Assemblée générale General Meeting Assemblée générale To Assess “Fairness” – Subjective Considerations Is the result reasonable? Was discretion or judgment exercised reasonably? Are individuals in same/different circumstances treated same/differently? Are the decisions or actions arbitrary? Are there circumstances that limit the ability to reflect differences?

2006 General Meeting Assemblée générale General Meeting Assemblée générale Discussion Questions ?? Comments

2006 General Meeting Assemblée générale General Meeting Assemblée générale Summary C-57 “actuarial” requirements emphasize policyowner interests Appointed Actuary fairness opinions required Significant Start-up Work CIA responding and preparing guidance Coming Soon !