2008 Annual Meeting ● Assemblée annuelle 2008 Québec 2008 Annual Meeting ● Assemblée annuelle 2008 Québec Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

Does IASB matter for Group Insurance? Annual General Meeting IP 36 June 19, 2008 David Congram

IFRS – Moving Towards a Global Standard Fixed deadlines for IFRS implementation Convergence plans US-GAAP - Convergence intended No intent to converge with IFRS

Primary attributes of IFRS Timetables Phase I Phase II Implications Meeting the deadline Agenda

Primary Attributes of IFRS Insurance to be subject to the same general principles as other financial services firms Principles-based approach with additional guidance Consistency of treatment between insurance, investment management and banking products Proposal outlined in Phase II –Single measurement model for Life and non-life –Prospective valuation – Present Value of all future cash flows –Paradigm of Current exit value - transfer value

Publicly Accountable Enterprises Life P&C Reinsurers Credit Union/Cooper atives Non Profit Member owned Government Owned Insurers Canadian Owned Foreign Owned IFRS - AcSB IFRS – IASB IFRS – EU US – GAAP IFRS - AUST PSAB - GAAP IFRS – AcSB IFRS – SME DRAC OSFI has designated that Federally Regulated Financial Institutions as PAE’s

AcSB’s, CSA and OSFI External Requirements AcSB’s progress review Qualitative disclosures of differences (‘08 annual report) Quantify effects of changeover to IFRS (‘09 annual report) Prepare comparative figures under IFRS March 2011 first interim reporting quarter end with disclosures Data capture for Comparatives in 2011 OSFI progress report OSFI progress report OSFI progress report OSFI progress report OSFI progress report

International Insurance Project Time table IASC Issues Paper DSOPED 5 IFRS 4 Discussion Paper ED X Start Insurance Project Steering Committee Phase I Split of Project IASB Advisory Committee Phase II Insurance Working Group Discussion With FASB 2013 Phase II Application

Understanding IFRS 1 Mandatory guidance for first time preparers First financial statement of unreserved compliance with IFRS Apply IFRS at the reporting date retrospectively Date of transition is first balance sheet Recognize and de-recognize Mandatory and optional exceptions from retrospective application.

IFRS Phase I --> Phase II AssetsLiabilities IAS 39 for Invested Assets IFRS 4 IAS 39 and some aspects in IAS 32 and IAS 18 Phase II 2013? All Insurance Contracts and Investment Contracts with Discretionary Participation Features Other Investment Contracts and All Service Contracts

Where does Group Insurance Fit? Insured Business Pooling ASO

Review IAA Classification Paper - Highlights Significant insurance risk Insurance Contains service elements? Contains Discretionary Participation Feature? IAS 18 Service Contract Measurement Create financial assets or liabilities? Split Embedded Derivative No Yes Separate Deposit Component Yes No Service Element Financial Instrument IAS 39 Financial Instrument Measurement Yes No IFRS 4 Measurement Split Host from Embedded Derivative and Deposit Host

PRIMARY PROVISIONS OF IFRS 4 Applies to Insurance Contracts—must have “significant insurance risk” Insurance contracts accounted under local GAAP, with certain restrictions (generally deferral and matching) Embedded derivatives at fair value (similar to FAS 133 treatment) Liability adequacy test Insurance contract liabilities may be adjusted for changes in interest rates

IAS 32 & 39 APPLY TO MOST ASSETS AND INVESTMENT CONTRACTS Most other contracts held by insurance companies are investment contracts (do not meet definition of insurance) Held as amortized cost if considered “held to maturity” otherwise at fair value (with demand deposit floor)

SERVICE CONTRACTS Generally, contracts that are neither insurance contracts or investment contracts are service contracts –Claim service contracts (ASOs) –Self insurance of first layer of group coverage Service component of an investment contract is to be separated Covered by IAS 18

In Phase 1 ASO will likely be measured under Service Contracts Insurance Contract measurement through IFRS 4 will remain on the existing accounting model

IAA Insurance Actuarial Practice Guidelines Introduced July 25, 2005 IASP 9 Accounting for Reinsurance Contracts IASP 10 Embedded Derivatives and Derivatives Introduced June 11, 2007 IASP 2 Actuarial Practice IASP 3 Classification of Contracts IASP 4 Measurement IASP 5 Current Estimates IASP 6 Liability Adequacy Testing IASP 7 Discretionary Participation Features IASP 8 Changes in Accounting Policies

IFRS – Implementation 2010/11 Assets –S 3855 re – designation allowed under IFRS 1 Investment Contracts –Amortized Cost –Fair Value Service Contracts –Percentage of completion Insurance Contracts –Adjusted segments for CALM Tax implications Conclusion Impact will depend on company’s position and mix of business

Earnings Phase II The “3 building blocks” 1. Current unbiased probability-weighted estimates of future cash flows (ie an expected value approach) 2. Current market discount rates that adjust the estimated future cash flows for the time value of money 3. An explicit unbiased estimate of the margin that market participants require for Bearing risk (a risk margin); and Providing other services (a service margin)

Unearned premiums Instead of recognizing premiums over the term of the policy: –All premiums and acquisition costs recognized immediately - no unearned premium liability –Actuarial liabilities will include estimated future claims and other cash flows for the remaining policy period As most policies operate on a 30 day billing period limited implications

Future premiums Cash flows used in measuring insurance liabilities should include future premiums subject to one of the following conditions being met 1.The policyholder must pay the premiums to retain a right to guaranteed insurability 2.The insurer can compel the policyholder to pay the premiums 3.Including the premiums and the resulting policyholder benefits will increase the measurement of the liability Group contracts typically based on one year renewable terms With competitive rates initial deficits and acquisition costs will not be recoverable from future premiums in the accounting model

Impact on Capital? Mismatch risk Use of risk free interest rate Credit risk Total Balance Sheet

Impact on Products Product Classification Closer focus on options Embedded derivatives Deposit Components Longer for profits to be recognized Market indicators Lack of deep and liquid market

Meeting the Deadline Planning phase Implementation phase Pilot phase Management Reporting Classification Accounting policy development Programming and Testing Chart of Account changes Disclosure design Assumption Development Recognition Education Controls Exceptions Exemptions Parallel Runs User Education

Thank you