Segregated Fund Liability & Capital Methodologies Task Force Josephine Robinson

Background Task Force Members Mandate 2007 Educational Note & Update OSFI’s Concerns Segregated Fund Policyholder Behaviour – Research Objective – Current Status – Next Steps Agenda

OSFI and CIA meet bi-annually OSFI investigating segregated fund capital and the approach that should be used to assess the level of capital Indicated that they were reviewing methodology CIA established Task Force OSFI prepared to consider input Background

Alexis Gerbeau (chairperson) Christian-Marc Panneton Byron Corner Edwin Peh Lynn Guo Mike Schofield Ricardo Mitchell Allan Brender (observer) Qi Sun (minute taker) Task Force on Segregated Fund Liability and Capital Methodologies

To explore alternative methodologies for determining actuarial liabilities and capital considering the total balance sheet requirements To address the issue of the recognition of hedging in the determination of actuarial liabilities and regulatory capital for segregated fund guarantees To identify at a high level all material risks that should be considered in the determination of the liabilities and capital To identify areas where further guidance is required Mandate of Task Force

Intention is to prepare a well-articulated recommended methodology – If no consensus or no methodology is clearly superior then documentation of various methodologies with advantages and disadvantages would be prepared Mandate of Task Force

Intend to examine particular risks related to a hedging program such as basis risk, the uncertainty in future implied volatility and the liquidity risk in financial markets. – Currently insufficient guidance as to how to reflect this in the valuation Mandate of Task Force

Target date of final report is the end of December 2009 Areas that require additional review and quantification would be dealt with thereafter Time Frame

Issues addressed 1.Valuation Method – Bifurcated or Whole Contract Approach 2.Term of the Liability Hedging 3.Recoverability Testing for the Allowance for Acquisition Expenses Choice of CTE Level November 2007 Educational Note

Issues addressed (cont’d) Level of Aggregation Discounting and C3 PfAD Policyholder Related Assumptions Margins for Adverse Deviation Sampling/Number of Scenarios November 2007 Educational Note

2002 Segregated Fund paper only dealt with the downside movement – Draft by the 2007 Task Force on Segregated Funds in their unpublished paper was focused on expanding on this issue Update

Whether current approach captures all the risks and produces sufficient required capital Last year’s crisis highlights that there continues to be unresolved issues in establishing required capital OSFI’s Concerns

OSFI is concerned with the significant differences amongst companies; different models are used to model the same risk OSFI is investigating alternative methodologies OSFI will consider the work of the Task Force OSFI’s Concerns

The Member Services Council established a subcommittee to investigate what analysis should be conducted for segregated funds policyholder behaviour Subcommittee of the Research Committee Will start with an empirical analysis of policyholder lapsation Segregated Fund Policyholder Behaviour

Gather together data on lapses across relevant policyholder, distribution and product features characteristics – Will deliver a report and Excel tables for practitioners to perform additional analysis Research Objective

Currently working on the second iteration of the data request template Preparing a notice of intent to obtain data for a segregated fund lapse experience study (incl. data guidelines, instructions and confidentiality agreement) Current Status

Data processing, analysis of results and construction of lapse tables based on experience – Data collection targeted for 2010 – Report and distribution to members Next Steps