CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006  Les 29 et 30 juin 2006 Ottawa, Ontario Session IND-4: Insurance Pricing Hot Topics

Agenda Update on Task Force on Costing of Life and Health Insurance Costing and Risk Management Stochastic Modeling Fundamentals ALM for Pricing Actuaries Session IND-4: Insurance Pricing Hot Topics

Update on Task Force on Life and Health Insurance Costing

Update on Task Force on Costing of Life and Health Insurance Mandate: Develop a research paper that will describe accepted actuarial costing techniques for life insurance, health insurance and annuity products. The primary focus of the work should be on products with longer-term guarantees. The research paper would also cover considerations in establishing assumptions and provide illustrative examples of how to approach assumption setting when experience is not directly available. Session IND-4: Insurance Pricing Hot Topics

Costing and Risk Management

The work of science is to substitute facts for appearances and demonstrations for impressions John Ruskin Session IND-4: Insurance Pricing Hot Topics

Costing and Risk Management There are three kinds of lies: Lies, Damn Lies and Statistics Benjamin Disraeli Session IND-4: Insurance Pricing Hot Topics

Costing vs. DCAT Session IND-4: Insurance Pricing Hot Topics CostingDCAT Similarities Risk Based Analysis Yes Projects Future Results Yes Differences ScopeSingle ProductWhole Company Projection Period Policyholder Lifetime 5 Years FocusProduct Profitability Company Solvency

Risk Categories Session IND-4: Insurance Pricing Hot Topics Risk CategoryCosting SensitivityDCAT Category Policyholder ActionsMortality Morbidity Lapse UL Premium Patterns Mortality Morbidity Persistency Investment ReturnsInterest RateCash Flow Mismatch (C-3) Deterioriation of Asset Value (C- 1) Mix of BusinessDemographicsNew Business Cost of Doing BusinessExpenses

Other DCAT Risk Categories Reinsurance Risk Turns Policyholder Action Risk into credit risk Multiple reinsurers may introduce uncertainty to costs Government and Political Risk Are you testing impact of plausible future government actions? Off Balance Sheet Risk Price volatility for derivatives Ability to perfectly match hedges Session IND-4: Insurance Pricing Hot Topics

Other Risk Categories Reputation Risk Adjustability Operational Risk Product complexity Ability to adequately model for costing Ability to administer Consumer Understanding Special Quotes/Business Concessions Session IND-4: Insurance Pricing Hot Topics

Costing Risk Analysis Best Practices Identification of risks in a product Analysis of potential range of results for an assumption Explicit modeling of risk profile where appropriate Communication of results of analysis and disclosure of exposures to key decision makers Session IND-4: Insurance Pricing Hot Topics

Closing Thoughts Profit results should be expressed as ranges as opposed to discrete numbers Every policyholder option impacts profitability and the risk profile of the product Sensitivity analysis must be based on expected range of results Periodic income volatility become more of a concern for publicly traded companies Analysis of the tails is as important as the expected results Session IND-4: Insurance Pricing Hot Topics

Closing Thoughts (continued) Communication of results in real life terms is powerful For many products, explicit modeling of assets and liability cash flows is a must Understanding of the risk may require stochastic modeling Don’t follow history blindly Session IND-4: Insurance Pricing Hot Topics

Final Thought As a general rule the most successful man in life is the man who has the best information. Benjamin Disraeli Session IND-4: Insurance Pricing Hot Topics