LIFE INSURANCE CAPITAL Market and Credit Risk QIS Sylvain St-Georges, FSA, FCIA November 19, 2009

2 QIS – MARKET AND CREDIT  Introduction  Market Risk  Credit Risk  Participating Products  Closing Comments

3INTRODUCTION  Main purpose:  Test the practicality of the methods  Estimate the potential impact  Approach based on shocks  Actual requirements will require calibration

4 MARKET RISK  Interest Rate Risk  Equity Risk  Real Estate Risk  Pass Through Products Risk  Currency Risk  Liability Market Options Risk  Asset Market Options Risk

5 Interest Rate Risk  Cash Flows  Risk Free Interest Rates  Interest Rate Shock Method  Additional Scenarios

6 Cash Flows  CALM cash flows  No reinvestment  Asset – fixed cash flows  Asset – non-fixed cash flows  Off-CALM assets and liabilities

7 Risk Free Interest Rates  Spot rates for Government of Canada Bonds  Provided rates for Canada and U.S.A.  Rates for the first 30 years

8 Interest Rate Shock Method  Economic impact of a sudden change in interest rates at time zero  Discount cash flows after 30 years to the year 30 using a flat 6% rate  Discount cash flows from years 0 to 30 to the year 0 using the prescribed interest rates  Net PV = Asset PV – Liability PV  Buffer = Net PV of the base scenario - min(Net PV of the test scenarios)

9 Interest Rate Shock Method  Tests (estimated 99.5% percentile)  Potential upward or downward change in 30 day T-bill rate over one year  Potential upward or downward change in 30 year spot rate over one year  Linear interpolation of shocks between these two rates  Shocks based on a simplified Cox- Ingersoll-Ross model fitted to historical data

10 Interest Rate Shock Method  Universal Life Products  Guaranteed credited rates considered  CFs consistent with the scenario interest rates, for example, account values  No adjustments due to anticipated changes in lapse rates and expense charges (considered in insurance risk)

11 Additional Scenarios  Additional information to assist in calibrating the metrics  Shocks based on a 95% confidence level

12 Equity Risk  Common shares (preferred shares included in the credit risk component)  Immediate shock (at time 0)  Equity index stocks – 20% decline  Managed equity portfolio – 30% decline

13 Real Estate Risk  Immediate shock (at time 0)  20% decline

14 Pass Through Products Risk  Existing capital requirements  New threshold of CF<70%  Use of the CF based requirement is optional

15 Currency Risk  Immediate shock (at time 0)  Shock applied to the net mismatch of CFs in each currency  20% rise or decline in currency’s value against the Canadian dollar

16 Liability Market Options Risk  Risk related to minimum interest rate guarantees reflected in the interest rate risk solvency buffer  Risk related to segregated fund guarantees is based on deterministic shocks  Additional segregated fund scenario requested for supplementary information

17 Liability Market Options Risk  Risk related to segregated fund guarantees – maximum of these two scenarios:  Equity market falls 30% and bond market falls 20% (no recovery)  Equity index is assumed to increase 100% over 44 months, then drop to 75% of its starting value and fixed income market drops 20% in the 45th month (no recovery)

18 Asset Market Options Risk  Products described in section 3.7 (Assets replicated synthetically and derivatives transactions) of MCCSR guideline  Current requirements

19 CREDIT RISK  Short Term Investments  Public Bonds  Private Bonds  Asset Backed Securities  Mortgages  Preferred Shares  Other Items

20 Short Term Investments  Current requirements  Current factors consistent with factors established for public bonds

21 Public Bonds  Factors set up by rating and remaining term to maturity  Factors established using the Basel Foundation IRB approach, except  99.5% confidence level (instead of 99.9%)  A modified maturity adjustment appropriate for longer duration of bonds held by Canadian life companies

22 Public Bonds Standard Basel Current AAA0.25% 0.50% 1.00%1.05%1.18%1.25%1.60%0.25% AA0.25%0.50%0.75%1.00%1.25%1.35%1.60%1.75%1.60%0.50% A0.75%1.00%1.50%1.75%2.00%2.20%2.70%3.00%4.00%1.00% BBB1.50%2.75%3.25%3.75%4.00%4.15%4.53%4.75%8.00%2.00% BB3.75%6.00%7.25%7.75%8.00% 4.00% B7.50%10.00%10.50% 12.00%8.00% Other15.50%18.00% 12.00%16.00%

23 Private Bonds  This category also includes leases and other loans  Factors based on the inferred rating from other issues by the same issuer  If it is not possible: factors are an average of the Public Bond BBB and BB factors for the equivalent term to maturity

24 Asset Backed Securities  Calculated as a separate category of assets  To be grouped according to maturity and rating of the issue, on a similar basis as set out for Public and Private Bonds

25Mortgages  Commercial Mortgages  Factor: 6% (current: 4%, Basel: 8%)  Based on evidence from the 1990 real estate downturn  Single Family Residential Mortgages  Current factor  Some data from the industry seems to show numbers in line with the current factors

26 Preferred Shares  Current categorization  Factors consistent with Public Bonds factors QISCurrent PFD-13.00%1.00% PFD-25.00%2.00% PFD %4.00% PFD %6.00% Other30.00%15.00%

27 Other Items  Other items are:  Miscellaneous Items  Off-Balance Sheet Exposures  Securities Lent  Current requirements

28 PARTICIPATING PRODUCTS  The “gross” reduction is based on the maximum reduction in present value of future dividends  The reduction included in the other components is subtracted from the “gross” reduction  The “net” reduction is applied to the market and credit risk components

29 CLOSING COMMENTS  Worksheets should be completed and returned by December 11, 2009  Submissions will be shared with Assuris and OSFI/AMF on a confidential basis  Interrogatories and Preparer Comments  Responses to questions required  Additional comments encouraged