CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006  Les 29 et 30 juin 2006 Ottawa, Ontario CLIFR Calibration of Interest Rate Models Working Group

CIA Annual Meeting  Assemblée annuelle de l’ICA Calibration of Interest Rate Models Working Group VAL-2: CLIFR Part I - PD June 29 – 30, 2006 CLIFR Calibration of Interest Rate Models Working Group

Agenda  Composition of the Working Group  Objective & Mandate  Scope  Timeline  Overview of Calibration Framework  Questions CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

Composition of the Working Group  Ed Astrachan  Michael Bean  David Campbell  Ron Harasym  Arshil Jamal  Christian-Marc Panneton  Jason Wiebe CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

Objective It is desirable to have a set of calibration standards that can be applied consistently to as wide a range of interest-sensitive insurance and investment products as possible, including both long and short term products. Mandate The working group has been formed to investigate and develop methodologies and standards for the calibration of interest rate models for determining reserves to be held by life insurance companies. CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

Scope In order to arrive at a set of standards that can be applied to at least some products within a reasonable timeframe, it may be necessary for the working group to limit the scope of its work to a few specific products for which complete calibration criteria can be more readily determined and leave the specification of calibration criteria for other interest- sensitive products as a future project, possibly for another working group. CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

Current Timeline CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA General Principles Outline of Framework CIA Annual Meeting June 29/ , Ottawa Framework & Preliminary Calibration Criteria Seminar for the Appointed Actuary September 21/ , Toronto Additional RefinementsOctober/November 2006

Overview of the Calibration Framework  General Principles  Qualitative Criteria  Quantitative Criteria CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

General Principles Calibration criteria should: 1.Be sufficiently robust to narrow the range of practice, but allow the actuary to apply reasonable judgement to specific circumstances; 2.Be applied to the set of scenarios produced, not to the model parameters or inputs; 3.Be applied to not only the near term, but also the steady state portions of the scenarios produced; CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

General Principles (continued) 4.Be applied to more than one point on the yield curve including a mix of short, medium, and long-term points; 5.Promote the development of scenario sets that measure exposure to yield curve shocks as well as long-term paths of declining as well as rising interest rates, consistent with history; 6.Look at average rate distributions corresponding to extended periods of time as well as rate distributions at selected points in time. CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

Qualitative Criteria  Robustness of the Scenario Generator  Use of multiple interest rate models  Integration with Equity Market Risk  Characteristics not specifically mentioned CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

Quantitative Criteria  Initial State & Steady State Yield Distributions  Left & Right Tail Thickness  Shape Distribution & Inversion Frequency  Yield Curve Change Characteristics  Average Yield Distribution Characteristics  Correlation Characteristics  Sampling Error Tolerance  Characteristics not specifically mentioned CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA

Questions? CLIFR Calibration of Interest Rate Models Working Group CIA Annual Meeting  Assemblée annuelle de l’ICA