1. CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006  Les 29 et 30 juin 2006 Ottawa, Ontario INSURANCE PRICING HOT TOPICS

2. CIA Annual Meeting  Assemblée annuelle de l’ICA INSURANCE PRICING HOT TOPICS Session IND – 4 June 29 – 30, 2006 Don Fischer FCIA, FSA (1974)

3. CIA Annual Meeting  Assemblée annuelle de l’ICA Investment Pricing Issues –Historically low interest rates –Equities backing fixed liabilities –Pricing for the risk premium –Embedded investment options –Ultimate investment yields –Availability of investment product –Commitment pricing ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

4. CIA Annual Meeting  Assemblée annuelle de l’ICA Historically Low Interest Rates –Increase price –Reduce ROE –Increase risk –Increase equity mix –Invest short & Wait –Buy a competitor’s product ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

5. CIA Annual Meeting  Assemblée annuelle de l’ICA Equities Backing Fixed Liabilities –What types of liabilities? –What return should be expected? –9.86% –6.63% –Risk-free rate + 2.50% –Higher rate requires higher ROE ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

6. CIA Annual Meeting  Assemblée annuelle de l’ICA Risk Premium –Should pricing reflect a risk premium? –Financial Economics pricing –No credit spread pickup –No equity risk premium –Who should receive the risk premium? –Policyholder or shareholder –Varying required ROE with the risk –How much risk is appropriate for a 15% ROE –Scenario analysis examination ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

7. CIA Annual Meeting  Assemblée annuelle de l’ICA Embedded Investment Options –Floor rate guarantees –Out of / In the market –Pricing –Explicit –Implicit –Gratis ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

8. CIA Annual Meeting  Assemblée annuelle de l’ICA Embedded Investment Options (continued) –View of value –Investment market –Reserve –Policy holder –Insure or self-insure ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

9. CIA Annual Meeting  Assemblée annuelle de l’ICA Ultimate investment yields –Pricing / reserving –Is 5% a reasonable long-term rate ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

10. CIA Annual Meeting  Assemblée annuelle de l’ICA Availability of Investment Product –Investment Supermarket –50 year fixed income –Public bonds –Spread product –Leveraged product ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

11. CIA Annual Meeting  Assemblée annuelle de l’ICA Commitment Pricing –Explicit –Implicit ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

12. CIA Annual Meeting  Assemblée annuelle de l’ICA Matching Alternatives –Duration matching –Cashflow matching –No matching –Dynamic ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

13. CIA Annual Meeting  Assemblée annuelle de l’ICA Searching for the “Holy Grail” –Guaranteed 10 year on a 1 year investment –Guaranteed equity-type returns on a fixed income investment ALM and Investment Pricing Don Fischer FCIA, FSA (1974)

14. CIA Annual Meeting  Assemblée annuelle de l’ICA Concluding Remarks –Don’t have unreasonable expectations –Understand the risks –Define a risk level that is appropriate for your company –Limit costly options –Beware the 5% ultimate interest rate –There is no supermarket –Consult with ALM ALM and Investment Pricing Don Fischer FCIA, FSA (1974)