1. Canadian Institute of Actuaries L’Institut canadien des actuaires
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009 1

2. PD-11 (Life)
CLIFR Update
Dale Mathews
Rebecca Rycroft

3. Agenda Mortality Improvement Currency (Foreign Exchange) Risks
Long – Term Equity Returns
Term of the Liability/Segregated Funds
Group Life and Health
Calibration of Interest Rate Models
Universal Life
Income Taxes
2009 Fall Letter

4. Mortality Improvement
Status
Changes to Standards of Practice
Notice of Intent published June 2008
Exposure Draft
Hope to have approved at October ASB meeting
Promulgation of Improvement Rates
Promulgation of rates will be done by ASB
Will have the force of Standards
Research Paper/Educational Note
Will support promulgated rates and levels of margins

5. Mortality Improvement
Changes to Standards of Practice – current CLIFR Draft
Insurance Mortality ( and )
Maximum reduction based on promulgated rates where improvement reduces liabilities
Minimum increase based on promulgated rates where improvement increases liabilities (at appropriate level of aggregation)
Low and high margins per 1000 for adverse deviation remain at 3.75/ex and 15/ex

6. Mortality Improvement
Changes to Standards of Practice – current CLIFR Draft
Annuity Mortality ( and )
Minimum increase in liabilities based on promulgated rates where improvement increases liabilities
Low and high margins per 1000 for adverse deviation changed to 2% and 8% respectively applied to best estimate

7. Mortality Improvement
Proposed Base Rates
Improvement rates will be the same for males and females
Products where improvement decreases liabilities
Maximum improvement rates are equal to 50% of “base” rates
Maximum duration of improvements is 25 years
Products where improvement increases liabilities
Minimum improvement rates are 150% of “base” rates
Minimum duration of improvements is 25 years

8. Mortality Improvement
Proposed Annuity Valuation Rates

9. Mortality Improvement Rates
Hardy Study versus Proposed Base

10. Mortality Improvement: Life Expectancies
Issue Age* 40 50 60
80% of CIA Table
81.6
82.4
83.8
50% of Scale
82.7
83.3
84.5
100% of Scale
83.7
84.2
85.2
150% of Scale
84.8
85.1
85.9
Mod AA Scale
84.4
85.0
* For a Male Non-Smoker

11. Mortality Improvement: Life Expectancies*
* For a Male Non-Smoker at 3 Issue Ages

12. Mortality Improvement
Proposed Annuity Margins
Proposed Range is 2% to 8%
Life Insurance MfADs produce lower PfADs
Mortality improvement previously not permitted for insurance
MfAD needed only for missestimation of mean
MfAD for deterioration now included with mortality improvement
Proposed range approximates life margin at age 60

13. Mortality Improvement
Effective Date
Expected to be Oct. 2010
Possible additional capital requirements from OSFI

14. Currency (Foreign Exchange) Risk
Status
Notice of Intent to Revise Standards published November 15, 2007
Exposure Draft for Revised Standards published May 22, 2009
Comment Period to June 30th, 2009
Final Standard approved at August ASB meeting – effective Oct. 15, 2009
Educational Note being finalized consistent with proposed changes to Standards

15. Currency (Foreign Exchange) Risk
Proposed Changes to Standards of Practice ( )
Base scenario assumption developed from currency forward rates or risk-free interest rate differentials
Consistent with previous fall letter guidance and earlier CLIFR proposal
PfAD developed from adverse scenario reflecting historical volatility
Earlier proposal was 5%-50% MfAD reflecting how well economies were integrated
Minimum MfAD of 5%

16. Currency (Foreign Exchange) Risk
Proposed Changes to Standards of Practice ( )
Changes to approach for MfAD reflect feedback received
Combination of forward rates for base scenario plus high end margin could be unduly conservative
Base scenario is more of a “risk neutral” approach
Being combined with “real world” type margin

17. Currency (Foreign Exchange) Risk
Proposed Changes to Standards of Practice ( )
Proposed approach parallels that for interest rates
Base scenario using forward rates
Additional scenario to develop PfAD
Minimum PfAD of 5% parallels +/- 10% interest rate scenarios

18. Currency (Foreign Exchange) Risk
Educational Note – Additional Guidance
Guidance applies to unhedged currency risk in valuation
Actuary must look at underlying cash flows to assess whether or not currency risk exists
E.g. common equity of companies that transact business in several currencies
Practical application in CALM

19. Currency (Foreign Exchange) Risk
Educational Note – Additional Guidance
Construction of Adverse Scenario
Examine volatility over periods consistent with expected time over which mismatch expected to last
Suggest use of one standard deviation of change in exchange rate for unbiased measure
If strong economic evidence that exchange rates will move, use mean plus one standard deviation if directionally consistent

20. Currency (Foreign Exchange) Risk
Educational Note Example 1 US/Canada

21. Currency (Foreign Exchange) Risk
Liability Example (at Sept. 30, 2008)
Liability of $1000 Canadian payable at the end of 10 years
Assets backing liability are $U.S.
10 year risk free rates at valuation date
US: 3.83%
Canada: 3.72%
Exchange rate at valuation date
1 USD buys CAD
Assume underlying USD asset earns risk free rate at valuation date

22. Currency (Foreign Exchange) Risk
Implied movement in exchange rates over 10 years
From risk free rates (Base Scenario):  1.048
From one Standard Deviation of .17 over 10 year periods (Adverse Scenario):
1.059  .877

23. Currency (Foreign Exchange) Risk
Results: Liability in CAD
Continuation of current exchange rate
$686.71
Base currency scenario
$694.02
Adverse scenario
$829.36
5% minimum margin
$730.48
Liability booked
PfAD
$135.34
PfAD as % of base scenario liability: 19.5%

24. Currency (Foreign Exchange) Risk
Educational Note Example 2 Canada/Jamaica

25. Currency (Foreign Exchange) Risk
Liability Example (at Sept. 30, 2008)
Liability of 1000 JAD payable at the end of 10 years
Assets backing liability are CAD
10 year risk free rates at valuation date
Jamaica: 13.0% (assumed)
Canada: 3.72%
Exchange rate at valuation date
1 CAD buys JAD
Assume underlying CAD asset earns risk free rate at valuation date

26. Currency (Foreign Exchange) Risk
Implied movement in exchange rates over 10 years
From risk free rates (Base Scenario):  170.6
From mean of 1.22 minus one Standard Deviation of .587 over 10 year periods (Adverse Scenario)
72.40  118.4

27. Currency (Foreign Exchange) Risk
Results: Liability in JAD
Continuation of current exchange rate
$694.02
Base currency scenario
$294.59
Adverse scenario
$424.20
5% minimum margin
$310.09
Liability booked
PfAD
$129.61
PfAD as % of base scenario liability: 44.0%

28. Long-Term Equity Returns
Development of an Educational Note for establishing investment return assumptions for non-fixed income assets
Expect to publish Educational Note in early 2010
Expansion of guidance in previous Fall Letters

29. General Update Segregated Funds
Exposure Draft Practice-Specific Standards for Insurers, Subsection 2320 – Term of the Liability
Approved by ASB and published in February 2009
Comment period ended March
No comments received
Final Standard approved July 15 with an effective date of October 15, 2009

30. General Update Segregated Funds
CLIFR’s view is that the current Standards of Practice imply a different determination of the term of the liability for fully guaranteed contracts compared to those with no material guarantees
The change clarifies that
The term of the liability for both types of contracts would end at the balance sheet date if the liability would otherwise be negative
Extension to recover DAC
The term of the liability would be extended beyond that date to the date that maximizes the liability, at an appropriate level of aggregation

31. General Update Segregated Funds
CLIFR’s view is that the current Standards of Practice guidance on term of the liability needed to be adjusted to recognize the impact of hedging
The change allows both the value of the liability and the value of its associated hedge to be considered when applying the term of the liability constraints.

32. General Update Segregated Funds
CLIFR is participating in new ASB “designated group” to potentially move some of the educational material in the Educational notes and other guidance into the SOP
Key areas
Stochastic modeling principles
Addition of “Whole Contract” and “Bifurcated Method”
Stochastic model calibration criteria
Assumptions for additional policyholder options

33. Group Life and Health
Valuation of Group Life and Health Policy Liabilities
Revising May 2000 Research Paper On Group Life and Health valuation considerations
Currently in translation and expected to be published in the next couple of months

34. Group Life and Health Similar content to original Research Paper
Updated to reflect current standards and Group Practices
Some additional guidance provided on CALM impact of 3855
Clarification and expansion of section on ERR

35. Calibration of Stochastic Interest Rate Models
Phase 1 – Long term interest rates
Has been approved by CLIFR
Expect to send to Practice Council for final approval in October
Publish late Fall 2009
Phase 2 – Short and medium term interest rates
Includes correlation between short, medium, and long-term interest rates
Expected completion in 2010

36. Calibration of Stochastic Interest Rate Models
Later phases
Credit spreads
Other markets
Correlation of interest rates with equities
Correlation of interest rates with currencies

37. Calibration of Stochastic Interest Rate Models
Two significant events since most of work on Phase 1 was completed
Financial crisis
Publication of calibration criteria by the AAA

38. Calibration of Stochastic Interest Rate Models
Financial Crisis
Long-term rates are the lowest seen in a half century
A combination of extremely low rates and high rate volatility that appears unique in modern financial history
CLIFR believes that recent events confirm the appropriateness of the calibration approach
The actuary should be cautious if liabilities are sensitive to short term exposure to high volatility

39. Calibration of Stochastic Interest Rate Models
In May 2009, the AAA published
A fully parameterized stochastic model, and
Stochastic scenario sets
AAA will also provide a tool to generate any number of scenarios with any initial yield curve

40. Calibration of Stochastic Interest Rate Models
AAA vs. CIA approach
AAA used a different approach to develop the criteria
Criteria derived in the current low rate environment may be broadly consistent for some products (such as products with exposure to low long term interest rates)
This may not be true for all products or all interest rate environments
Calibration Criteria from other countries
To use other countries calibration criteria need to demonstrate that they are broadly consistent with the criteria in the CIA educational note

41. Tax note Future Income and Alternative Taxes Educational Note
Tax changes substantively enacted in March 2009
Note will be updated to be consistent with federal tax changes
Expected to be published in Fall 2009

42. 2009 Fall Letter
Status
Expect to send to Practice Council for final approval in October
Publish Fall 2009

43. 2009 Fall Letter – Section 1 Experience Studies Expect to refer to
Annuitant Mortality Experience (March 2009)
Mortality Study – Canadian Standard Ordinary Life Experience (September 2009)
LTD termination study to be published this year with experience

44. 2009 Fall Letter – Section 2 Insurance Mortality Similar to last year
Any mortality improvement offset in MfAD
Additional guidance
Best practice to incorporate mortality improvement from mid point of the study to valuation date

45. 2009 Fall Letter – Section 3 Annuity Mortality Similar to last year
just changed effective date of new mortality improvement rates (October 15, 2010)

46. 2009 Fall Letter – Section 4 Scenario Assumptions – Interest Rates
Repeat reminder to test premiums for default risk at 50% and 200% of those at balance sheet date
Note the lower bound used in the prescribed scenarios is dropping
Situations where stochastic results can be used

47. 2009 Fall Letter – Section 4
Can hold CTE(60) to CTE(80) of the stochastic results if:
Reserves are not sensitive to short- and medium-term interest rates
Stochastic interest rate model meets the Phase 1 calibration criteria
Stochastic interest rate model doesn’t include spreads.
If spreads are included then must hold at least Scenario 9 (old guidance)

48. 2009 Fall Letter – Section 5
Value of Minimum Interest Guarantees and Embedded Options
Guidance unchanged from previous years
Still appropriate in continued low economic environment
May not be captured by deterministic scenarios, consider stochastic testing

49. 2009 Fall Letter – Section 5 (old)
Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments
Deleted
Still valid, but has appeared enough times

50. 2009 Fall Letter – Section 6
Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes
Tax legislation now substantively enacted
Previous guidance on what to do in the interim now withdrawn
Reminder of application of 5 year grade in period

51. 2009 Fall Letter – Section 7 Equity Returns
Reintroduced from 2007 Fall Letter
Guidance on long term assumption for deterministic valuation
Impact of 2008 results on 30 year average return
Possibility some guidance around calibration of models for stochastic valuation