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

2. 2009 Seminar for the Appointed Actuary
Agenda
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
Earnings Volatility
Required Capital Volatility
Product Scrutiny

3. Earnings Volatility 18.8% drop from June 30th, 2008

4. 2009 Seminar for the Appointed Actuary
Earnings Volatility
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
The volatility of Guarantee Liabilities due to the decreased markets are significantly impacted by your current inforce business:
75/75 Guarantees with no resets and long-dated maturities
100/100 Guarantees with resets and 10-year maturity structure
GMWB with deferral bonuses and resets
There may be additional impacts due to:
Scenario generator parameter updates
Changes in policyholder behaviour
Decrease in the yield curve
The volatility of Guarantee Liabilities may be mitigated by hedging programs
Deferred Acquisitions Costs (DAC) may need to be written down

5. 26% decrease year-over-year
Earnings Volatility
Average TSX level over 2008
26% decrease year-over-year
Average TSX level in 2009

6. Required Capital Volatility
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
In late 2008, OSFI implemented a new temporary “Alternative Method” for calculating Required Capital:
Three bucket structure for CFs: Year 1, Years 2 to 5, Years 5+
CTE determination of CTE(98), CTE(95) and CTE(90), respectively
Year 5+ bucket is pulled back to CTE(95) over time (subject to maximum and minimums)
This may provide Required Capital relief if the insurer had significant guarantee cash flows over 5 years from the valuation date; however, it may increase Required Capital for companies with shorter term cash flows
Complex interpretation and implementation:
Allocation of Actuarial Liabilities between the three buckets
Transitioning formula for the Year 5+ bucket
Difficult interpretation and additional volatility if the term of your liability changes

7. 2009 Seminar for the Appointed Actuary
Impacts on the Future
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
Insurers are taking a long look at the feasibility and risk of various product designs
Products are being discontinued
Fund shelves are being altered
Restriction of deposits to existing policies
Guaranteed fees are being increased
Expected product offerings are being reconsidered
OSFI has shown increased interest in Segregated Funds, since the market declines:
OSFI Data Request
OSFI Benchmarking Study – Phase I
Moratorium on Model Modifications

8. Impacts on the Future
Source: Statistics Canada, CANSIM, table and Catalogue no X. Last modified:
This table presents results from medium growth scenario 3.

9. 2009 Seminar for the Appointed Actuary
Impacts on the Future
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
An insurer should consider the following risks when looking at their Segregated Fund product shelf:
Product Design and Pricing Risk
Insurance Risk
Mortality
Policyholder Behaviour
Market Risk
Equity returns and volatility
Interest Rates
Currency
Operational Risk

10. 2009 Seminar for the Appointed Actuary
Impacts on the Future
2009 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2009
Risk mitigation strategies can be applied to inforce or new business to help mitigate all or part of the risk:
Reinsurance
Limited capacity
Unattractive prices
Hedging
What to hedge?
How do hedging programs work?
Basis Risk
Increased cost of hedging
Increased operational risk
Limited Capital Relief