1. CIA Annual Meeting Assemblée annuelle de l’ICA
June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006
Ottawa, Ontario
Session GEN-6

2. Update from ALM / Market risk working group
Session GEN-6

3. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Agenda
Scope and composition of group
Timeline, priorities and approach
Technical issues
Session GEN-6

4. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Membership of group
Mike White
Wally Bridel
Stephanie Fadous
Charles Gilbert
Ron Harasym
Andrew Norville
Christian-Marc Panneton
Sylvain St Georges
Session GEN-6

5. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Scope
Methodology to replace “Changes in interest rate environment (C3)” MCCSR component
includes impact of non-fixed income assets supporting liabilities
current phase excludes seg fund guarantees
allow for correlation and diversification
Analysis of sensitivities
1 year vs run-off
real world vs risk neutral
new approach vs existing MCCSR
Session GEN-6

6. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Scope
Implementation issues (working with Modelling Standards group)
use of approximations
comparability of results
Session GEN-6

7. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Timeline
“More complex issues” includes:
correlations across products
policyholder behaviour
asset side features (prepayments etc.)
Define methodology
Q2-Q3 2006
Simple initial modelling
Q3-Q4 2006
Pilot studies
2007
More complex issues
non NA products
implementation issues and approximations
Session GEN-6

8. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Issues faced so far
Terminal value methodology
real world vs risk neutral
PADs or no PADs
Interactions between market movements and insurance cashflows
Run-times
Session GEN-6

9. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Risk neutral
Uses current market prices
No arbitrage
Actuarial assumptions at best estimate
...adjust for risk to the extent that not diversifiable
Session GEN-6

10. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Real world
Uses judgement and historical experience
Possibility for arbitrage
All risks merit a risk premium
Margins for risk are calibrated for consistency
Session GEN-6

11. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Comparison
Risk neutral
objective (....sort of)
consistent with banking definitions
some international approaches use this method
consistent with market cost to close out risk
non-market risks?
Real world
subjective?
consistent with existing practices
consistent with cost of continuing to run risk
need to have a margin for prudence – how?
works well for non-market risks
Session GEN-6

12. Update from Modelling Standards
Session GEN-6

13. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Membership of group
Bill Beatty
Ron Harasym
Trevor Howes
Jean-Guy Lapointe
Robin Li
Sylvain St.-Georges
Stuart Wason
Session GEN-6

14. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Objective
Best practices for internal capital models to ensure:
Accuracy: Each risk is accurately reflected.
Comparability: Between companies.
Consistency: Between valuation dates and risks.
Transparency: Including capabilities and limitations.
Reliability: Robust process of generating capital results.
Practicality: Recognizing cost and time constraints and appropriate trade-offs between theoretical accuracy and materiality.
Session GEN-6

15. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Need for Capital Model Guidance
Capital models have some unique issues:
Tail Considerations: Models that work well around the expected may be inadequate at estimating losses under extreme events.
How to calibrate the tail to a 1 in 200 year event?
What management action assumptions are appropriate?
Do correlations increase in the tail?
Practical Implementation: Theoretical framework is stochastic upon stochastic which generally will not be achievable.
Risk Aggregation: Reflection of diversification benefits.
Paper will not provide solutions to these issues per se, but rather highlight them and discuss ways to ensure a chosen approach is appropriate.
Session GEN-6

16. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Scope
Best practices paper only, standards and regulatory guidance notes may follow.
Includes
Model Design
Model Implementation
Governance
Reporting
Excludes
Risk based capital principles
Methodologies
Session GEN-6

17. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Timetable
First Draft: End of summer
Final Base Document: End of 2006
Risk Specific Appendix on ALM/Mismatch Risk: Q107
Session GEN-6

18. CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Issues Faced So Far
To what extent should Advanced Methods be standardized?
Should capital be based on the company’s risk profile at the valuation date, or include anticipated changes in risk profile?
What minimum requirements should be met before a company adopts an advanced method?
Session GEN-6