1. 2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) 2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. WS-32 Par Topics Stephen Humphreys Arshil Jamal Dale Mathews June 26, 2009

3. Topics Bill C-57 Par Governance Valuation –CICA 3855 –Application of CALM Selection of Scenarios –DCAT –Retention of Knowledge –Legacy Systems Open Block Issues Closed Block Issues Stochastic Scenarios/ Economic Capital

4. 3 Bill C-57 December 2008-Finance issued draft regulations March 2009-CLHIA response –Still concerns about application to adjustable policies issued in foreign branches Finance intention was to implement regulations prior to YE 09 –Would require minimum of 6 months lead time –Appear to be preoccupied with credit card legislation –Implementation prior to YE 09 may be in doubt

5. 4 Draft Regs-Dividend Policy Shall include a description of: Frequency of adjustment Principal factors affecting determination of dividends or that might cause board of directors to review the dividend policy Basis for allocating dividends between different classes Principle sources of income for funding dividends How policyholder behavior is reflected in dividends

6. 5 Draft Regs-Management Policy Shall include a description of: Policies included Investment Policy Method of allocating investment income Method for allocating expenses and taxes Approach to managing and using surplus –Blocks closed to new business –Fairness to policyholders in closed blocks of demutualized companies Principal factors that might cause board of directors to change policy Intended transfers to shareholders account under Section 461

7. 6 Draft Regs-Annual Meeting Must provide: Summary of dividend and management policies and information on how to obtain them Statement for each par account of financial position for two years prior to meeting Amounts transferred to shareholder account and applicable percentage for prior two years Information on how to obtain copies of Dividend Policy and Management Policy

8. 7 OSFI Guidelines Expected to include: Final demutualization closed block rules Interpretations regarding shareholder transfers under Section 461 Greater detail on information regarding allocations of investment income, expenses and taxes

9. 8 CIA Taskforce Reports to AA committee To develop guidance through standards of practice or educational notes –Standard opinion wording May be included in SOP –Definition of “fairness” Educational material on appropriate criteria to follow Working groups: –Dividend Policies-Arshil Jamal –Par Account Management-Simon Curtis –Adjustable Policies-Nick Bauer Overall coordination – Nick Bauer

10. 9 Par Governance How are companies dealing with governance issues? SLF Canada Practice: Par Governance Committee: –Continuous support and input to existing annual governance processes –Support fair and equitable treatment of policyholders –Implementation of Bill C-57 requirements Par Operating Guidelines: –Details about how par policies should be managed –Specific requirements and annual process to comply with: legal requirements ( eg., ICA sections 460, 461, 462) standards set by regulators actuarial guidance demutualization agreements –Document responsibilities and sign-off requirements –Will include C-57 requirements

11. 10 CICA 3855 Term of the liability for elements of a policy –If it operates independently has its own term –Dividends on Deposit credited rates may be short term, but could be backed by portfolio assets –2008 CLIFR Guidance Letter: if DOD profits support dividends, then DOD is not independent and term of liability is the same as related policy Otherwise, DOD are independent –Demand liability=>cash value floor –Recent decline in asset values may trigger cash value floor

12. 11 CICA 3855 Yield used to set dividend scale –Approximation of pre-CICA 3855 basis? –Multiple DSRs –Five year pass-back period for qualifying par

13. 12 Application of CALM Frequency of CALM valuations Number of scenarios run Margins actually held / degree of pass-through reflected –C3 based on CALM run? –CALM as adequacy test of C3? Dividend scale / glidepath reflected in valuation –Based on CALM booking scenario? –Current dividend scale? –Best estimate glidepath?

14. 13 Application of CALM Guarantees –Implicit interest rate guarantees in dividends –Settlement options –Guaranteed minimum DOD rates

15. 14 DCAT Impact of economy on selection of scenarios

16. 15 Retention of Knowledge Few companies now offering new par contracts Now nearly 10 years since demutualization Knowledge is in danger of being lost How are companies addressing this issue?

17. 16 Legacy Valuation Systems Models of various types originally developed by predecessor companies Conversion of remaining APL valuation systems Re-engineering of older AXIS models to reduce number of models, improve consistency and reduce run time

18. 17 Open Block Issues Many Open Blocks are now closed to new business Target Policyholder Surplus –Period over which to reach target Repatriation of Seed Capital Consistency of margins with Closed Blocks

19. 18 Closed Block Issues Orderly Release of PfADs –Effect of assumption changes –Treatment of experience gains and losses –Changes in Fair Value of underlying assets Wind-up of Closed Blocks

20. 19 Stochastic Scenarios Technically challenging for Par business due to modelling of pass-through in dividends and run-time issues Generally has not been a high priority due to stable nature of business May become important in the future: –Necessary to obtain a view on economic capital (Rating Agencies) –IASB 2007 discussion paper on Phase 2 suggests that the implicit interest rate guarantees should be evaluated on a market-consistent basis What are companies doing?

21. 20 Par Topics Questions?