1. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 MEASUREMENT OF INSURANCE CONTRACT LIABILITIES under IFRS 4 September 2008 Lesley Thomson

3. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Agenda Scope of IFRS 4 Conditions under which existing accounting policy may be used for valuation of insurance contracts CALM meets the criteria for life insurers Allowable changes to accounting policy for valuation of insurance contracts Reasons to continue using CALM Other issues/options allowed Discretionary Participation Features Unbundling Discounting of future tax cash flows

4. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Scope of IFRS 4 IFRS 4 covers measurement (valuation) of insurance contracts, including reinsurance contracts Phase 1 only Phase 2 expected in 201? Applies in any country adopting IFRS

5. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Current Accounting Policy IFRS 4 allows the use of the current accounting policy (which is CALM in Canada) for the valuation of insurance contract liabilities provided certain criteria are met, viz: No provision for future claims on insurance contracts not in existence at the reporting date Liability adequacy test Liability is only taken off balance sheet when it is extinguished Reinsurance assets, income, expenses are not offset Impairment of reinsurance assets is considered

6. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 No Catastrophe or Equalization Provisions No provision for future claims on insurance contracts not in existence at the reporting date Focus is on catastrophe or equalization provisions, neither of which are liabilities under CALM Paragraph 2130.03 of the SOP says liabilities are only recognized for contracts that are in existence at the reporting date

7. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Liability Adequacy Test The insurer must carry out a liability adequacy test Minimum requirements for the liability adequacy test are: The test considers current estimates of all contractual and related cash flows (including embedded options and guarantees), and If the test shows the liability is inadequate, the entire deficiency is recognized in profit or loss If CALM can be shown to meet these minimum requirements, then nothing further is required If not, an additional liability adequacy test would be required

8. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Liability Adequacy Test The second test is obviously met, as the entire change in CALM liability is recognized in profit or loss CICA Handbook 4211.21

9. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Liability Adequacy Test In my opinion, the first test is also met: Under SOP 2130.04-.05 of SOP, CALM makes provision for all contractual cash flows and related cash flows, including those from embedded options and guarantees “Current estimate” normally refers to estimate before the addition of provisions for adverse deviations, which implies CALM is more stringent than the minimum requirements Limitations on the term of the liability under CALM might be considered a problem, but: This restriction almost always acts to increase the liability, and only doesn’t if the insurer has an unconstrained right to reprice the contract, in which case such a renewal is considered a future contract

10. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Derecognition Liability is only removed from the balance sheet when it is extinguished, i.e., when the obligation specified in the contract is discharged or cancelled or expires SOP 2130.03-.05 Term of the liability considerations apply

11. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Reinsurance Ceded This is the one criteria CALM doesn’t meet (per SOP 2130.05) Must change balance sheet presentation, so reinsurance ceded is on the asset side of the balance sheet Need a reasonable way to allocate net liability into direct (liability) and ceded (asset) Must be based on underlying cash flows Reasonable assumption about related assets

12. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Impairment of Reinsurance Assets Impairment of reinsurance assets is considered per SOP 2130.30

13. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Therefore: Therefore, under IFRS 4, CALM can continue to be used for the valuation of (life) insurance contracts when we move to IFRS in 2011 One change in presentation will be required Reinsurance ceded amounts must be shown as assets

14. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 IFRS 4 - Changes to Accounting Policies IFRS 4 allows certain changes to accounting policies for measurement (valuation) of insurance contracts Change is allowed if and only if the change makes the financial statements more relevant and not less reliable, or more reliable and no less relevant Some specific changes are discussed and deemed either acceptable or not acceptable, e.g. Reflection of current market interest rates is permitted Measuring on an undiscounted basis is not

15. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Reasons to Continue using CALM Sun Life has decided not to make any such changes for a number of reasons: Transition period only – prefer to wait for Phase 2 Lack of comparability with other companies We believe CALM is appropriate (reliable and relevant) Don’t want to ‘cherry-pick’ changes Analysts would be suspicious OSFI has expressed concern

16. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Discretionary Participation Features IFRS 4 allows separate recognition of guaranteed components from DPFs (e.g., par policyholder dividends), and, if separately reported, insurers can classify DPF as a liability or a separate component of equity IASP 7 suggests “constructive obligations” should be classified as liabilities Under CALM, DPFs are included in liabilities to the extent required to meet Policyholders’ Reasonable Expectations

17. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Discretionary Participation Features Sun Life will not be changing its accounting policy for DPFs PRE is essentially the same as ‘constructive obligations’ Any shift from liabilities to equity would fail the “no less reliable test’ Lack of comparability with other companies OFSI would be nervous

18. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Unbundling ‘ Unbundling’ is separating a contract into components, each of which is subject to a different financial reporting standard There are three different types of unbundling: Unbundling a deposit component from an insurance contract Unbundling an insurance component from an investment contract Unbundling a service contract from an investment contract

19. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Unbundling Deposit Components from Insurance Contracts Unbundling of deposit components from insurance contracts is required under some accounting regimes If measurement of the insurance contract would not recognize the obligations of the deposit Not true for CALM, so unbundling is not required Unbundling is permitted if the separation can be done reliably. Possible candidates include: UL account values Amounts on deposit

20. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Unbundling Deposit Components from Insurance Contracts Deposit components, if unbundled, are subject to IAS 39 Residual is subject to IFRS 4 So the total liability would change Sun Life has tentatively decided not to unbundle any deposit components from insurance contracts Prefer to wait until phase 2 Avoids deposit-type accounting CALM liability is appropriate in aggregate

21. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Unbundling Insurance Components from Investment Contracts Some investment contracts contain an immaterial amount of insurance risk Riders DB = 101% of AV Unbundling of any immaterial insurance components would be permitted but not required Sun Life does this in the UK for practical reasons

22. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Unbundling Service Components from Investment Contracts Required under IAS 39 and IAS 18 Investment management services/fees on investment contracts Need to split fees as well as transaction costs Portion related to the right to provide services Portion related to the financial liability Guidance is in IASP 4

23. 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Other Issues Some have said that discounting of future tax cash flows is prohibited under IAS 12, and that this would apply to insurance contracts on adoption of IFRS (phase 1) On the other hand, IFRS 4 allows continuation of CALM, and furthermore prohibits a change that would make the results less relevant Sun Life agrees with the latter position IATF has been asked for their opinion Similar issue for foreign exchange provisions IFRS would suggest use current exchange rates only