1. Office of the SuperintendentBureau du surintendant of Financial Institutions Canadades institutions financières Canada Discounting The Appointed Actuary Seminar Presenter: Patricia Hladun September 20, 2004

2. 2 Topics The Move to Discounting Annual Return Results Unpaid Claims and Loss Ratio Analysis Exhibit Sample Review – 10 Companies Some Filing Guidelines

3. 3 The Move to Discounting Discounting for P&C companies policy liabilities came into effect Jan 1, 2003 Historical reasons for not allowing discounting: Short tailed business Low interest rates No actuarial requirements (e.g. actuarial report) Lack of standards of practice Implicit margin

4. 4 The Move to Discounting Changes in historical conditions: Increased litigation Coverage provided becomes longer tailed and therefore investment income becomes material Introduction of actuarial requirements by regulators Development of actuarial standards

5. 5 The Move to Discounting Reasons for OSFI requiring discounting: Consistent with OSFI’s reliance approach Provides a more realistic measure of financial performance Provides for the explicit determination of margins for adverse deviation Makes financial reporting practices more consistent with the economic realities Improves the consistency of Canadian P&C financial reporting

6. 6 The Move to Discounting Changes to Actuarial Reports: Opinions are not qualified anymore New CIA educational note was developed (regarding the runoff of unpaid claims on a discounted basis) Appendix II was removed and the Unpaid Claims and Loss Ratio Analysis Exhibit was added

7. 7 The Move to Discounting Changes to the Annual Return: Policy liabilities are on a discounted basis Page 60.41(run-off on a discounted basis) was added

8. 8 Annual Return Results Expected Results based on 12/2001: –Net claims liabilities reduced by $350 million: 1 ½ % of net undiscounted reserves 8 – 10 points on MCT/BAAT

9. 9 Annual Return Results Use of prior period adjustment at 12/2002: –Canadian (20.40.04.02) 67 million –Foreign (20.45.04.02) 120 million 187 million

10. 10 Annual Return Results Discounting results at 12/2002: –Net outstanding¾ of 1% –Capital 1% –MCT/BAAT: Canadian 1% Foreign 9% Total 3%

11. 11 Annual Return Results Discounting results at 12/2003: –Net outstanding 0.8% –Capital 1.1% –MCT/BAAT: Canadian 2% Foreign 10% Total 4%

12. 12 Annual Return Results Use of Exhibits 60.40 & 60.41: –60.40 Net Undiscounted O/S Claims 24,925 m –60.41 Net Discounted O/S Claims 24,714 m –Change 211 m

13. 13 Annual Return Results

14. 14 Unpaid Claims & Loss Ratio Analysis Exhibit Hard copy was included in the AAR Electronic copy was to be filed by June 1, 2004

15. 15 Unpaid Claims & Loss Ratio Analysis Exhibit Problems: Companies unaware of June 1 deadline Software problems Incorrect data formats

16. 16 Unpaid Claims & Loss Ratio Analysis Exhibit Results: Co-ordination between Quebec regulator and OSFI Industry results will most likely be shared Target release for early December

17. 17 Unpaid Claims & Loss Ratio Analysis Exhibit Next year: For 2004, electronic exhibits are due with the Annual Return filing on March 1 or April 15

18. 18 Sample Review – 10 Companies 10 of the largest federally regulated companies (8 Canadian and 2 Foreign) Primary insurers

19. 19 Sample Review – 10 Companies $ millions Total undiscounted unpaid claims10,287 Present value of unpaid claims 9,123 Change 1,164 Percentage Change (11.3%)

20. 20 Sample Review – 10 Companies Discount as % of Undiscounted Auto BI11.5% Auto PD 3.7% Auto AB11.3% Auto Physical Damage 1.9% Property – Personal 4.6% Property – Commercial 3.5% Liability14.4%

21. 21 Sample Review – 10 Companies Range of change in present values to total undiscounted: Low: 6.9% High:13.4% Differences were mainly due to: Mix of business Auto AB

22. 22 Sample Review – 10 Companies PfAD – Claims $949 million 83% of PfAD Average MfAD is 10.4% MfAD range is 6.5% to 12.8%

23. 23 Sample Review – 10 Companies PfAD – Claims Auto BI – MfAD range: 8.4% to 13.8% – Average MfAD: 11.1% Auto PD – MfAD range: 2.5% to 7.4% – Average MfAD: 4.7%

24. 24 Sample Review – 10 Companies PfAD – Claims Auto AB – MfAD range: 0.4% to 13.7% – Average MfAD: 9.3% Auto AB (excluding one company) – MfAD range: 6.1% to 13.7% – Average MfAD: 10.4%

25. 25 Sample Review – 10 Companies PfAD – Claims Auto Physical Damage – MfAD range: 2.5% to 7.4% – Average MfAD: 4.5% Personal Property (excl one company) – MfAD range: 2.5% to 9.4% – Average MfAD: 5.2%

26. 26 Sample Review – 10 Companies PfAD – Claims Commercial Property – MfAD range: 2.6% to 9.6% – Average MfAD: 6.5% Liability – MfAD range: 7.4% to 14.3% – Average MfAD: 11.8%

27. 27 Sample Review – 10 Companies PfAD – Reinsurance $21 million 2% of PfAD

28. 28 Sample Review – 10 Companies PfAD – Interest Rate $172 million 15% of PfAD

29. 29 Sample Review – 10 Companies $ millions Total undiscounted unpaid claims10,287 Total discounted unpaid claims + PfADs10,265 Change – Sample of 10 companies 0.2% Change – Industry Total 0.8% Actuarial reserves as % of undiscounted 99.8% Range 98.1% to 101.3%

30. 30 Some Filing Guidelines