1. CIA Annual Meeting LOOKING BACK…focused on the future

2. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Moderator Jonathan Hede Speakers Jacques Boudreau Gord Marvel Moderator Jonathan Hede Speakers Jacques Boudreau Gord Marvel

3. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Considerations in Defining & Managing Currency Risk Gord Marvel Sun Life Assurance Company June 29, 2005 Considerations in Defining & Managing Currency Risk Gord Marvel Sun Life Assurance Company June 29, 2005

4. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future What is it Why is this an issue Expectations Where is it Is it a risk Accounting for currency Quantifying currency risk A Final Word

5. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future What is it Financial loss arising from changes in foreign exchange rates Less general focus than interest rate, equity, credit risk operational risks Should it?

6. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future What is it Transactions in other than the base currency of the operation Global vs. local presence / aspiration Enterprise vs. territorial perspective Investments Liability vs. surplus Foreign Operations Income from primary vs. ancillary vs. discontinued operations Balance sheet exposure to investment in foreign operations

7. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why is this an issue Globalization Investments Policyholders Suppliers Volatility in F/X Secular movement Shocks & revaluations

8. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why? … Globalization Territorial operations Appropriate investments may not be available in required currency Market limitations – terms, structures, credit, qualities, sectors, liquidity, currency restrictions Policyholders Foreign operations Dual residencies Vendors / Suppliers

9. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why? … Volatility

10. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why? … Volatility

11. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why? … Volatility

12. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why? … Volatility

13. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why? … Volatility

14. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Why? … Volatility

15. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Where - Accounting for Currency Current Canadian GAAP: Balance sheet: Impact of change in F/X flows through income IF – enterprise has self-sustaining operation(s) in a foreign currency, impact of change in F/X flows through Currency Translation Account (CTA)

16. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Where - Accounting for Currency Current Canadian GAAP: Income : Change in F/X is based on the average F/X rate(s) during year Impact follows balance sheet treatment Derivatives: No special treatment of foreign exchange hedging No specific Canadian GAAP guidance for derivative accounting New Accounting Guidelines A discussion for another day

17. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Where – Income Statement Premiums Investment Income Fee Income Benefits Expenses Taxes Change in Reserves

18. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Where – Balance Sheet Assets Replication using foreign assets (including derivatives) or foreign assets as eligible asset class Investment in foreign operations Accounts receivable Liabilities Product reserves & liabilities & provisions Accounts payable Corporate issued debt Equity Currency translation

19. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Expectations Actuaries “In the long run we are all dead. Economists [Actuaries] set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat” With apologies to John Maynard Keynes

20. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Expectations Shareholder Global or Local play Policyholder Solvency Management Value proposition? Balances expectations & sets framework

21. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Expectations F/X policy principles: Balance prudence, strategies & tactics Holistic view with respect to preferred risks Segmentation considerations Degree of hedging/exposure – partial vs. complete – address speculation Recognize organizational structure Self sustaining territories vs. manufacturers/distributors Local vs. enterprise accountabilities & management

22. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Risk Considerations Introduces volatility What role does currency exposure play in the enterprise value proposition None, or Long term business strategy, or Lesser of two evils Should it be hedged away? May not be viewed negatively - response requires consideration of expectations & point of reference

23. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Risk Considerations Which currencies should be hedged? Materiality – where are largest exposures Practicality – where are active & developed F/X derivative markets Residual risk – use proxies or leave unhedged

24. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Quantifying Currency Risk Business objectives Planning & scenario risk assessments Capital & reserves Pricing – internal vs. market implied Technical issues Key dynamics – technical vs. fundamental view Decision statistics Materiality & resources/capabilities

25. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Quantifying Currency Risk Balance quantification sophistication with business need & capabilities Literature search doesn’t point to any clear preference in either fundamental or technical streams Simple notional exposure monitoring may be good enough, or Simple distributions or adaptations of other model structures may be good enough

26. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future A Final Word Considerations in the management of currency risk extends beyond simple risk identification, quantification & mitigation Fundamental operating principles and the value proposition for shareholders & policyholders need to be considered Organizations should be clear on how much currency risk their key stakeholders are expecting At a minimum, there should be sufficient testing to either dismiss F/X as an immaterial risk or to confirm the level of risk to which stakeholders will be subjected