1. Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario)

2. Agenda Insurance contracts measurement – IFRS Phase II update IAS 39 (Financial Instruments) revisions Appendix I - Field Testing Appendix II - Comparison of Management Candidates Appendix III - Summary of tentative decisions – November 2009 2 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

3. IFRS – Insurance Contracts Project IASB developing IFRS for insurance contracts as accounting for insurance contracts differs from practices in other sectors Project split into two phases: Phase I: IASB issued IFRS 4 – Insurance Contracts, interim standard that permits a wide variety of accounting practices for insurance contracts Phase II (Current Phase): Development of a standard that replaces interim standard and will provide a basis for consistent accounting for insurance contracts IASB and Financial Accounting Standards Board (FASB) taking building block approach to develop accounting 3 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

4. IASB — discussion paper issued Insurance Contracts Project - Timelines FASB — invitation to comment 2005 2006 2007 2008 2009 2010 2011 2012 2013 April June May November August End of comment periods (IASB and FASB) Exposure draft Final standard Implementation date Implementation Phase 2 Phase 1 FASB — Joined the project October IFRS 4 Insurance Contracts devised January Jan. thru Dec. IASB and FASB meetings to develop accounting standards 4

5. Insurance Contracts Project – Contract Measurement  The boards discussed two measurement approaches for insurance contracts:  Measurement approach based on approach being developed in the IASB’s project to amend IAS 37 Provisions, Contingent Liabilities and Contingent Assets  IASB tentatively selected updated model being developed in the project to amend IAS 37, modified to exclude day one gains.  Current fulfillment value with a composite margin  FASB affirmed tentatively that the objective of liability measurement is to report a value based on the insurer’s fulfillment of its contractual obligations to its policyholders over time  January 2010 exposure draft will explain both of the above measurement approaches  IASB tentatively decided on unearned premium approach for short-duration contracts 5 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

6. Current Candidates for Measurement Model The amount the entity would rationally pay to be relieved of an obligation (a transfer notion). A “residual” margin”, based on the day one difference, is added. The expected present value of the cost of fulfilling the obligation to the policyholder over time (a settlement notion, excluding the cost of bearing risk). A “composite margin”, based on the day one difference, is added. May include a risk margin. Discounted current estimate of future cash flows Risk margin Service margin Residual margin Insurance liability Discounted current estimate of future cash flows Composite Margin The part of the premiums for the unexpired part of the insurer’s contractual obligation, subject to a liability adequacy test. This model would probably only apply to the pre-claims period. An unearned premium model may be favoured for certain short duration contracts. Updated IAS 37 model Current fulfilment value with composite margin Unearned premium 6

7. Insurance Contracts Project – Risk Margin  The IASB tentatively decided that that a risk margin should be shown separately from the rest of the margin and remeasured at each reporting period.  FASB tentatively decided that no risk margin should be included in the measurement of an insurance contract.  The FASB believed that a risk margin conflicted with the basic principles in CON 7  The FASB has received additional information regarding risk margin and now are considering a risk margin.  The FASB is troubled by the wording of the proposed IAS 37 model as the definition implies a transfer notion.  The FASB to review updated IAS 37 definition and provide the IASB with suggested changes. 7 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

8. Key issues that need to be resolved before an Exposure Draft  Measurement, including  Measurement objective  Margins  Embedded derivatives  Unbundling  Presentation, including the use of other comprehensive income  Policyholder participation  Margins  Participating, unit-linked and index-linked insurance contracts and investment contracts and universal life contracts  Business Combinations  Definition and scope (including consideration of whether to deal with policyholder accounting)  Disclosures  Reinsurance  Transition  Sweep issues 8 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

9. Insurance Contracts IFRS Phase 2 Update IAS 37 model Price you would rationally pay to be relieved of the obligations Fulfilment value How much it would cost you to fulfil the obligations In the absence of evidence to the contrary (e.g., could transfer to a third party at a lower amount), IAS 37 model would default to fulfilment value 9 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

10. Insurance Contracts IFRS Phase 2 Update Approaches have the same building blocks Current estimate of expected present value of future cash flows Time value of money An explicit margin Both are from the perspective of the insurer, so both include entity-specific cash flows (one problem with exit value) Both look like PPM 10 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

11. Insurance Contracts IFRS Phase 2 Update Current estimate of expected present value of future cash flows: Current estimates means use all information available and update for new information Use market information where relevant “Expected present value” means probability-weighted (vs. present value of the best estimate of cash flows) Changes in estimates flow through profit or loss Canadian methods already do this 11 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

12. Insurance Contracts IFRS Phase 2 Update Future premiums – which can be included? IASB leaning towards including future renewal premiums as part of the current contract (vs. customer intangible asset) Renewal/cancellation is an option the insurer is providing to policyholders Renewal premiums would be included up to the point where entity has an unconditional right to re-underwrite or re-price or cancel the contract Similar to our ‘term of the liability’ concept Whether excess premiums (e..g, UL) could be included or not is still up in the air 12 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

13. Insurance Contracts IFRS Phase 2 Update No front-ending of profits will be allowed in any case Consistent with IASB’s position on revenue recognition (not until contract is delivered) Margin to be calibrated to initial premium 13 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

14. Insurance Contracts IFRS Phase 2 Update Will be strain at issue Acquisition expenses are expensed when incurred (i.e., no DAC asset) FASB has decided to allow no recognition of revenue to offset acquisition expenses IASB originally decided to allow recognition of revenue to offset direct incremental acquisition expenses, but recently changed to agree with FASB Any allowance would be viewed as an exception for the insurance industry 14 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

15. Insurance Contracts IFRS Phase 2 Update Margins - separate or composite? IAS 37 model includes separate margins for risk, service (if any), and ‘residual’ for elimination of day one gains Runoff pattern of residual margin undecided Fulfilment value includes a composite margin only Runoff pattern of composite margin undecided FASB is reconsidering whether ‘risk’ (uncertainty) margin should be separate 15 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

16. Insurance Contracts IFRS Phase 2 Update Risk margin in IAS 37 model Value to the entity of not having to bear the risk in the expected cash flows Remeasured at each reporting date Should not be adjusted for changes to estimates Further guidance expected from IAA Cost of capital appears to be the favourite Quantile approaches Margins for adverse deviations on assumptions 16 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

17. Insurance Contracts IFRS Phase 2 Update Discount rate “Consistent with observable current market prices, capturing the characteristics of the liability” Not connected to supporting assets Whether or not to take account of credit risk is topic of a separate IASB paper IASB decided not to provide more detailed guidance Expect the IAA to provide guidance 17 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

18. Insurance Contracts IFRS Phase 2 Update Other recent decisions No deposit floor Unbundling might be required if components not interdependent 18 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

19. Financial Instruments IAS 39 Revisions Objective is to simplify accounting and reporting of financial instruments Three main phases: Classification and measurement Exposure draft July 2009; comments Sept 14 Adoption before Jan 1, 2012 Impairment of financial assets Exposure draft Oct 2009 ‘expected loss model’ comments requested June 2009 Hedge accounting Exposure draft Dec 2009 19 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

20. Financial Instruments IAS 39 Revisions Classification and measurement Amortized cost for contracts with basic loan features and managed on a contractual yield basis No “tainting” provisions Subject to impairment test No need to separately report embedded derivatives Otherwise at fair value through profit and loss Fair value option is available for amortized cost assets if it eliminates or significantly reduces mismatch 20 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

21. Financial Instruments IAS 39 Revisions Classification and measurement (continued) Optional classification of some equities (not held for trading) as fair value but with changes through OCI Gains/losses/dividends would never hit earnings No impairment test Classification at initial recognition; no subsequent reclassifications permitted 21 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

22. Financial Instruments IAS 39 Revisions Transitional issues Adds a step to the IFRS conversion process Early adoption of IAS 39 changes in time for Phase 1 conversion is simply not feasible Would need to classify all assets by end Q1 2010 to meet requirements of conversion Would increase the number of changes to actuarial liabilities Unlikely OSFI would allow different companies to use a different basis 22 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

23. Financial Instruments IAS 39 Revisions Transitional issues Under current IAS 39 (CICA 3855), most assets supporting actuarial liabilities are held at fair value Avoids mismatch since income on available-for-sale assets goes through OCI Under new IAS 39, many of those assets would be amortized cost CALM liability would change in tandem Fair value option would not apply (no mismatch with CALM) Under Phase II insurance contracts, would expect those assets to be fair value To improve matching 23 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

24. Financial Instruments IAS 39 Revisions Other issues Volatility of surplus assets Increased flexibility to trade assets between liabilities and surplus Need to redesignate assets when Phase II insurance contracts is adopted IASB staff has indicated this is likely Tax implications? Capital implications? 24 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

25. Appendix I - Field Testing The main objectives of field testing the Insurance Contracts project proposals are: –(a) to test proposals and get input from our constituents on whether they: (i) result in a faithful representation of insurers’ financial position and performance (ii) can be applied rigorously and consistently in practice (iii) provide workable and auditable solutions –(b) to collect observable and measurable evidence that supports conclusions –(c) to consult interested parties prior to the issue of an ED and final standard. Staff recommend a targeted field test approach which, being flexible and focused, will enable proposals to be tested as they evolve and the results fed back promptly. This approach also minimizes the risk of delay to the project timetable. Staff aim to understand: –(a) the current basis of accounting –(b) incremental costs and benefits of moving to the new approach –(c) obstacles affecting application of the proposed approach –(d) whether the proposed approach is operational for an entity with a reasonable level of knowledge and sophistication, using information that is currently available or that can be created. Staff propose a test group of 15 insurers, which is a manageable number that still allows for some diversity. Staff suggest the following selection criteria for participants: –(a) geographic spread (which determines the regulatory and financial reporting environment) –(b) diversity of line of business (life, general, health and reinsurance) –(c) some mutual companies –(d) size, so that smaller and medium sized insurers are represented –(e) willingness and ability to participate (e.g., sufficient resources). 25 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

26. Appendix I - Field Testing Participants will be asked to make an assessment of both one-time costs and ongoing costs associated with the proposals. Such costs may include: –(a) costs to understand the new requirements (e.g., training) –(b) costs to collect, process and analyze new information (e.g., systems changes) –(c) costs associated with disclosure of proprietary information (competitive advantages/disadvantages). Benefits associated with a new standard may include: –(a) increased credibility and representational faithfulness of financial reporting –(b) improved financial processes resulting in better pricing, risk and capital management. Participants will be asked to answer questions on specific topics and, if possible, to design their own tests to support their conclusions using internal modeling techniques and financial data. The following topics may be suitable candidates for field testing: –(a) estimation of cash flows –(b) determination of discount rates –(c) determination of risk margins –(d) other application issues of the measurement approach –(e) treatment of acquisition costs –(f) features of participating contracts –(g) investment contracts –(h) the effects of policyholder behaviour, including boundaries of existing contracts. 26 2009 General Meeting Assemblée générale 2009 2009 General Meeting Assemblée générale 2009

27. Appendix II - Comparison of Measurement Candidates Key issuesMeasurement approach based on updated IAS 37 model Current fulfilment valueUnearned premium DefinitionThe amount the entity would rationally pay at the end of the reporting period to be relieved of the present obligation. Plus a “residual margin, based on the day one difference. The amount the entity would rationally pay is the lowest of: a) the value to the entity of not having to fulfil the liability (an entity-specific measure); b) the price that the market would demand to assume the liability; and c) the price that the counterparty would demand to cancel the liability, if cancellation is possible. The expected present value of the cost of fulfilling the obligation to the policy holder over time. Plus a “composite margin”, based on the day one difference. [Possible variation: including an explicitly prescribed risk margin of some form, plus a “residual margin, based on the day one difference.] The part of the premiums for the unexpired part of the insurer’s contractual obligation, subject to a liability adequacy test. ScopeAll insurance liabilities. Only pre-claim short duration insurance liabilities. Building blocks for the measurement approach* current estimate of the expected (i.e., probability weighted) present value of future cash flows time value of money an explicit margin If there is no evidence that the entity could cancel or transfer it to a third party for a lower amount, the entity measures the liability at the value it would gain if it did not have to fulfil the obligation. current estimate of the expected (ie probability weighted) present value of future cash flows time value of money an explicit margin An implicit building block approach that includes (1) expected cash flows (2) time value of money (3) a margin; all locked-in at inception. 27

28. Appendix II - Comparison of Measurement Candidates Key issuesMeasurement approach based on updated IAS 37 model Current fulfilment valueUnearned premium Inputs for estimates of cash flows Inputs for which observable market information is available (financial market variables) Consistent with observed market pricesConsistent with observed market prices. Not applicable unless onerous. Other inputsThe entity’s estimate of the cash flows it would incur in fulfilling the liability. In some cases the amount required by a subcontractor for other services [often to be estimated by the amount the insurer requires for other services]. The entity’s estimate of the cash flows it would incur in fulfilling the liability. Not applicable unless onerous. Characteristics of cash flows Cash flows that arise from the characteristics of the portfolio (portfolio- specific) Included. Not applicable unless onerous. Cash flows that arise from the characteristics of the entity (entity-specific) Included. Not applicable unless onerous. 28

29. Appendix II - Comparison of Measurement Candidates Key issuesMeasurement approach based on updated IAS 37 model Current fulfilment valueUnearned premium Subsequent measurement of cash flows Current estimates for all variables. No remeasurement unless onerous. Changes in estimates of cash flows Effect included in profit or loss. Included in profit or loss if contract becomes onerous. Time value of money Consistent with observable current market prices, capturing the characteristics of the liability. At inception, arguably implicit in the premium. Components of the margin risk margin service margin residual margin (calibrated to premium) composite margin [Possible variation: risk margin plus a residual margin calibrated to the premium]. No explicit margin. Implicit margin at inception, as implied by the premium Risk marginThe value to the entity of not having to bear the risk in the expected cash flows. No explicit risk margin. Implicit in the “composite margin”. [Possible variation: explicitly prescribed risk margin, based on a principle still to be decided]. No explicit margin. Implicit margin at inception, as implied by the premium Risk margin – initial measurement Estimates the value to the entity of not having to bear the risk in the expected cash flows. Uses premium as basis for determining the initial composite margin. [Possible variation: explicitly prescribed risk margin, based on a principle to be decided yet]. Not applicable. Risk margin – subsequent measurement Remeasured at each reporting date.Not applicable. (Implicit release as the composite margin runs off) [Possible variation: risk margin remeasured at each reporting date]. Not applicable. (Implicit release as the premium becomes earned) 29

30. Appendix II - Comparison of Measurement Candidates Key issuesMeasurement approach based on updated IAS 37 model Current fulfilment valueUnearned premium Service marginThe profit the insurer requires for undertaking services. [Sometimes already included in the amount a subcontractor would charge for undertaking a service]. No explicit service margin. Implicit in the “composite margin”. No explicit margin. Implicit margin at inception, as implied by the premium Service margin – subsequent measurement Remeasured at each reporting date.Not applicable. (Implicit release as the composite margin runs off) Not applicable. (Implicit release as the premium becomes earned) Day one difference (the difference between the actual margin and the required margin) No profit at inception; “residual margin” recognised as a separate item (presumably within the insurance liabilities). No profit at inception; “composite margin” recognised as a separate item (presumably within the insurance liabilities). No profit at inception. Loss at inception if onerous. Liability adequacy test Not applicable. Required at inception and each subsequent reporting date. Acquisition costs Expensed when incurred. Part of the premium expected to recover incremental acquisition costs Included in the residual margin.Included in the composite margin.IASB: Recognised as revenue on day one. FASB: Included in unearned premium. Own credit riskTo be discussed (arguably implicit in residual margin at inception). To be discussed (arguably implicit in composite margin at inception). Not applicable (arguably implicit at inception). 30

31. Appendix III - Summary of tentative decisions – November 2009 TopicIASBFASB Building BlocksThe IASB tentatively decided that the measurement for insurance contracts should include three building blocks: current estimates of expected (that is, probability weighted) future cash flows, incorporation of time value of money, and an explicit margin. The FASB tentatively decided that the measurement for insurance contracts should include three building blocks: current estimates of expected (that is, probability weighted) future cash flows, incorporation of time value of money, and an explicit margin. Candidate measurement approaches The IASB tentatively selected the approach being developed in the project to amend IAS 37, modified to exclude day-one gains. Nevertheless, a significant minority of Board members supported the approach based on current fulfilment value. Therefore, the exposure draft will explain both approaches. The FASB tentatively selected a current fulfilment approach with a composite. Margin Exclude discounting and margins in some instances? The IASB noted the arguments for and against an approach that uses an estimate of future cash flows with no margins and no discounting. The IASB considered whether to use such an approach for non-life claims liabilities and tentatively decided not to add it to the list of candidates. The FASB will consider at a future meeting whether, in certain instances, a measurement of insurance contracts would use future cash flows with no margins and no discounting. 31

32. Appendix III - Summary of tentative decisions – November 2009 TopicIASBFASB Use of inputsA measurement approach for insurance contracts conceptually should use current estimates of financial market variables that are as consistent as possible with observable market prices. The measurement of cash flows should be discounted and the discount rate should be updated each reporting period. The measurement of cash flows should consider all available information that represents the fulfilment of the insurance contract. All available information includes, but is not limited to, industry data, historical data of an entity’s costs, and market inputs when those inputs are relevant to the fulfilment of the contract. The measurement of cash flows should be discounted and the discount rate should be updated each reporting period. Unearned PremiumThe IASB decided tentatively that: a)an unearned premium approach would provide decision-useful information about pre-claims liabilities of short-duration insurance contracts. b)to require rather than permit the use of an unearned premium approach for those liabilities. The FASB will discuss an unearned premium approach at a future meeting. Measurement of the margin at inception The margin at inception should be measured by reference to the premium. Therefore, no day one gains should be recognised in profit or loss. If the initial measurement of an insurance contract results in a day-one loss, the insurer should recognise that day-one loss in profit or loss. In principle the initial recognition of an insurance contract should not result in the recognition of an accounting profit. The FASB will discuss this issue (day-one loss) at a future meeting. 32

33. Appendix III - Summary of tentative decisions – November 2009 TopicIASBFASB Subsequent treatment of margins On the residual margin, the IASB decided tentatively that: a) the driver selected for releasing the residual margins should result in recognizing those margins in income in a systematic way that best depicts the insurer‘s performance under the contract. b) the residual margin should be released over the period during which the insurer is standing ready to accept valid claims (the coverage period). c) the insurer should not adjust the residual margin in subsequent reporting periods for changes in estimates. The FASB will discuss the subsequent treatment of margins at a future meeting. Discount ratesThe IASB decided tentatively that: a) the discount rate for insurance liabilities should conceptually adjust estimated future cash flows for the time value of money in a way that captures the characteristics of that liability rather than using a discount rate based on expected returns on actual assets backing those liabilities b) the standard should not give detailed guidance on how to determine the discount rate The FASB will discuss this issue further at a future meeting. Acquistion costsAn insurer:  should expense all acquisition costs when incurred. should not recognize any revenue (or income) to offset those costs incurred. An insurer:  should expense all acquisition costs when incurred. should not recognize any revenue (or income) to offset those costs incurred. 33

34. Appendix III - Summary of tentative decisions – November 2009 TopicIASBFASB Policyholder behaviour and contract boundaries The measurement should include the expected (i.e., probability-weighted) cash flows (future premiums and other cash flows resulting from those premiums, e.g., benefits and claims) resulting from those contracts, including those cash flows the timing of which depends on whether policyholders exercise options in the contracts. To identify the boundary between existing contracts and new contracts, the starting point would be to consider whether the insurer can cancel the contract or change the pricing or other terms. The staff will develop more specific proposals for identifying the boundary. The FASB will discuss this issue further at a future meeting. Deposit FloorThe IASB confirmed that, applying tentative decisions it has already made on policyholder behavior, no deposit floor applies in measuring insurance contracts. The FASB will discuss this issue further at a future meeting. Policyholder accounting The IASB asked the staff to prepare an analysis of policyholder accounting with the goals of Identifying possible issues arising from lack of symmetry between policyholder accounting and the accounting by the issuer of the insurance contract and Any similarities with accounting for reinsurance contracts from the perspective of the policyholder. The FASB asked the staff to prepare an analysis of policyholder accounting with the goals of Identifying possible issues arising from lack of symmetry between policyholder accounting and the accounting by the issuer of the insurance contract and Any similarities with accounting for reinsurance contracts from the perspective of the policyholder. 34