1. B2-PD Pandemics and the Insurance Industry Scott McGaire November, 2004

2. 2 l Bubonic Plague – 30% of European population died l 1918 Influenza – 0.6% of US population died l 1997 Influenza < 0.01% of US population died Sizes of Pandemics

3. 3 l Bubonic Plague Destroyed fabric of civilization Not only mortality – assets are worthless without people No need to pay insurance claims Frequency – 1,000 years or more? l 1997 Influenza - Killed very young and very old Low impact on life insurance Asset values not damaged Frequency – 20 to 30 years Implications of Pandemics

4. 4 l 1918 Influenza - Killed mostly between 15 and 44 High impact on life insurance claims Asset values damaged in the short term Frequency: 75 to 100 years

5. 5 Pandemics … l do not affect all segments of the population evenly l do not affect all product lines the same way l can harm asset values if severe or prolonged

6. 6 The 2010 Influenza Pandemic l 20 million hospitalized l Killed 2 million in Canada and the USA l Mortality was 2.5 x normal in the prime market for life insurance l Caused 10% drop in real estate values for 5 years

7. 7 What Could We Do? l The Hypothetical Insurance Company of Canada Management assessed the risk with pandemic DCAT scenarios, then planned ahead Positioned the company to weather the storm of the 2010 influenza pandemic Made further changes during and after the pandemic to manage the company’s financial well being

8. 8 Diversify l Entered New Markets Socioeconomic Geographic l Developed/Expanded Product Lines Critical Illness Long Term Care Disability Annuity products

9. 9 Reduce Mortality Exposure l Arranged Reinsurance Ensured financial strength, watched credit exposure l Developed Products with Fewer Guarantees Experience Rated products Adjustable UL COI l Arranged Mortality Bonds Diversified mortality risk outside industry

10. 10 Financial Strength l Set target capital above MCCSR Examined 1918 DCAT severity scenario to establish target l Pricing: set to return x% to free surplus above target

11. 11 Asset Quality and Diversity l Invest in quality assets l Reassess asset quality regularly l Set up conservative asset default provisions to cushion bad economic times l Ensure appropriate liquidity levels l Invest in a good variety of assets

12. 12 2010 Claims for The Hypothetical Insurance Expected Claims Excess Claims BlockGrossNet Guaranteed755075.0 Experience Rated 25 37.5 Total10075112.5

13. 13 Manage the Situation AvailableUsed Excess Claims-112.5 Other Experience Gains1515.0 Mortality Bond Principal6060.0 Annual Par Dividends3510.0 Change in Earnings-27.5 Shareholder Dividends105.0 Change in Excess Capital50-22.5 Remaining Excess Capital27.5

14. 14 Manage the Situation l Some excess capital was available to cover an increase in asset default provisions l Impact of economic downturn from pandemic was lessened due to Higher quality assets Balance sheet kept clean Already conservative asset default provisions did not increase as much

15. 15 Pfads, MCCSR and Surplus l MCCSR and Pfads are fine, but do not manage earnings l Manage to a comfortable surplus level IN EXCESS of MCCSR and Pfads l Experience rating action could be spread over several years and still affect surplus (via reserve releases)

16. 16 Food For Thought l The Hypothetical Insurance Company succeeded in weathering the storm - l How will your company do?