1. 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted Steven Appointed Actuary Seminar September 21, 2004 Montréal, Québec

2. 2  Further education and research in the area of ALM  Survey industry practice  Identify areas where there exists a wide range of practice or where techniques not well developed  Improve understanding of life insurance practices compared to banking practices  Promote ALM best practices CIA Working Group on ALM formed in 2000

3. 3 Key activities: 2000 – present 2000 200220032004 2001 Meetings w/  OSFI  Banking Reps Focus Group MtgALM PA createdMeetings w/CALMA Survey on Industry Practice χχχχχ Quarterly ALMPA meetings across North America

4. 4  Low interest rate environment –previously mismatched portfolios now face reinvestment at lower rates than assumed in pricing guaranteeing loss  No fixed income assets available to match long term liabilities –no more 30 year government  Significant credit exposure –pressure to make spreads  Equity market volatility –proliferation of equity-based products investment guarantees = embedded derivatives fee income is based on AUM Current ALM issues insurance companies facing

5. 5  Pre-funding problem for products that have positive liability cash flows in early years –assets not available at issue to fund future benefits –substantial reinvestment exposure arises from early net cash flows  Cost of enriched guarantees not priced –Q-measure price is substantially higher than actual price of product  Par may have little or no room in dividend scale –treat as guaranteed product if unable to pass on adverse experience  Basis risk on pass-through products  Lack of diversification of liability portfolio  Impact of changes in assumptions Companies deal with many internal challenges

6. 6 “Living” document captures current practice  Wide range of practice exists in some areas –projecting cash flows with MfADs –modeling equities  Document records all discussion points –objective to reflect current practice (for better or for worse)  “Unsound” practices to be identified  Best Practices to be described

7. 7 Future deliverables: ALMPA Mtgs ALM List Serve Discussion Point Doc Educational Note Other Developments

8. 8 Your opportunity to define ALM practice Get involved Join the ALM PA today Attend meeting this afternoon at 3:00PM