1. PD - 16 Developments on International Accounting Standards From a P & C and Life Perspective Canadian Institute of Actuaries Annual Meeting David Oakden June 29, 2007

2. 2 Overview of Risk Margins IASB - Preliminary Views on Insurance Contracts IAA - Measurement of Liabilities for Insurance Contracts: Current Estimates and Risk Margins

3. 3 IASB Basic Building Blocks Estimate of future cash flows Time value of money Margin

4. 4 IASB Exit Value Amount the insurer would expect to have to pay today to another entity if it transferred all its remaining contractual rights and obligations immediately to that entity …excluding any payment for other rights and obligations

5. 5 IASB Margin As required by market participants for –Bearing risk –Providing services Not a shock absorber More guidance is needed on calibration

6. 6 IASB Risk Margin Approaches Confidence level CTE Canadian approach Cost of capital Based on CAPM Adjustments to cash flows Risk adjusted discount rate

7. 7 IASB Calibration of Margins Observed price to policyholder –Price to policyholder is a reasonableness check –Profit or loss at inception is permitted Unbiased estimate of third party acquisition –Business combination or portfolio transfer

8. 8 IAA - Current Estimate Exit Value = Current Estimate + Margin Expected present value of probability weighted cash flows using current assumptions

9. 9 Current Estimate Considerations All relevant expected cash flows are included Consistent with financial reporting standards Reflects observed market inputs Otherwise model-based estimates may be used Unit of account is portfolio –Similar risks –Managed together Current estimates not current conditions

10. 10 Current Estimate Considerations Ctd. Consistent assumptions Any significant asymmetry in cash flow should be reflected Approximations can be used if impact is small in relation to cost of a more refined approach Alternate data sources may be used where the actual data is inadequate Assumptions should be reviewed systematically and revised when appropriate

11. 11 IAA Risk Margin Approaches Cost of capital –Apparent preferred approach Statistical Methods –Quantile –Conditional tail expectation Explicit assumption approaches (Canadian method) –May produce inconsistency between Assets and liabilities Insurance and other industries

12. 12 IAA High Risk Margin Situations Less information Low frequency / high severity Longer payment terms Wider probability distribution To the extent that emerging experience reduces risk then risk margins should decrease

13. 13 IAA Reference Entity To be consistent with an exit value approach, it is reasonable to construct a reference entity to which the portfolio would be transferred The use of a reference entity would promote increased comparability between preparers’ financial statements

14. 14 IAA Reference Entity Large –Process risk is as small as practical Multi-line / diversified –Benefits of risk diversification Highly rated –AA Business similar in nature

15. 15 IAA Cost of Capital Preferred method Cost of capital –4% to 6% (above the risk free rate) used to illustrate the method –Seems low by North American standards –Wide range Capital –IAA Blue Book –Solvency II SCR –More guidance needed

16. 16 IAA Sample Risk Margins CapitalCost of Capital Short Tail Line of Business Long Tail Line of Business 35%10%6.3%17.2% 70%10%12.6%34.4%

17. 17 Questions ?