1. 2008 General Meeting Assemblée générale 2008 Toronto, Ontario 2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Agenda 1.IFRS Background 2.IFRS 4 Phase I – Insurance Contracts 3.IFRS 1 – First-time Adoption of IFRS

3. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IFRS Background

4. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Recent IFRS Developments Where are we now Transition from Canadian GAAP to IFRS –On February 13, 2008 the AcSB confirmed that the use of IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. Canadian Securities Administrators –On February 13, 2008, the CSA announced its proposal to allow domestic issuers to early-adopt IFRS for financial years beginning on or after January 1, 2009.

5. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Recent IFRS Developments Where are we now Office of the Superintendent of Financial Institutions Canada –On April 25, 2008, OSFI issued a letter to all Federally Regulated Financial Institutions which clarified: All FRFIs will be considered publicly accountable enterprises and required to adopt IFRS in 2011; Early adoption of IFRS will not be permitted; and A progress review will be required from each FRFI on a semi-annual basis. –On Oct 31, 2008, OSFI issued a letter to Federally Regulated Insurers which clarified: Do not expect companies to make changes to accounting policies for insurance contracts relating to IFRS 4 – Insurance Contracts on initial adoption (other than impacts related to product classifications) Actuarial standards should continue being used under IFRS 4 Phase I –Update from Auditors Advisory Meeting Currently working on revised Capital model

6. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 2009 and 2010 statements filed under local standards Statements restated under IFRS but to be filed in 2011 IFRS statements are published with comparatives for 2010 Fiscal 2009 Fiscal 2010 Fiscal 2011 Q1Q2Q 3Q4 Q1 Q2Q 3Q4 IFRS transition date IFRS transition date Filing date of IFRS accounts Filing date of IFRS accounts Fiscal 2008 IFRS convergence plan disclosure IFRS convergence plan disclosure IFRS detailed plan disclosure IFRS detailed plan disclosure Fiscal 2007 Training and knowledge of IFRS Preparation of convergence plan New IFRS standards Timeline for IFRS Adoption – 5 Key Dates Project Structure and Governance (budget implications, resourcing, etc.) 1 2 4 5 3 Disclose IFRS implementation plan and qualitative impact analysis Disclose IFRS quantitative impact analysis Opening IFRS balance sheet and transition adjustments First full year of IFRS income statement (internal only) First external quarterly IFRS financial statements including comparatives 1 2 3 4 5 Assess System Change Impact and Implementation

7. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IFRS 4 – Phase I

8. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 High Impact Standards - IFRS 4 – Life Insurance IFRS requirements Financial Line item Related IT System Financial Impact H/L Disclosure Impact H/L Potential IT impact Y/N Standard Volatility H/L Overall Impact assessment IFRS 4 Insurance Contracts HHYLH Scope (Opening Balance) 1. Actuarial Liabilities 2. Policy Loans 3. Policyholders’ Funds on Deposit, Reinsurers’ Funds on Deposit 4. Provision for claims, provision for PHD and ERR 5. Premium income 6. Fee and other income 7. Policyholder benefits (Life and health claims, Cash value of surrendered policies) 8. Increase in actuarial liabilities Actuarial Systems, Investment Systems, General Ledger HHYLH Definitions (selected) HHYLH Embedded Derivatives HHYLH Unbundling of Deposit components HHYLH Recognition and Measurement HHYLH Current market interest rates HHYLH Disclosure HHYLH

9. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 There is a phased approach to insurance contracts. Phase I implements some components of the insurance project in 2005 Phase II will be new insurance measurement standard IFRS INSURANCE PROJECT IFRS INSURANCE PROJECT Phase I – Implemented 2005 Phase II – Implement by 2013? Phased approach for insurance

10. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Insurance Assets – IFRS 4 Non-Insurance Financial Assets - IAS 39 Insurance Liabilities – IFRS 4 Non-Insurance Financial Liabilities, Including Investment Contracts IAS 39 Key standards for insurance “IFRS 4: Insurance Contracts and IAS 39: Financial Instruments are the key standards that will apply to insurance contracts”

11. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IASB Phase I Phase I: IFRS 4, Insurance Contracts, issued in 2004 –Interim standard –Allows insurers to retain existing accounting policies, with some modifications, for: Contracts which meet its definition of insurance Investment contracts with discretionary participation features Investment contracts – IAS 39 –DAC amortization model –Onerous contracts

12. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Phase I (2005) Phase II (2013??) AssetsLiabilities IAS 39 for Invested Assets IFRS 4 Status Quo IAS 39 and some aspects in IAS 32 and IAS 18 Phase II All Insurance Contracts and Investment Contracts with Discretionary Participation Features Other Investment Contracts and All Service Contracts IFRS 4 - Insurance Contracts

13. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Issues Contract classification Embedded derivatives Insurance contract measurement Disclosure Requirements

14. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Contract classification defines accounting treatment Phase I Investment contracts Discretionary Participation Investment contracts Insurance contracts * Subject to certain modifications Existing Accounting* Amortised Cost -or- Fair Value Contract classification - Why is it important?

15. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Tends to be a more complicated issue for Life and Health Insurance as a number of products may have been created primarily for investment purposes Due to the somewhat liberal definitions in IFRS 4 – Insurance Contracts, most of the Life and Health Insurance contracts are expected to meet the insurance contract threshold (but an insurer still needs to conduct an analysis of its contracts!) Contract classification

16. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Classification flowchart Is there significant insurance risk present in the contract? Is there a deposit component to the contract? If so, is the deposit component independent of the insurance cash flows? Are any elements of the benefit driven by discretionary participation Insurance features present in contract Classified as an investment contract Deposit component Yes No Insurance and deposit components of contract must, if not recognised, be unbundled and valued separately Yes No Insurance component Product is an Investment Contract without discretionary participation features Product is an Insurance Contract Product is an Investment Contract with discretionary participation features Yes No

17. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Definition of insurance “ A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. ” IFRS 4.Appendix A

18. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance risk is risk, other than financial risk, transferred from the holder of a contract to the issuers If both financial risk and significant insurance risk are present, contract is classified as insurance. IFRS 4.Appendix A Insurance versus financial risk

19. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 ‘Significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance.’ Additional benefits must be for pre-existing risk and do not include: –Charges that would be made on cancellation or surrender –Loss of ability to charge policyholder for future services –Possible reinsurance recoveries (these are classified separately) IFRS 4.Appendix B22 - B28 Significant insurance risk

20. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Significant insurance risk Additional benefits include timing risk –Whole life contract (payment known, timing unknown) has additional benefits –Contract where death benefit is equivalent to maturity benefit (I.e. maturity benefit adjusted for time value of money) does not have additional benefits Classification on a contract by contract basis –Contracts entered into simultaneously with the same policyholder count as one contract –Products may be classified homogeneously on materiality grounds IFRS 4.Appendix B22 - B28

21. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 No quantitative guidance given Rules of thumb currently being adopted for internal consistency –Benefit paid on death exceeds benefits payable on survival by more than x% (term assurance) –Plausible scenario exists under which the death benefit exceeds the survival benefit by x% or more at any time during the policy term (guaranteed minimum death benefit in unit-linked contract) –Benefit payable on survival exceeds the benefit payable on death by more than x% (Pure Endowment, life contingent annuity) Quantitative measures

22. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Testing for significant insurance risk FeatureSignificant Significant additional benefits payable on insured event Costly and feasible event in scenario of commercial substance even if it is extremely unlikely Waiver on death of surrender charges  Loss of ability to charge for future services  Unfeasible event in any scenario  Contingent amount is insignificant in all scenarios of commercial substance 

23. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Once insurance, always insurance, but can go from investment to insurance Investment may change to insurance through: –Switch between funds, first fund has no insurance risk – second fund has insurance risk –Take up of option to increase insurance risk IFRS 4.Appendix B.29-30 INVESTMENTINSURANCE Change in level of insurance risk

24. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Unbundling Is there significant insurance risk present in the contract? Is there a deposit component to the contract? If so, is the deposit component independent of the insurance cash flows? Are any elements of the benefit driven by discretionary participation Insurance features present in contract Classified as an investment contract Deposit component Yes No Insurance and deposit components of contract must, if not recognised, be unbundled and valued separately Yes No Insurance component Product is an Investment Contract without discretionary participation features Product is an Insurance Contract Product is an Investment Contract with discretionary participation features Yes No

25. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 When do you unbundle? Unbundling is required when: –The insurer’s existing accounting policies do not require recognition of the deposit component –The insurer can independently measure the deposit component from the insurance component Unbundling is allowed when the insurer can independently measure the deposit component from the insurance component –Consistent treatment of unit-linked products where some contracts have rider benefits IFRS 4.10 - 12

26. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Embedded derivatives in Insurance Contracts Certain embedded derivatives have to be separated from insurance contracts, investment contracts with Discretionary Participation Features and investment contracts without Discretionary Participation Features measured at amortised cost If separated, measured under IAS 39: –Fair value –Changes in fair value through profit and loss IFRS 4.7-9

27. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Embedded derivative flowchart

28. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Insurance contract measurement During Phase I, existing accounting policies apply with certain modifications –Prohibited – certain accounting policies are prohibited as they do not meet the IFRS framework –Mandated – certain accounting policies must be implemented if they are not already in the existing accounting policies –Allowed to continue, but not start – certain accounting policies that do not meet the IFRS framework can continue, but cannot be implemented. –Can be started – certain accounting policies can be introduced. Existing accounting policies are those in the current financial statements

29. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Prohibited policies The following accounting policies are prohibited –Setting up catastrophe provisions –Setting up claims equalisation provisions –Offsetting of reinsurance assets and direct liabilities IFRS 4.14

30. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Mandated policies The following accounting policies are mandated if they are not already present –Liability adequacy testing –Impairment of reinsurance assets IFRS 4.14

31. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Policies that may continue The following accounting policies may continue but companies may not switch to these where they are not already applied –Using an undiscounted liability basis –Measuring future investment management fees at a value greater than the acquisition costs –Using non-uniform accounting policies for subsidiaries –Using excessive prudence in the valuation of liabilities IFRS 4.25

32. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Policies that may be started The following accounting policies can be started subject to certain restrictions –Use of current market discount rates –Use of shadow accounting –Use of asset based discount rates Only if part of a comprehensive accounting policy which makes financial statements more relevant and reliable

33. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Insurance disclosure requirements Principle 1 - Explanation of recognised amounts An insurer shall disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts Principle 2 – Nature and extent of risks arising An insurer shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts IFRS 7 (S.3862): Financial Instruments incorporates similar risk disclosures to financial instruments

34. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Life Insurance Contracts Individual Insurance Annuities Group Insurance TermPar Universal Life Variable Universal Life Life Contingent Payout Annuities Fixed Payout Annuity Fully Insured Plan Experience Rated Refund Administrative Services Only InsuranceNot Insurance Bifurcation or TBD?

35. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 IFRS 1 – Insurance Contracts Implications: A first-time adopter may apply the transitional provisions in IFRS 4. That standard limits an insurer to changing ‘its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in IAS 8.’185 As noted above OSFI does not want companies to initially change their existing accounting policies

36. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Questions?