1. CIA Annual Meeting LOOKING BACK…focused on the future

2. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Agenda Approach taken and rationale Numerical example Discussion/Questions: Desire for some uniformity in industry What methodology do you think is acceptable actuarial practice ? Agenda Approach taken and rationale Numerical example Discussion/Questions: Desire for some uniformity in industry What methodology do you think is acceptable actuarial practice ?

3. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future What is Sources of Earnings Presentation of net income in a different format from traditional accounting Explains difference between Actual income and Income that would have been reported had all assumptions at the start of the year been realized Explains impact of reserve margins on income What is Sources of Earnings Presentation of net income in a different format from traditional accounting Explains difference between Actual income and Income that would have been reported had all assumptions at the start of the year been realized Explains impact of reserve margins on income

4. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Uses of a Sources of Earnings Analysis Effective strategic planning and monitoring tool Used to track experience in fields such as mortality, morbidity, expense, investment income, reserve movements (new business strain, release in PfAD’s) Periodic reporting to management Tool also used as an input for DCAT analysis, experience studies, … Uses of a Sources of Earnings Analysis Effective strategic planning and monitoring tool Used to track experience in fields such as mortality, morbidity, expense, investment income, reserve movements (new business strain, release in PfAD’s) Periodic reporting to management Tool also used as an input for DCAT analysis, experience studies, …

5. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future General methodology Group LTD and Life business Detailed model based on concepts similar to individual life & annuities SOE Other group lines Expected vs Actual Loss ratio approach General methodology Group LTD and Life business Detailed model based on concepts similar to individual life & annuities SOE Other group lines Expected vs Actual Loss ratio approach

6. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Principles underlying the detailed model Started with individual life concepts Expected is pricing assumptions Not necessarily the same as valuation expected assumption (based to some extent on industry experience) Using real pricing assumptions has more value to management (real expected, based on company experience) Principles underlying the detailed model Started with individual life concepts Expected is pricing assumptions Not necessarily the same as valuation expected assumption (based to some extent on industry experience) Using real pricing assumptions has more value to management (real expected, based on company experience)

7. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Principles underlying the detailed model Theoretically correct/complete Model before approximations does balance with net income Gives confidence that the “plug” would indeed be zero if reality was less complex Focuses on period of disability There is a significant new business strain component on LTD and WP, which literature typically does not recognize Incidence and termination gains/losses are analyzed and reported separately Principles underlying the detailed model Theoretically correct/complete Model before approximations does balance with net income Gives confidence that the “plug” would indeed be zero if reality was less complex Focuses on period of disability There is a significant new business strain component on LTD and WP, which literature typically does not recognize Incidence and termination gains/losses are analyzed and reported separately

8. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Development of model done through scenarios Start with “expected” income statement model with no PfAD’s (pricing reserve basis) Expected profit margin Successively change parameters to their “actual” value Statutory reserve -> New business strain in first period & expected PfAD releases in following periods Generates gains and losses Factor in change in reserve basis & other items to finish with Development of model done through scenarios Start with “expected” income statement model with no PfAD’s (pricing reserve basis) Expected profit margin Successively change parameters to their “actual” value Statutory reserve -> New business strain in first period & expected PfAD releases in following periods Generates gains and losses Factor in change in reserve basis & other items to finish with

9. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Issues encountered Correlation between the different sources of profits E.g. Incidence & Terminations & Investment income gains/losses are interrelated Treatment of new business What constitutes new business for group insurance ? Built model around the movement of reserves (similarly to individual business) Treatment of reinsurance Cost & benefits of reinsurance factored in explicitly in some cases, implicitly in others (through the use of net reserves) Issues encountered Correlation between the different sources of profits E.g. Incidence & Terminations & Investment income gains/losses are interrelated Treatment of new business What constitutes new business for group insurance ? Built model around the movement of reserves (similarly to individual business) Treatment of reinsurance Cost & benefits of reinsurance factored in explicitly in some cases, implicitly in others (through the use of net reserves)

10. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Group Long Term Disability Expected Profits on Inforce Operations +150 Expected release of PfAD’s New Business Gain+20 Profit margin New Business Strain-220 Expected set-up of PfAD’s on new claims Experience Gains (Losses) +570 Term, Incidence, Expense, Inv. Inc, Disputed, Pending & IBNR Changes in Assumptions+5 Others-25 Earnings on Operations (before taxes & income on surplus) 500

11. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Strategic planning & management tool: Indicators New claims Actual vs Expected Incidence Rate Actual vs Expected Average Reserve Closed claims Actual vs Expected Termination Rate Actual vs Expected Average Reserve Reserves can be with or without margins Mortality Actual vs Expected Mortality Rate Strategic planning & management tool: Indicators New claims Actual vs Expected Incidence Rate Actual vs Expected Average Reserve Closed claims Actual vs Expected Termination Rate Actual vs Expected Average Reserve Reserves can be with or without margins Mortality Actual vs Expected Mortality Rate

12. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Summary Pricing assumptions are being used instead of valuation expected assumptions New business strain & reserve movements are key components of the model Gains and losses split by components “Indicators” are being used for various purposes Summary Pricing assumptions are being used instead of valuation expected assumptions New business strain & reserve movements are key components of the model Gains and losses split by components “Indicators” are being used for various purposes

13. Session 1204 Group Sources of Earnings LOOKING BACK…focused on the future Questions / future improvements How to factor in IBNR, pending & disputed claims ? Change in reserve or separate gains/losses analysis ? Automation of processes Use of SOE in conjunction with experience studies & DCAT Questions / future improvements How to factor in IBNR, pending & disputed claims ? Change in reserve or separate gains/losses analysis ? Automation of processes Use of SOE in conjunction with experience studies & DCAT