2009 general meeting ● assemblée générale 2009 ottawa, ontario ● ottawa (ontario) 2009...

2009 General Meeting ● Assemblée générale 2009Ottawa, Ontario ● Ottawa (Ontario)

2009 General Meeting ● Assemblée générale 2009Ottawa, Ontario ● Ottawa (Ontario)

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

Session/séance : PD-22 (Valuation) CLIFR Update Speaker(s)/conférencier(s) : Edward Gibson, Rebecca Rycroft

2

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Agenda

• Mortality Improvement• Currency (Foreign Exchange) Risks• Long – Term Equity Returns• Term of the Liability/Segregated Funds• Group Life and Health• Calibration of Interest Rate Models• Universal Life• Income Taxes• 2009 Fall Letter

3

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Mortality Improvement

• Status• Changes to Standards of Practice

• Notice of Intent published June 2008• Exposure Draft

• Hope to have approved at December ASB meeting

• Promulgation of Improvement Rates• Promulgation of rates will be done by ASB• Will have the force of Standards

• Research Paper/Educational Note• Will support promulgated rates and levels

of margins

4

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Changes to Standards of Practice – current CLIFR Draft• Insurance Mortality (2350.06 and

2350.07)• Maximum reduction based on promulgated

rates where improvement reduces liabilities• Minimum increase based on promulgated

rates where improvement increases liabilities (at appropriate level of aggregation)

• Low and high margins per 1000 for adverse deviation remain at 3.75/ex and 15/ex

5

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Changes to Standards of Practice – current CLIFR Draft• Annuity Mortality (2350.011 and

2350.12)• Minimum increase in liabilities based on

promulgated rates where improvement increases liabilities

• Low and high margins per 1000 for adverse deviation changed to 2% and 8% respectively applied to best estimate

6

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Proposed Base Rates• Improvement rates will be the same for males

and females• Products where improvement

decreases liabilities• Maximum improvement rates are equal to 50%

of “base” rates• Maximum duration of improvements is 25 years

• Products where improvement increases liabilities

• Minimum improvement rates are 150% of “base” rates

• Minimum duration of improvements is 25 years

7

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98

Attained Age

Imp

rov

em

en

t

Male Mod AA Female Mod AA Proposed Valuation

Proposed Annuity Valuation Rates

8

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Mortality Improvement Rates

0.0%

0.5%1.0%

1.5%

2.0%2.5%

3.0%

3.5%

4.0%4.5%

5.0%

0 10 20 30 40 50 60 70 80 90

Attained Age

Imp

rove

men

t

Male Female Proposed

Annuity Minimum Insurance* Maximum

Hardy Study versus Proposed Base

9

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


0.0%

0.5%1.0%

1.5%

2.0%2.5%

3.0%

3.5%

4.0%4.5%

5.0%

0 10 20 30 40 50 60 70 80 90

Attained Age

Imp

rove

men

t




10

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


0.0%

0.5%1.0%

1.5%

2.0%2.5%

3.0%

3.5%

4.0%4.5%

5.0%

0 10 20 30 40 50 60 70 80 90

Attained Age

Imp

rove

men

t




11

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


0.0%

0.5%1.0%

1.5%

2.0%2.5%

3.0%

3.5%

4.0%4.5%

5.0%

0 10 20 30 40 50 60 70 80 90

Attained Age

Imp

rove

men

t




12

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Mortality Improvement: Life Expectancies

Issue Age* 40 50 60

80% of CIA Table 81.6 82.4 83.8

50% of Scale 82.7 83.3 84.5

100% of Scale 83.7 84.2 85.2

150% of Scale 84.8 85.1 85.9

Mod AA Scale 84.5 84.4 85.0

* For a Male Non-Smoker

13

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Mortality Improvement: Life Expectancies*

•

* For a Male Non-Smoker

80

81

82

83

84

85

86

50

Current

Revised

"Base"

Maximumfor Life

Insurance Minimum for Annuities

14

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Proposed Annuity Margins• Proposed Range is 2% to 8%• Life Insurance MfADs produce lower PfADs

• Mortality improvement previously not permitted for insurance

• MfAD needed only for missestimation of mean

• MfAD for deterioration now included with mortality improvement

• Proposed range approximates life margin at age 60

15

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Effective Date• Expected to be Oct. 2010• There will likely be additional capital

requirements from OSFI

16

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Currency (Foreign Exchange) Risk

• Status• Notice of Intent to Revise Standards

published November 15, 2007• Exposure Draft for Revised Standards

published May 22, 2009• Comment Period to June 30th, 2009

• Final Standard approved at August ASB meeting – effective Oct. 15, 2009

• Educational Note being finalized consistent with proposed changes to Standards

17

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Proposed Changes to Standards of Practice (2340.17-2340.19)

• Base scenario assumption developed from currency forward rates or risk-free interest rate differentials

• Consistent with previous fall letter guidance and earlier CLIFR proposal

• PfAD developed from adverse scenario reflecting historical volatility

• Earlier proposal was 5%-50% MfAD reflecting how well economies were integrated

• Minimum MfAD of 5%

18

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Proposed Changes to Standards of Practice (2340.17-2340.19)• Changes to approach for MfAD reflect

feedback received• Combination of forward rates for base

scenario plus high end margin could be unduly conservative

• Base scenario is more of a “risk neutral” approach

• Being combined with “real world” type margin

19

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Proposed Changes to Standards of Practice (2340.17-2340.19)

• Proposed approach parallels that for interest rates

• Base scenario using forward rates• Additional scenario to develop PfAD• Minimum PfAD of 5% parallels +/- 10% interest

rate scenarios

20

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Educational Note – Additional Guidance• Guidance applies to unhedged currency

risk in valuation• Actuary must look at underlying cash

flows to assess whether or not currency risk exists

• E.g. common equity of companies that transact business in several currencies

• Practical application in CALM

21

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Educational Note – Additional Guidance• Construction of Adverse Scenario

• Examine volatility over periods consistent with expected time over which mismatch expected to last

• Suggest use of one standard deviation of change in exchange rate for unbiased measure

• If strong economic evidence that exchange rates will move, use mean plus one standard deviation if directionally consistent

22

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Educational Note Example 1 US/Canada


23

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Liability Example (at Sept. 30, 2008)• Liability of $1000 Canadian payable at the end

of 10 years• Assets backing liability are $U.S.• 10 year risk free rates at valuation date

• US: 3.83%• Canada: 3.72%

• Exchange rate at valuation date• 1 USD buys 1.059 CAD

• Assume underlying USD asset earns risk free rate at valuation date

24

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Implied movement in exchange rates over 10 years• From risk free rates (Base Scenario):

1.059 1.048

• From one Standard Deviation of .17 over 10 year periods (Adverse Scenario):

• 1.059 .877

25

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


Results: Liability in CAD

Continuation of current exchange rate

$686.71

Base currency scenario $694.02

Adverse scenario $829.36

5% minimum margin $730.48

Liability booked $829.36

PfAD $135.34

PfAD as % of base scenario liability: 19.5%

26

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


C a n v s . J a m

6 . 9 0 0

1 1 . 9 0 0

1 6 . 9 0 0

2 1 . 9 0 0

2 6 . 9 0 0

3 1 . 9 0 0

3 6 . 9 0 0

4 1 . 9 0 0

4 6 . 9 0 0

5 1 . 9 0 0

5 6 . 9 0 0

6 1 . 9 0 0

6 6 . 9 0 0

7 1 . 9 0 01

99

1

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Ex

ch

an

ge

ra

te

Educational Note Example 2 Canada/Jamaica

27

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Liability Example (at Sept. 30, 2008)• Liability of 1000 JAD payable at the end of 10

years• Assets backing liability are CAD• 10 year risk free rates at valuation date

• Jamaica: 13.0% (assumed)• Canada: 3.72%

• Exchange rate at valuation date• 1 CAD buys 72.40 JAD

• Assume underlying CAD asset earns risk free rate at valuation date

28

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Implied movement in exchange rates over 10 years• From risk free rates (Base Scenario):

72.40 170.6

• From mean of 1.22 minus one Standard Deviation of .587 over 10 year periods (Adverse Scenario)

72.40 118.4

29

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


Results: Liability in JAD

Continuation of current exchange rate

$694.02

Base currency scenario $294.59

Adverse scenario $424.20

5% minimum margin $310.09

Liability booked $424.20

PfAD $129.61

PfAD as % of base scenario liability: 44.0%

30

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Long-Term Equity Returns

• Development of an Educational Note for establishing investment return assumptions for non-fixed income assets

• Expect to publish Educational Note in early 2010

• Expansion of guidance in previous Fall Letters

31

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

General Update

• Segregated Funds• Exposure Draft Practice-Specific

Standards for Insurers, Subsection 2320 – Term of the Liability

• Approved by ASB and published in February 2009

• Comment period ended March 31 2009• No comments received• Final Standard approved July 15 with an

effective date of October 15, 2009

32

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

General Update

• Segregated Funds• CLIFR’s view is that the current Standards of

Practice imply a different determination of the term of the liability for fully guaranteed contracts compared to those with no material guarantees

• The change clarifies that• The term of the liability for both types of contracts

would end at the balance sheet date if the liability would otherwise be negative

• Extension to recover DAC• The term of the liability would be extended beyond that

date to the date that maximizes the liability, at an appropriate level of aggregation

33

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

General Update

• Segregated Funds• CLIFR’s view is that the current

Standards of Practice guidance on term of the liability needed to be adjusted to recognize the impact of hedging

• The change allows both the value of the liability and the value of its associated hedge to be considered when applying the term of the liability constraints.

34

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

General Update

• Segregated Funds• CLIFR is participating in new ASB “designated

group” to potentially move some of the educational material in the Educational notes and other guidance into the SOP

• Key areas• Stochastic modeling principles• Addition of “Whole Contract” and “Bifurcated Method”• Stochastic model calibration criteria• Assumptions for additional policyholder options

35

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Group Life and Health

• Valuation of Group Life and HealthPolicy Liabilities• Revising May 2000 Research Paper On

Group Life and Health valuation considerations

• Currently in translation and expected to be published in the next couple of months

36

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Group Life and Health

• Similar content to original Research Paper

• Updated to reflect current standards and Group Practices

• Some additional guidance provided on CALM impact of 3855

• Clarification and expansion of section on ERR

37

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Calibration of Stochastic Interest Rate Models

• Phase 1 – Long term interest rates• Has been approved by CLIFR• Received Practice Council approval in

November• Will be published in early 2010

• Phase 2 – Short and medium term interest rates

• Includes correlation between short, medium, and long-term interest rates

• Expected completion in 2010

38

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Later phases• Credit spreads• Other markets• Correlation of interest rates with equities• Correlation of interest rates with currencies

39

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Two significant events since most of work on Phase 1 was completed

• Financial crisis• Publication of calibration criteria by the AAA

40

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Financial Crisis• Long-term rates are the lowest seen in a half

century• A combination of extremely low rates and high

rate volatility that appears unique in modern financial history

• CLIFR believes that recent events confirm the appropriateness of the calibration approach

• The actuary should be cautious if liabilities are sensitive to short term exposure to high volatility

41

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• In May 2009, the AAA published• A fully parameterized stochastic model, and• Stochastic scenario sets• AAA will also provide a tool to generate any

number of scenarios with any initial yield curve

42

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• AAA vs. CIA approach• AAA used a different approach to develop the criteria• Criteria derived in the current low rate environment may

be broadly consistent for some products (such as products with exposure to low long term interest rates)

• This may not be true for all products or all interest rate environments

• Calibration Criteria from other countries• To use other countries calibration criteria need to

demonstrate that they are broadly consistent with the criteria in the CIA educational note

43

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

Tax note

• Future Income and Alternative Taxes Educational Note• Tax changes substantively enacted in

March 2009• Note will be updated to be consistent

with federal tax changes• Expected to be published in early 2010

44

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009 Fall Letter

• Status• Published November 11, 2009

45

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009 Fall Letter – Section 1

• Experience Studies• Expect to refer to

• 2001-2004 Annuitant Mortality Experience (March 2009)

• 2005-2006 Mortality Study – Canadian Standard Ordinary Life Experience (September 2009)

• LTD termination study to be published this year with 1988-1997 experience

46

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Insurance Mortality • Similar to last year

• Any mortality improvement offset in MfAD

• Additional guidance• Best practice to incorporate mortality

improvement from mid point of the study to valuation date

47

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Annuity Mortality• Similar to last year

• just changed effective date of new mortality improvement rates (October 15, 2010)

48

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Scenario Assumptions – Interest Rates• Repeat reminder to test premiums for

default risk at 50% and 200% of those at balance sheet date

• Note the lower bound used in the prescribed scenarios is dropping

• Situations where stochastic results can be used

49

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Can hold CTE(60) to CTE(80) of the stochastic results if:• Reserves are not sensitive to short- and

medium-term interest rates• Stochastic interest rate model meets the

Phase 1 calibration criteria• Stochastic interest rate model doesn’t

include spreads.• If spreads are included then must hold at

least Scenario 9 (old guidance)

50

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Value of Minimum Interest Guarantees and Embedded Options • Guidance unchanged from

previous years• Still appropriate in continued low

economic environment• May not be captured by deterministic

scenarios, consider stochastic testing

51

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009 Fall Letter – Section 5 (old)

• Considerations for Amounts on Deposit and Claims Provisions under AcSB Section 3855 Financial Instruments• Deleted• Still valid, but has appeared

enough times

52

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Implication of AcSB Section 3855 Financial Instruments on Future Income and Alternative Taxes• Tax legislation now substantively

enacted• Previous guidance on what to do in the

interim now withdrawn• Reminder of application of 5 year grade

in period

53

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• HST proposals (ON & BC):• The actuary would discuss these

proposals with the organization’s accountant and auditor to determine whether or not it would be appropriate to reflect the proposals in the 2009 year-end valuation.

54

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009

2009

Gen

eral

Mee

ting

Ass

embl

ée g

énér

ale

2009


• Equity Returns• Reintroduced from 2007 Fall Letter

• Guidance on long term assumption for deterministic valuation

• Impact of 2008 results on 30 year average return

• Review 25% to 40% range for the assumed change in value of non-fixed income assets for the valuation

2009 general meeting ● assemblée générale 2009 ottawa, ontario ● ottawa (ontario) 2009...

Documents