Transcript Canadian FIAC Actuarial Policy

CIA PD 30:
3855 Implementation:
SLF View
Chris Christaki
Introduction
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3855 = FIAC = Financial Instruments Accounting Changes
Sun Life world wide project
Main areas of Canadian impact:
– Investment Accounting
– Tax
– Actuarial Reserving
– Impact to quarterly close period
Lesson Learned:
– knew International GAAP was on the horizon
– Took simplest approach possible that was acceptable
under CSOP
– Could have made this more complicated – but shelf life
is short (4-5years)
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Accounting Mismatch, Term of Liability>0
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Under CALM, Actuarial Liabilities are equal to the
Statement Value of the assets that back them.
Both AFS and HFT assets use market value on balance sheet.
Impact of Unrealized Gains and Losses on Actuarial
Liabilities always flows through Income via change in
Actuarial Liabilities. (i.e., don’t get USGAAP shadow
treatment)
HFT: Unrealized Gains and Losses in Income
Stable Income
AFS: Unrealized Gains and Losses in OCI
Unstable Income
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Accounting Mismatch, Term of Liability>0
Conclusion
– Choose HFT whenever possible
– Opposite of USGAAP
• Lesson Learned: it is troublesome to have the
same asset designated 2 ways for 2 different
bases. Lack of shadow accounting on the
liabilities has created this.
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Accounting Mismatch, Term of Liability=0
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Under CSOP, Actuarial Liability is equal to the
Account Value or undiscounted value (e.g., IBNR)
Unrealized Gains and Losses do not impact Actuarial
Liabilities and never flow through Income via change in
Actuarial Liabilities
HFT: Unrealized Gains and Losses in Income
Unstable Income
AFS: Unrealized Gains and Losses in OCI
Stable Income
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Accounting Mismatch, Term of Liability=0
Conclusion:
• Choose AFS whenever possible
• Same as USGAAP
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Valuation
Goals
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Maintain existing control processes
Minimize inappropriate volatility of income
Issues
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Deferred Tax Accounting
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Four Valuation Methods
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CFVM (Cash Flow Valuation Method)
PPM + Fair Value Adjustment
Modified Account Value (some participating
products)
Account Value for term 0 liabilities
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PPM + Fair Value Adjustment
Post  3855 Reserve  Pre 3855 Reserve
 Post  3855StatementValue of Assets
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 Pre 3855StatementValue of Assets 
•Use for portfolio segments
•Maintain Pre-3855 accounting and reserving
•Keep existing controls
•Stable base for SOE and MCCSR (e.g. Negative Reserves)
•Maintain Policyholder Reasonable Expectations (PRE) in Group and
Individual Life
•Lessons Learned:
•double work for Investment accounting,
•Investment Accounting was not preserved perfectly,
•must carefully consider what is included in ratio (surplus, goodwill,
short term liabilities).
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CFVM (Cash Flow Valuation Method)
Post - 3855Reserve Post - 3855StatementValue of Assets
 Discounted Value of ProjectedLiabilityCash Flows
- DiscountedValue of ProjectedAsset Cash Flows
•Use for CFVM segments (Individual Wealth and GRS)
•Manage under Discounted Values
•Keep existing controls
•Keep existing SOE
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Modified Account Value
P ost  3855 Reserve  Account Value 
  P ost  3855 St atementValue of Assets
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Max1,
  P re 3855 St atementValue of Assets 
• Applies to Dividends on Deposit (DOD)
• Demand liability, but credited rates are tied to portfolio rates
on Pre-3855 basis
• Because of PRE cannot change credited rate strategy quickly
• If Post-3855 Asset Value> Pre-3855 Asset Value, need reserve
larger than account value to support future credited rates
Term of Liability>0
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Modified Account Value cont’d
• If Post-3855 Asset Value < Pre-3855 Asset Value, Term
of Liability=0, since extending the term of the liability
lowers the reserve below the account value
Account Value Floor
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Account Value
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Use for liabilities with Term of Liability=0
In theory should be backed with AFS assets to get
stable Net Income
Use HFT as liabilities are small and income
volatility from accounting mismatch is small
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Deferred Tax Accounting
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Do CALM on a no-tax basis
Remove best estimate timing differences and
calculate Discounted Deferred Tax Liability
(DDTL)
Some 3855 adjustments are not taxed because they are
permanent differences:
 Changes flow directly to after tax income
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December 28 2006 Proposals
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Mark-to-Market Properties
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Gains/losses realized before 2007 continue to be spread over the remaining term to maturity
All debt obligations carried at fair market value for accounting purposes will be mark-to-market for
tax (Under current rules only new debt obligations were mark-to-market for tax)
Unrealized gains/losses of these investments as at January 1, 2007 will be spread evenly over a 5year period
Changes in Policy Reserves
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Post-1995 Tax Reserves
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Increase or decrease in reserves as of January 1, 2007 spread over 5 years starting with 2007
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Pre-1996 Tax Reserves
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Beginning January 1, 2007 tax reserves for pre-96 policies (but not health) will be based upon
statement reserves (i.e. the rules that currently apply to post-1995 tax reserves will apply to ALL
reserves). The one time change in pre-1996 tax reserves will be spread over 5 years starting
with 2007
Capital Tax
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Excess of statement policy reserves over tax policy reserves no longer in base
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December 28 2006 Proposals
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GOOD NEWS – simpler!
BAD NEWS
• so late, no time to react
• No real law, no guidance – essentially no one knew
what to do
• CLIFR letter was distributed in April 13 (after quarter
end!)
Lesson Learned: If possible, try to start lobbying the
Department of Finance earlier to ensure there is enough time
to implement appropriately.
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Accounting Issues
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Should the Tax proposals be considered in the restatement under 3855 of
the opening balance sheet for 2007?
• Tax proposals are not substantively enacted and may not be for some
time:
• Debt Obligation and Capital tax proposals require changes to
Income Tax Act. Requires passing 3rd reading to be substantively
enacted under minority government
• Reserve proposals require changes to regulations. To be
substantively enacted, the Privy Council must pass an order (called
an "Order in Council"). This process takes considerable time
..sometimes years
• Result – tax had to use current rules for all their calculations
• Are the changes to the pre-’96 reserves separate from the 3855
changes and does the change flow through income?
• agreement that it is not part of 3855 and that it will flow through
income
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Actuarial Concerns and Issues
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CLIFR letter:
• No adjustment to 2006 year-end liabilities
• Adjustments to opening balance sheet:
• Caution should be used in projecting any favourable tax
timing changes as a result of the accounting changes
• If liabilities reduce, ignore impact until proposal is
substantively enacted
• If liabilities increase, assume that proposed rules are a
reasonable best estimate of future tax regulations
• Evaluation is in aggregate, but done separately for
shareholders and policyholders
• Result:
• For Actuarial Liabilities we used Proposed Rules (Dec 28th)
• Set up additional tax PfAD in case of changes to proposed
rules
• Similar approach in par blocks
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Implementation Challenges
and Issues
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CRA (Canada Revenue Agency) likely will administrate as if rules were in place
for 2007
Implication:
• After-tax actuarial liabilities are done on proposed rules.
• Tax accounting done on current rules
• Use carve-out to preserve impact of proposed rules by looking at what Tax
department has actually booked
• Lesson Learned: Work needs to be done twice
• Accounting rules do not permit you to do anything else (Current rules)
• Actuarial Rules allow you to do what is reasonable (Proposed rules)
(CSOP 1130.10)
Some asset segments did not line up with liability segments – this created a host
of issues
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Other 3855 related Impacts
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SOE – preserved pre-3855 SOE and created new source
called 3855 (plan to drill down into more detail if needed).
– Lesson Learned: optimal solution is to apply 3855
appropriately to each source.
EV – Changes were minimal
– Only real impact is cost of capital due to increase in
MCCSR
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CALM – CALM is essentially 3855 blind
• Essentially a cashflow is a cashflow
• Need alternative base for any assumption that is based
on statement value of reserves e.g. defaults,
investment expenses, etc…
• Lesson Learned: less 3855 impact in segments that are
better matched
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