Transcript Canadian Institute of Actuaries L’Institut canadien des

Canadian
Institute
of
Actuaries
L’Institut
canadien
des
actuaires
PD – 27 CLIFR Update
2008 General Meeting
Assemblée générale 2008
Toronto, Ontario
Agenda
2008 General Meeting
Assemblée générale 2008
• General Update and Fall Letter – Ty
• Equity Returns - Leonard
• Group Life and Health - Whitman
General Update
• CLIFR Committee
•
•
2008 General Meeting
Assemblée générale 2008
•
Chair – Ty Faulds
Vice-chair – Dale Mathews
Members – Wally Bridel, Nathalie Bouchard,
Tim Cavalin, Alexis Gerbeau, Edward Gibson,
Eric Jobin, Jean Mongrain, Leonard Pressey,
Rebecca Rycroft, Sheldon Selby, Mary Stock,
Whitman Wu
General Update
• CLIFR – Effect of International Standards
•
Essentially in maintenance mode with respect to
current standards
•
2008 General Meeting
Assemblée générale 2008
•
•
•
Avoiding significant new initiatives
Several existing initiatives still in progress
Trying to ensure existing initiatives are
reasonably consistent with IFRS
Ready to assist ASB / PC with conversion to IFRS
•
Support to ASB on Discretionary Participating
Features
General Update
• Recent Publications – Educational Notes
2008 General Meeting
Assemblée générale 2008
•
Implications of Proposed Revisions to Income
Tax Legislation (November 7, 2007
Department of Finance Proposal), January
2008
•
•
•
Extended current guidance to include changes
related to tracking properties
Consistent with earlier Educational Note of April,
2007
Considerations in the Valuation of Segregated
Fund Products, November, 2007
General Update
• Recent Publications – Notices of Intent
2008 General Meeting
Assemblée générale 2008
•
•
Notice of Intent to Revise the Standards of
Practice – Practice-Specific Standards for
Insurers, Subsection 2320 – Term of the
Liability
Notice of Intent Regarding a Change to the
Treatment of Secular Trends for Insurance and
Annuitant Mortality in the Standards of Practice
– Practice-Specific Standards for Insurance,
Subsection 2350 Life and Health Insurance
General Update
• Current Initiatives
•
•
2008 General Meeting
Assemblée générale 2008
•
•
•
•
•
Mortality Improvements
Currency (Foreign Exchange) Risks
Segregated Fund Valuation
Universal Life
Calibration of Interest Rate Models
Equity Returns
Group Life and Health
General Update
• Current Initiatives – Mortality Improvement
•
Goal: Propose mortality improvement basis for
annuity and life insurance valuation
2008 General Meeting
Assemblée générale 2008
•
•
•
Draft educational note expected Early 2009
Changes required to Standards of Practice – Notice of
Intent published June, 2008
Changes to Standards won’t be effective until 2009
–
•
Exposure Draft in due process
Method of Promulgation of Mortality Improvement
Assumptions likely to change in 2009
General Update
• Current Initiatives – Mortality Improvement
•
Current Draft Proposal
2008 General Meeting
Assemblée générale 2008
•
•
•
•
“minimum reserve” prescribed for valuation of life
insurance and annuity business
Base improvement scales would be the same for life
and annuity business
Mortality improvement assumption would have its
own MfAD
MfAD’s on base assumption before improvement
–
–
No change for Life
reduced for Annuitant mortality
General Update
• Current Initiatives – Mortality Improvement
•
Current Draft Proposal
2008 General Meeting
Assemblée générale 2008
•
•
Improvement rates will be the same for males and
females
Life Insurance
•
•
•
Maximum improvement rates are 50% of “base” rates
Maximum duration of improvements is 25 years
Annuities
•
•
Minimum improvement rates are 150% of “base” rates
Minimum duration of improvements is 25 years
General Update
• Current Initiatives – Mortality
Improvement
•
Promulgation of Improvement Rates
2008 General Meeting
Assemblée générale 2008
•
•
•
•
Paragraph 2350.11 “It is prescribed that the
actuary’s best estimate includes a secular trend
toward lower mortality as promulgated from time
to time.”
Promulgation has been done via CLIFR Fall Letter
Process expected to be changed in 2008 –
improvement rates considered part of standards
Process being developed with ASB
General Update
• Current Initiatives - Currency Risks
•
Had proposed in Notice of Intent
•
Use of currency forwards for best estimate
•
2008 General Meeting
Assemblée générale 2008
•
•
MfAD range from 5% to 50%
Feedback
•
•
•
–
If not available, use interest rate differentials
Is this consistent with direction of International
Standards?
Use of risk neutral Best Estimate plus a margin
Why expanding MfAD range
Working on Revisions
General Update
• Current Initiatives – Segregated Funds
–
–
Notice of Intent published June, 2008
Exposure Draft to be out shortly (in due process)
•
2008 General Meeting
Assemblée générale 2008
–
Changes to Standards won’t be effective until 2009
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 proposed change would clarify 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.
General Update
• Current Initiatives – Segregated Funds
2008 General Meeting
Assemblée générale 2008
–
CLIFR’s view is that the current Standards of
Practice guidance on term of the liability
needs to be adjusted to recognize the impact of
hedging
– The proposed change would allow both the value of the
liability and the value of its associated hedge to be
considered when applying the term of the liability
constraints.
General Update
• Current Initiatives – Universal Life
2008 General Meeting
Assemblée générale 2008
–
–
–
Revising draft Educational Note to reflect
finance proposal in area of tracking properties
(Unit Trusts)
Timing dependent on passage of legislation
Note that a working group had been investigating
changes to standards to address similar situations
•
Conclusion that current standards provide enough
flexibility
General Update
• Current Initiatives – Calibration of Interest
Rate Models
2008 General Meeting
Assemblée générale 2008
–
–
Initial Phase focused on long end of the yield
curve
Draft Calibration criteria for
•
•
•
–
–
–
steady state (long horizon)
Shorter term
Mean Reversion
Presented at AA Seminar
Draft Educational Note to be published
Working Group testing impact
General Update
Draft Calibration Criteria – Steady State
Long horizon
2008 General Meeting
Assemblée générale 2008
Left tail
Right tail
Percentile
Long rate
Historical
’36-’07
2.5th
2.60%
2.61%
5th
2.95%
2.90%
10th
3.40%
2.99%
90th
10.00%
10.56%
95th
12.00%
12.16%
97.5th
13.50%
13.44%
Long horizon is 60 years
Long rate is 20 year bond
General Update
Draft Calibration Criteria – Shorter Term: 2 and 10 year
Horizon
Initial Rate
2008 General Meeting
Assemblée générale 2008
Left-tail
Righttail
2-Year
10-year
4%
6.25%
9%
4%
6.25%
9%
2.5th perc.
2.95%
4.40%
6.20%
2.50%
3.20%
4.00%
5th perc.
3.10%
4.65%
6.55%
2.70%
3.50%
4.45%
10th perc.
3.30%
4.95%
6.95%
3.00%
3.90%
5.00%
90th perc.
5.05%
7.70%
10.70%
6.60%
9.05%
11.60%
95th perc.
5.40%
8.15%
11.30%
7.45%
10.25%
12.80%
97.5th
perc.
5.70%
8.60%
11.80%
8.25%
11.40%
13.90%
General Update
• Current Initiatives – Calibration of Interest
Rate Models
2008 General Meeting
Assemblée générale 2008
– Next phase:
• Calibration criteria for short and medium term risk
free rates
• Correlation between short, medium and long rates
– Later work could focus on:
• Credit spreads
• Correlation between equities and interest rates
• Correlation between currencies and interest rates
General Update
• Current Initiatives – Testing Impact of
Calibration of Interest Rate Models
2008 General Meeting
Assemblée générale 2008
– Assumed:
• All assets supporting liabilities are risk free.
• Only purchase risk free assets in the future.
 results don’t depend on credit spread assumptions
• Initial yield curve: June 2008, and June 2008 +/- 2%
 allows the assessment of the sensitivity of results to
yield curve movements
General Update
Current Initiatives – Testing Impact of Calibration of
Interest Rate Models
1. Payment Annuities (CF beyond 30 years supported
by 30-year zero coupon)
2008 General Meeting
Assemblée générale 2008
Stochastic CALM
initial yield curve
base
base + 2%
base - 2%
mean
1,000
996
1,005
initial yield curve
base
base + 2%
base - 2%
Worst
1,021
1,014
1,059
base
base + 2%
base - 2%
standard
deviation
11
10
11
Best
979
971
980
Worst
1,034
1,031
1,041
Sc 0
1,006
1,006
1,006
Sc 1
1,018
1,014
1,020
Sc 2
987
984
990
CTE60 /
CTE80 /
Deterministic Deterministic
99.0%
99.5%
99.2%
99.7%
96.0%
96.5%
CTE 60
1,011
1,006
1,017
CTE 75
1,014
1,010
1,020
Deterministic CALM
Sc 3
Sc 4
1,001
1,001
993
999
999
999
CTE 80
1,016
1,011
1,022
CTE95
1,024
1,019
1,029
CTE99
1,030
1,025
1,037
Sc 5
994
987
993
Sc 6
996
995
993
Sc 7
1,010
1,011
1,010
Sc 8
1,002
1,002
1,001
Sc 9
1,021
1,000
1,059
General Update
2008 General Meeting
Assemblée générale 2008
• Current Initiatives – Testing Impact of
Calibration of Interest Rate Models
– Results are similar for T100
– For an asset-liability profile exposed to the risk
of low interest rates in 30 years:
• Deterministic CALM ~ stochastic CALM as at June
2008.
• Results are less volatile under stochastic CALM.
• In particular, exposure to the risk of a downward
shift in interest rates is greater with deterministic
CALM because of scenario 9.
General Update
Current Initiatives – Testing Impact of Calibration of
Interest Rate Models
2. Minimum interest rates guarantee on term investment
funds on universal life policies
2008 General Meeting
Assemblée générale 2008
Stochastic CALM
initial yield curve
base
base + 2%
base - 2%
standard
deviation
mean
1,000
791
640
653
1,708
900
initial yield curve
base
base + 2%
base - 2%
Worst
2,142
1,157
6,267
base
base + 2%
base - 2%
Sc 0
672
682
663
CTE60 /
CTE80 /
Deterministic Determinist
83.3%
105.8%
110.8%
147.8%
41.7%
49.1%
Best
0
0
53
Sc 1
1,757
941
2,954
Worst
4,402
3,796
4,976
Sc 2
0
0
775
CTE 60
1,785
1,281
2,615
CTE 75
2,122
1,576
2,945
CTE 80
2,267
1,710
3,078
CTE95
3,022
2,449
3,762
CTE99
3,760
3,244
4,480
Deterministic CALM
Sc 3
Sc 4
Sc 5
148
233
209
147
153
98
600
600
580
Sc 6
204
131
580
Sc 7
1,333
1,157
1,321
Sc 8
198
211
192
Sc 9
2,142
0
6,267
General Update
2008 General Meeting
Assemblée générale 2008
• Current Initiatives – Testing Impact of Calibration
of Interest Rate Models
– Results are similar for minimum interest rates guarantees
on GIC.
– When the payoff is an asymmetrical function of interest
rates:
• As at June 2008, stochastic CALM < deterministic CALM:
• the assumption that current rates persist forever (sc 9) is more
conservative than calibration criteria.
• Results are much less volatile under the stochastic CALM.
• For a downward shift of 2%:
– deterministic CALM up by a factor of 2.9
– stochastic CALM up by a factor of 1.7
General Update
Current Initiatives – Testing Impact of Calibration of
Interest Rate Models
3. 5-year term deposit without minimum interest rates
guarantee supported by a 10-year zero-coupon
2008 General Meeting
Assemblée générale 2008
Stochastic CALM
initial yield curve
base
base + 2%
base - 2%
initial yield curve
base
base + 2%
base - 2%
base
base + 2%
base - 2%
standar
d
mean
1,000
87
1,064
104
933
63
Worst
1,205
1,239
1,115
Sc 0
962
963
960
CTE60 / CTE80 /
Determinis Determin
90.1%
93.8%
94.2%
98.6%
89.2%
92.4%
Best Worst
827
1,415
817
1,640
806
1,255
Sc 1
923
989
864
Sc 2
1,021
1,108
941
CTE 60
CTE 75 CTE 80
1,086
1,116
1,131
1,167
1,204
1,222
995
1,018
1,030
Deterministic CALM
Sc 3
Sc 4
Sc 5
1,108
1,108
1,141
1,195
1,066
1,239
1,026
1,026
1,115
CTE95
CTE99
1,221
1,321
1,330
1,459
1,095
1,176
Sc 6
1,205
1,150
1,115
Sc 7
943
945
942
Sc 8
981
982
979
Sc 9
932
1,028
844
General Update
• Current Initiatives – Testing Impact of
Calibration of Interest Rate Models
2008 General Meeting
Assemblée générale 2008
– For a profile of asset-liability exposed to the risk
of high interest rates in 5 years:
• As at June 2008, stochastic CALM < deterministic
CALM:
• the increase in rates over the next 5 years in scenario
6 is much more conservative than calibration criteria.
• In scenario 6, the 5-year rate goes from 3.5% to 8.4%
in 5 years.
General Update
• Current Initiatives – Testing Impact of
Calibration of Interest Rate Models
2008 General Meeting
Assemblée générale 2008
– Working Group also looking at a unified
methodology for reinvestment strategy.
• Under current SoP, reinvestment strategies for
scenarios 0, 7, 8 and 9 can differ from those
(prescribed) for scenarios 1 to 6.
• For the application of the stochastic CALM, a unique
reinvestment strategy to be applied consistently across
all scenarios must be determined.
2008 Fall Letter
• Status
•
At Practice Council for Approval
2008 General Meeting
Assemblée générale 2008
• Letter is getting shorter
•
•
Educational notes published or about to be
published
Maintenance mode on existing standards
2008 Fall Letter
• Insurance Mortality
•
•
2008 General Meeting
Assemblée générale 2008
•
Unchanged
Any mortality improvement offset in MfAD
Changes to Standards of Practice related to
mortality improvement would be effective in
2009
2008 Fall Letter
• Annuity Mortality
•
2008 General Meeting
Assemblée générale 2008
•
Unchanged
Continues previous recommended alternative
to AA scale
•
•
•
Detailed in Appendix A
Changes to Standards of Practice related to
mortality improvement would be effective in
2009
Method for promulgation of rates of mortality
improvement expected to change in 2009
2008 Fall Letter
• Scenario Assumptions – Interest Rates
•
2008 General Meeting
Assemblée générale 2008
•
•
Modified from last year
Refers to Phase I of development of
Calibration Criteria expected to be published
this year
In the context of stochastic testing, if policy
liability is less than that required under worst
prescribed scenario CLIFR recommends
•
•
•
that the actuary ensure that model generated rates
are tested against draft calibration criteria, and
that rates ideally satisfy draft criteria,
in addition to guidance from previous years.
2008 Fall Letter
• Lapse Studies – Universal Life Level COI
and Term to 100
•
Modified to reflect
2008 General Meeting
Assemblée générale 2008
•
•
October 2007 study on lapse experience under
Universal Life Level COI Policies
October 2007 Term to 100 lapse study
• Long Term Equity Returns
•
Deleted in anticipation of Educational Note
2008 Fall Letter
2008 General Meeting
Assemblée générale 2008
• Value of Minimum Interest Guarantees and
Embedded Options
• Guidance unchanged from previous years
• Low current economic environment
• Not captured by deterministic scenarios
2008 Fall Letter
2008 General Meeting
Assemblée générale 2008
• Considerations for Amounts on Deposit
and Claims Provisions under AcSB Section
3855 Financial Instruments
• Guidance unchanged from previous years
• Concerns if liability valued without interest
adjustment
• Guidance on presentation in financial
statements
2008 Fall Letter
• Implication of AcSB Section 3855 Financial
Instruments on Future Income and Alternative
Taxes
2008 General Meeting
Assemblée générale 2008
•
•
Guidance modified from last year
July, 2008 draft proposals released
•
•
•
•
essentially unchanged from November 2007
comment period to September 15, 2008
not substantively enacted at time of writing
If auditor / accountant agree for balance sheet tax
provision to treat as if substantively enacted then
policy liabilities would be calculated consistent with
this position
2008 Fall Letter
2008 General Meeting
Assemblée générale 2008
• Implication of AcSB Section 3855
Financial Instruments on Future Income
and Alternative Taxes
• Otherwise
•
•
If current liabilities greater than post 3855
liabilities on both current and proposed basis,
then appropriate to reflect draft legislation in
2008 year-end liabilities
However, actuary would not reduce liabilities
relative to the liabilities in post-3855
environment with current tax rules.
2008 Fall Letter
2008 General Meeting
Assemblée générale 2008
• Implication of AcSB Section 3855
Financial Instruments on Future Income
and Alternative Taxes
• Considerations
•
•
•
•
Amount of time which has passed
Consistency of most recent draft with
revisions published in November, 2007
Difficulty in tracking liabilities on pre 3855
basis
Understanding that many insurers filed 2007
returns on basis of draft legislation