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

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 PD- Life Hot Topics Luc Bergeron, FSA, FCIA vice président actuariat La Survivance

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 PD- Life Hot Topics T100 / minimum funded UL with LCOI – Underpricing Maximum funded UL with LCOI – Unintended exposure to assets Stochastic modeling on Product features – It’s easy!

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 You ought to be able to explain why you're making the investment you're making We will only do with your money what we would do with our own.

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 T100 / min funded UL with LCOI Assumptions used in pricing –7% interest rate –1 -1.5% ultimate lapse rate Before age 60 a long time at 3-5% Assumptions used in corporate –ALM + adverse scenarios -> 5% –Lapse own experience / CIA study

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 T100 / min funded UL with LCOI Would you invest your money in that Product? Why are the reinsurers no longer in it? How do you get the message across? –Munich Re Pricing Survey –Invest in a 50-year bond, Yield >7%, after-tax

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 T100 / min funded UL with LCOI Pricing Actuary (Product development Actuary) –Paid to identify anti-selective features –Assess price / risk reward –Maximise profit: Profit x sales –To sell it to your company Now is a good time –Emphasis on profit is present Exceptions –Loss leaders?

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Maximum funded UL with LCOI Pricing –LCOI pricing –Different funding level –Happy: natural hedge Lower lapse: –Bad for the LCOI but –Good for investment spreads discounting (MERs) –That’s why LCOI is cheaper than T100 and pays more compensation

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Maximum funded UL with LCOI Valuation – usual approach –Calculate reserve – blending everything Investment and Insurance components –Carve-out investment at 100% –Reminder invested as a long term liability –Sub-optimal approach Example 5-yr GIC with a market spread of 1% (after margins) –Are you holding 100% as reserve? –Approx. 95% at issue, –gradually increasing to 100%at maturity

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Maximum funded UL with LCOI Valuation – better approach –Calculate reserve separately Investment component – reserve 70% -95% of fund Insurance component – long term liability –Keep lapse sensitivity analysis on components the same Latter approach –More stable Income Statement results –In not doing so Insurance component is invested 5% to 30% in assets reflecting the policyholder investment behaviour / strategy –IFRS “unbundled” will probably result in this treatment An investment strategy for the investment component And for the insurance component

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Stochastic modeling – it’s easy Not talking about the fancy stuff –Segregated-fund, market’s fluctuations,.. Product features that are non-linear –Combo product –Return of premium

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Stochastic modeling – it’s easy Simple binomial process –In /out Incidence rates: qx, qi, qw, … –qx=.001, qi =.02, qw =.10 –Random number generator [1, 999 ] 1 = death, [2, 22[ = morbidity, [22, 122[ = lapse, [122, 999] = survival (if additive)

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Stochastic modeling – it’s easy Return of premium on a DI product –Payable after 10 years without claims –First 10 years – easy A few things that are easier to model stochastically –The “cliff” moves as you become disabled –Claims decrease as you get closer to the “cliff” –Recovering to become active –….

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Stochastic modeling – it’s easy

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Conclusion Actuaries are the Warren Buffet’s of the liability side of an Insurance Company We should act like him: –Understand what we are selling (our products and their ramifications) –Be willing to invest in products we are promoting (If you were the Insurance Company would you invest in that product)

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 PD- Life Hot Topics Questions? Luc Bergeron, FSA, FCIA vice président actuariat La Survivance