CAPITAL ADEQUACY AND SOLVENCY

Keith WeaverSVP & CFO, AsiaManulife Financial

October 28, 2004

The views of a Multinational Life Insurer

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Manulife Financial• #2 Insurance company in North America based on

market capitalization

• Head Office – Toronto, Canada

• Direct selling operations in Canada, USA, Japan, Hong Kong, Philippines, Indonesia, PR China, Taiwan, Malaysia, Vietnam, Singapore, Thailand

• Merged with John Hancock in 2004

• Biggest impact on North America

• In Asia, biggest impact on Singapore with additional minority interests in Malaysia, Thailand, China

• Indonesia, Philippines were small and merge easily into Manulife’s local companies

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Solvency

#1 priority of regulators

is to ensure that

companies can meet their obligations

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Solvency

Appropriate reserves must be set up

AND

Suitable additional capital should be held to meet unforeseen circumstances

(Solvency Margin)

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Solvency Margin

• The size of the required solvency margin should be related to the risks inherent in the insurer’s balance sheet

• The size of the required solvency margin should take into account the conservatism included in the valuation basis

• Manulife supports regulatory approaches that define sensible reserves and a required solvency margin

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Shareholder Returns

• Overly conservative reserves or capital discourages investment

• Shareholders expect adequate returns on investment

• Investment is both strain on new business and regulatory capital

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Valuation / Capital Flaws

• Design can’t be perfect but….• Design flaws can increase risk• Flaws can create non-level playing field• Flaws can distort statutory income• Flaws can affect S&P Ratings

Valuation basis and capital requirements should be complementary

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CGAAP Valuation Overview• Gross premium reserves• Explicit assumptions • New CALM requires explicit asset modelling• All benefits are valued including policyholder

illustrated dividends• Assumptions: best estimates plus margins• Benefits: can monitor assumptions etc.• Benefits: reasonable earnings patterns • Requires extensive actuarial expertise

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Canadian Capital Overview• MCCSR: Minimum continuing capital

solvency requirement• Detail factor approach:

• Types of risk (asset default, mortality, etc.)• Covers negative reserves / CSV deficiencies

• Rules on forms of capital• Benefits to insurer: clear cut rules (altho’

complex).• Benefits to regulator:

• Can monitor ratio and take action• Can fine tune for new risks

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Risk Based Capital

• Manulife prefers Risk Based Capital• Detailed factor approach (e.g. MCCSR) is

better than Composite approach• Traditional simplified solvency ignores risk

and doesn’t require valuation of all benefits (e.g. Terminal Dividends)

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Necessary Conditions for RBC

• Regulator expertise• Professional body of actuaries• Developed capital markets• Stable practices in local insurance

market

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RBC Issues

• Actuarial work intensive - difficult for small life companies

• Precision is misleading• Creative tension on levels and factors

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Manulife supports

single international accounting and

valuation model for life insurance

plus

Standardized RBC approach

BUT

This will be difficult !

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Problems for Multinational Insurers

• Filings on multiple bases

• Some multinational insurers are impacted by double solvency standard (home country + local)

• Typically occurs when home jurisdiction looks at consolidated solvency (vs local regulatory focus on local solvency)

• This can create many anomalies in treatment of essentially similar products and risks

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Problems for Multinational Insurers

• Companies subject to double regulations are at competitive disadvantage since they are subject to additional constraints

• Uneven playing field is concern with no uniform approach to consolidated regulation

• RBC should be on local operations only at this time

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Holding Companies

• Companies establish legal structures for several reasons (limited liability, taxes, etc.)

• Global approach must distinguish between Holding Companies and Operating Companies

• RBC metrics should focus on operating companies

• Risk evaluation for holding companies should be based on risks at that level

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Perils of Global Approachto Regulation• Regulators in one jurisdiction often do not

understand other markets

• Products can be quite different

• Investment climate can be quite different

- - - - - - -

Regulators should focus on their own jurisdiction

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Two Tier Approach

• Simple RBC measure for small companies

• More sophisticated RBC methodology for those companies able to develop appropriate models

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Risk Diversification

• RBC formulas should recognize risk diversification

• Key way of controlling solvency risk

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Financial Reinsurance

• Regulators should be wary of giving too much credit for financial reinsurance

• Companies can reinsure the ‘safe’ risks and only retain the marginal risks

• Issue recognized by OECD

• Manulife supports regulation of FinRe in order to ensure industry soundness and consistency of regulation.

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RBC Must Have Teeth

• Objective is to avoid insolvencies

• RBC must be adequate and strongly enforced

• Exceptions should not be granted

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Manulife strongly prefers

a strong RBC regime to a reliance on

policyholder protection funds!

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Policyholder Protection Funds

• RBC must be in place before PPF is introduced

• RBC allows regulator to monitor financial condition of insurers

• Action can and should be taken before serious losses occur

• Result: minimal claims on PPF • Objection (strong companies

supporting weak companies) to PPF are minimized

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