Segregated Fund Liability & Capital Methodologies Task Force

Josephine RobinsonJosephine Robinson

• Background

• Task Force Members

• Mandate

• 2007 Educational Note & Update

• OSFI’s Concerns

• Segregated Fund Policyholder Behaviour

– Research Objective

– Current Status

– Next Steps

Agenda

• OSFI and CIA meet bi-annually

• OSFI investigating segregated fund capital and the approach that should be used to assess the level of capital

• Indicated that they were reviewing methodology

• CIA established Task Force

• OSFI prepared to consider input

Background

• Alexis Gerbeau (chairperson)

• Christian-Marc Panneton

• Byron Corner

• Edwin Peh

• Lynn Guo

• Mike Schofield

• Ricardo Mitchell

• Allan Brender (observer)

• Qi Sun (minute taker)

Task Force on Segregated Fund Liability and Capital Methodologies

• To explore alternative methodologies for determining actuarial liabilities and capital considering the total balance sheet requirements

• To address the issue of the recognition of hedging in the determination of actuarial liabilities and regulatory capital for segregated fund guarantees

• To identify at a high level all material risks that should be considered in the determination of the liabilities and capital

• To identify areas where further guidance is required

Mandate of Task Force

• Intention is to prepare a well-articulated recommended methodology

– If no consensus or no methodology is clearly superior then documentation of various methodologies with advantages and disadvantages would be prepared

Mandate of Task Force

• Intend to examine particular risks related to a hedging program such as basis risk, the uncertainty in future implied volatility and the liquidity risk in financial markets.

– Currently insufficient guidance as to how to reflect this in the valuation

Mandate of Task Force

• Target date of final report is the end of December 2009

• Areas that require additional review and quantification would be dealt with thereafter

Time Frame

Issues addressed

1. Valuation Method – Bifurcated or Whole Contract Approach

2. Term of the Liability

• Hedging

3. Recoverability Testing for the Allowance for Acquisition Expenses

• Choice of CTE Level

November 2007 Educational Note

Issues addressed (cont’d)

• Level of Aggregation

• Discounting and C3 PfAD

• Policyholder Related Assumptions

• Margins for Adverse Deviation

• Sampling/Number of Scenarios

November 2007 Educational Note

• 2002 Segregated Fund paper only dealt with the downside movement

– Draft by the 2007 Task Force on Segregated Funds in their unpublished paper was focused on expanding on this issue

Update

• Whether current approach captures all the risks and produces sufficient required capital

• Last year’s crisis highlights that there continues to be unresolved issues in establishing required capital

OSFI’s Concerns

• OSFI is concerned with the significant differences amongst companies; different models are used to model the same risk

• OSFI is investigating alternative methodologies

• OSFI will consider the work of the Task Force

OSFI’s Concerns

The Member Services Council established a subcommittee to investigate what analysis should be conducted for segregated funds policyholder behaviour

• Subcommittee of the Research Committee

• Will start with an empirical analysis of policyholder lapsation

Segregated Fund Policyholder Behaviour

• Gather together data on lapses across relevant policyholder, distribution and product features characteristics

– Will deliver a report and Excel tables for practitioners to perform additional analysis

Research Objective

• Currently working on the second iteration of the data request template

• Preparing a notice of intent to obtain data for a segregated fund lapse experience study (incl. data guidelines, instructions and confidentiality agreement)

Current Status

• Data processing, analysis of results and construction of lapse tables based on experience

– Data collection targeted for 2010

– Report and distribution to members

Next Steps