Actuary s Guide to Reporting on Insurers of Persons Policy Liabilities. Senior Direction, Supervision of Insurers and Control of Right to Practice

Transcription

1 Actuary s Guide to Reporting on Insurers of Persons Policy Liabilities Senior Direction, Supervision of Insurers and Control of Right to Practice September 2015

2 Legal deposit - Bibliothèque et Archives nationales du Québec, 2015 Legal deposit Library and Archives Canada, 2015 ISSN (on-line version)

3 TABLE OF CONTENTS Section Introduction B1 Summary of tables B2 Format of report B3 Section 1 - Executive summary B4 Section 2 - Summary of consolidated net contract liabilities and net provisions for adverse deviations B5 2.1 Net contract liabilities consolidated B5 2.2 Net provisions for adverse deviations consolidated B Additional net provisions for adverse deviations consolidated B5 Section 3 - Verification of data and calculations B6 Section 4 - Valuation assumptions B7 4.1 Determination of valuation assumptions B Mortality B Morbidity B Economic assumptions B Expenses B Lapses and partial withdrawals B Other assumptions B Description of valuation classes and assumptions B14 Section 5 - Valuation method and system B15 Section 6 - Other net contract liabilities consolidated B16 Section 7 - Materiality standard and approximations B17 Section 8 - Variation in consolidated net contract liabilities B Summary B By type of variation B18 Section 9 - Reinsurance B19 Section 10 - Segregated funds B20 Section 11 - Asset/liability management (ALM) B21 Section 12 - Conclusion B22 Appendix 1 - Actuary s certificate B23 Appendix 2 - Specific disclosure requirements B24 Appendix 3 - Segmentation of assets and liabilities B25 Appendix 4 - New individual business issued B26 Appendix 5 - Lapse-supported products B27 Appendix 6 - Sources of earnings and internal control over net policy liability analysis B28 Appendix 7 - Life insurance products with interest rate guarantees B29

4 Introduction This Guide is intended for actuaries of Quebec chartered insurers of persons. It sets out the requirements of the Autorité des marchés financiers (the AMF or the Authority ) for the content and presentation of the report required under section of An Act respecting insurance, CQLR, c. A-32 (the Act ). It does not in any way limit the information that may be included in the report. The actuary should include all information in addition to that mentioned in this Guide that is necessary for a proper understanding of his work. As required in section of the Act, the actuary shall apply generally accepted actuarial practice in carrying out his work. He shall, however, take into account any changes, clarifications or requirements made thereto by the AMF. Accordingly, he should comply with the accepted actuarial practice set out in the Standards of Practice of the Canadian Institute of Actuaries (the CIA ). The actuary must consider the guidance provided by the CIA s Committee on Life Insurance Financial Reporting ( CLIFR ), in particular, in the fall letter. He must justify any failure to comply with the above-mentioned documents and guidance. The actuary s opinion deal with the insurer s consolidated business. Some tables in the actuary s report are intended for reconciliation with the LIFE form and must therefore be presented on a consolidated basis. Those tables are explicitly identified in this Guide. All other information required herein concerns strictly non-consolidated business, since the information relating to the business of subsidiaries is found in the actuary s reports of the latter. The AMF expects that the valuation methods and assumptions to be clearly justified. Among other things, the source of the assumptions must be clearly disclosed. Thus, the actuary may be required to produce additional explanations if the financial returns or the actuary s report do not make it possible to judge the relevance of the methods and assumptions used. To that end and for the purpose of on-site examination, the actuary must collect and keep: the tests, studies and other analysis he carried out; the documents that could provide a clear and complete justification for the choice of methods and assumptions used; and the control procedures for data, assumptions and calculations. September 2015 B1.1

5 Summary of tables The tables the actuary must include in the appropriate sections of the report are as follows: Section Title Page 2.1 Net contract liabilities consolidated B Net provisions for adverse deviations by type consolidated B Net provisions for adverse deviations by year - consolidated B Schedule of the experience study B Mortality actual to expected experience vs. assumptions selected B Mortality credibility B Morbidity actual to expected experience vs. assumptions selected B i) Non-fixed income assets assumptions B i) Projected percentage of non-fixed income assets relative to total asset value B ii) assetaluevalue Fixed income assets assumptions B iii) Asset default risk (C-1 risk) B iv) Investment expenses actual to expected experience vs. assumptions selected B v) Interest rate risk (C-3 risk) B Maintenance expenses actual to expected expenses B Maintenance expenses experience ratios B Lapses actual experience vs. assumptions selected B Other net contract liabilities consolidated B Variation in other net contract liabilities - consolidated B Variation in consolidated net contract liabilities by type of variation B Reinsurance agreements B Reinsurance new agreements and amendments B Reinsurance concentration B Segregated funds B Duration matching level by segment B21.1 Appendix 3 Segmentation of assets and liabilities B25.1 Appendix 4 New individual business issued B26.1 Appendix 5 Lapse-supported products B27.1 Appendix 6 Sources of earnings and internal control over net policy liability analysis B28.1 Appendix 7 Life insurance products with interest rate guarantees B29.2 The actuary must ensure that these tables contain all the information required by this Guide, and comply with the format provided for herein, as applicable. September 2015 B2.1

6 Format of report Table of contents The report must include a detailed table of contents, containing all the sections outlined in this Guide in the order in which they are provided. If the actuary deems it appropriate to add sections to the report, he may do so after the prescribed appendices. Furthermore, the different sections must be identified and all pages must be numbered, in such a way that a reference can be made in the table of contents. Contact person The report must provide the contact information for that person, who is appointed by the actuary to answer disclosure questions relating to the report. Such contact information must be clearly indicated on the first page of the report and include the: contact person s name; mailing address; telephone number; address. Outline of report The actuary must ensure to produce a clear and complete report that contains all the sections, sub-sections and appendices set out in this Guide, as well as all the required tables listed on page B2.1. All the sections, appendices and tables are required in the report for administrative purposes. Thus, even if a section does not apply to an insurer, it must still be included in the report. September 2015 B3.1

7 Section 1 Executive summary This section of the report is intended to describe the context in which the actuarial valuation of the policy liabilities and reinsurance recoverables ( reinsurance assets ) was performed. Accordingly, the actuary must include the following: a brief presentation of the insurer: an overview of the insurer s structure; the changes made to the structure; the insurer s lines of business, etc. the significant developments in recent years materially affecting policy liabilities, reinsurance assets or the insurer s results: the introduction or termination of an important product or line of business; the implementation or discontinuation of an important reinsurance treaty; a portfolio transfer, partnership, merger or acquisition; a brief description of all material changes arising from the implementation of new accounting standards (e.g. phase 1 of IFRS), etc. a description of the material risks the insurer is facing: the material risks raised in connection with the last report on the insurer s financial position ( DCAT ); any other risk deemed material by the insurer; any material change to the methods and assumptions, etc. any other element required for a proper understanding of the valuation, such as: the significant issues or concerns identified by the actuary and the manner in which they were resolved; any unusual situation identified in connection with the valuation, etc. September 2015 B4.1

8 Section 2 Summary of consolidated net contract liabilities and net provisions for adverse deviations 2.1 Net contract liabilities consolidated In this section of the report, the actuary must provide a detailed table that reproduces the (gross) insurance and investment/service contracts liabilities (the contract liabilities ) indicated on pages , and of the LIFE form. In this Guide and in the table below, net contract liabilities refers to (gross) contract liabilities less reinsurance assets. The actuary should also provide information on the premiums and amounts in force. The information in this table must cover non-consolidated business and the business of subsidiaries, in order to reproduce certain amounts from the annual return. However, since the primary objective of the actuary s report is to provide information on a non-consolidated basis, complete information is required strictly for non-consolidated business. For each line of business, the actuary must provide the following information: Valuation class Premiums Gross Amount in-force LINE OF BUSINESS (in $000) Net (of reinsurance assets) Contract liabilities Premiums Amount in-force Contract liabilities Allocation of net contract liabilities Nonconsolidated Canada Class 1 Class 2 Subtotal Subsidiaries Canada Canada total United States Line of business total September 2015 B5.1

9 Please note the following points with respect to the table above: For each valuation class of non-consolidated business, the Valuation class column must include: a numbering; the product name or type of product; the number of the page in section 4.2 of the report, where the description of the assumptions for this class is disclosed. For non-consolidated business, a subtotal for each column must be provided. For business of subsidiaries, the information required must be provided on a single line after non-consolidated business (enter Subsidiaries in the Valuation class column). Complete information for this business must be found in the actuary s report of the subsidiaries. If necessary, the information must be provided first for business issued in Canada, then for business issued in the United States, and finally for business issued in other countries. For each region, a total must be provided for each column. The allocation of net contract liabilities is the proportion (as a %) of the net contract liabilities in the valuation class to the insurer s consolidated net contract liabilities. The actuary must specify the basis on which the premiums were calculated (e.g. annualized basis according to the valuation system, basis used for the results in the annual return). Note that the premiums may be presented, if necessary, by line of business or for certain groupings of valuation classes. For certain products, including accumulation products, the premiums correspond to deposits in the past year. The amounts in force correspond, where applicable, to the amount of insurance, the amount of the yearly annuity or the value of the fund. The actuary must provide the totals by line of business and for all business. The total (gross) contract liabilities must correspond to the sum of the amounts disclosed on page , line 010, column 01, and on page , line 450, column 41, of the LIFE form. The total net contract liabilities must correspond to the total (gross) contract liabilities, as defined above, less the reinsurance assets disclosed on page , line 559, column 01 of the LIFE form. September 2015 B5.2

10 2.2 Net provisions for adverse deviations consolidated The actuary must provide two detailed tables of the provisions for adverse deviations ( PfADs ) included in the consolidated net contract liabilities. The actuary must provide the PfADs by type for each of the insurer s lines of business on a non-consolidated basis and for the subsidiaries. A breakdown of the subsidiaries PfADs, by line of business, is found in the actuary s report of these ones. The first table below must be completed. The net PfADs for the investment expenses must be provided in the column Others in Economic assumptions instead of in the column Expenses. The actuary must provide the PfADs by year included in the consolidated net contract liabilities for the last three years. The second table below must be completed. The AMF expects the calculation method for the PfADs to be comparable from one year to another. Any change in method must be justified Additional net provisions for adverse deviations consolidated The actuary must disclose the additional net provisions for adverse deviations ( additional net PfADs ) included in the net contract liabilities. That enables the AMF to judge, among other things, the level of conservatism incorporated into the net contract liabilities. For the AMF, the additional net PfADs are defined as the difference between the net contract liabilities on the books and the minimum liabilities permitted by the CIA s Standards of Practice. Mortality The actuary must disclose whether the best estimate assumption of mortality in life insurance or in annuities includes a prospective mortality improvement assumption. The actuary must provide the resulting additional PfADs in the appropriate column of the following table. Such additional PfADs correspond to the excess between the net insurance contract liabilities in the books and the liabilities recalculated using the mortality improvement rates promulgated from time to time by the Actuarial Standards Board ( ASB ). September 2015 B5.3

11 If the best estimate assumption in respect of prospective mortality improvement is greater than 50% of the rates promulgated by the ASB for life insurance, over a 25 years period, the AMF expects the margin for adverse deviations for such improvement to reduce the improvement percentage to 50% or less. The actuary would provide as net PfADs by type for mortality improvement, the difference between the net contract liabilities calculated with an improvement of 50% of the rates promulgated by the ASB for 25 years and that calculated with the actuary s best estimate assumption for this improvement. Then, the actuary would provide the difference between the net contract liabilities on the books and the liabilities calculated with an improvement of 50% of the ASB rates for 25 years as additional net PfADs for mortality improvement. Economic assumptions Under the Canadian Asset Liability Method ( CALM ), the actuary must disclose the difference between the net contract liabilities calculated according to the worst-case scenario on the interest rates prescribed by the CIA s Standards of Practice and those calculated according to the base scenario as the net PfADs by type for the interest rate (C-3 risk) in the table below. If the actuary uses a yield assumption for non-fixed income assets (stocks only) less favourable than the historical yield of assets with the same characteristics in the same category, he must provide a note below the table net PfADs by type and indicate the impact in the additional net PfADs. If the actuary uses a more unfavourable economic scenario than those prescribed and/or reinvestment rates outside the range of short and long-term interest rates promulgated from time to time by the ASB, he must provide a note below the table net PfADs by type and indicate the impact in the additional net PfADs. Thus, the difference between the net contract liabilities on the books and those liabilities calculated according to the CALM base scenario must be equal to the sum of the net PfADs by type for the interest rate (C-3 risk) and the economic additional net PfADs mentioned above. September 2015 B5.4

12 Lines of business Non-consolidated - Non-participating Net contract liabilities Fixed income asset default (C-1 risk) Non-fixed income asset default (C-1 risk) Economic assumptions Insurance assumptions Other assumptions Mortality Economic assumptions Interest rate (C-3 risk) Credit spreads Supplementary PfAD for credit spreads (SOP ) Net PfADs by type Supplementary PfAD for NFI usage (SOP ) (in $000) Other Mortality Mortality improvement Morbidity Morbidity improvement lapse Expenses Other Additional net PfADs (deviation with the CIA's minimum base) Mortality improvement Stock return Additional economic scenario and interest rates Total net PfADs Amount (including the additional net PfADs) As a % of the net contract liabilities Life Annuity Accident/sickness individual group individual group individual group Total - non-consolidated non-participating Total - non-consolidated participating Total - non-consolidated non-participating and participating Subsidiaries TOTAL - consolidated Note that the net PfADs by type for the non-fixed income asset default (C-1 risk), the interest rate (C-3 risk) and the mortality improvement in the above table must not include the corresponding additional net PfADs. These additional net PfADs must be presented in the section additional net PfADs. If not, the actuary must provide explanations below the previous table. The total net PfADs presented at the end of this table must include the additional net PfADs. The actuary must provide explanations if some amounts are presented in the columns Other. September 2015 B5.5

13 (in $000) Net PfADs by year Lines of business T T-1 T-2 Non-consolidated - Non-participating Net contract liabilities Total net PfADs (including the additional net PfADs) Net PfADs as a % of the net contract liabilities Net contract liabilities Total net PfADs (including the additional net PfADs) Net PfADs as a % of the net contract liabilities Net contract liabilities Total net PfADs (including the additional net PfADs) Net PfADs as a % of the net contract liabilities Life Annuity Accident/sickness Total - non-consolidated non-participating Total - non-consolidated participating Total - non-consolidated non-participating and participating individual group individual group individual group Subsidiaries TOTAL - consolidated September 2015 B5.6

14 Section 3 Verification of data and calculations In this section of the report, the actuary must indicate the procedures used to verify the integrity and validity of the valuation data. The procedures must cover, among other things, the data related to the assets used in the calculation of net contract liabilities. The actuary must also summarize the process used to ensure that the data and calculations for policy liabilities net of reinsurance assets reflect the provisions of contracts and are in line with the actuarial method and assumptions chosen. The actuary must specify the extent to which he used and verified data produced by a third party. September 2015 B6.1

15 Section 4 Valuation assumptions This section of the report is divided into two parts: the determination of valuation assumptions; and a description of valuation classes and assumptions. The valuation assumptions for asset and liability cash flow using CALM must be covered for net insurance contract liabilities. Any projection of cash flows using approximations must be covered in section 7 of the report. As indicated in the introduction of this Guide, the actuary s report must provide information on a non-consolidated basis. Accordingly, the information required in this section must be presented on a non-consolidated basis. The information concerning the business of subsidiaries must be found in the actuary s report of the latter. 4.1 Determination of valuation assumptions Since the actuary applies his judgment in performing the valuation, it is essential for him to justify such application for all phases of the assumption determination process. To that end, the actuary must describe the determination process in detail for each valuation assumption chosen to calculate the insurer s non-consolidated net contract liabilities. The actuary must indicate, in each case, the best estimate assumption and margin for adverse deviations ( MfADs ) separately. The AMF expects the actuary to discuss, where relevant, the impact of the DCAT results on the determination of assumptions. The actuary must explain the reasons why he deems the best estimate assumption adequate, by referring to any supporting test, study (internal or industry) or analysis. He must give a clear description of such test, study or analysis. The actuary must complete the following table, to disclose when the expected experience assumptions were last updated or reviewed and how frequently each assumption is to be updated or reviewed, for each assumption discussed in this section. Group of policies affected by the experience study Date of the last 2 experience studies were produced (month, year) Schedule of the experience study Name of the assumption Expected date of the next experience study (month, year) Frequency at which an experience study is produced If, for any case, the same study experience covers all policies, the actuary must indicate "All" in the "Group of policies affected by the experience study" column. Justification must be provided if the date of the next experience study is unknown. Explanation must be provided if there is no established process for updating the experience study, including the frequency at which an experience study is produced. September 2015 B7.1

16 The actuary must provide the following for each assumption discussed in this section: the source of the data; a justification of the relevance of the data; the treatment of the data; the credibility of the data used; the results obtained; the link between the study results and the assumption chosen. The actuary must, in particular, describe and justify any trend reflected in the assumption chosen. He must also indicate how he determined assumptions for which the sources of data are limited. In addition, the actuary must describe and explicitly justify the MfADs chosen and their variation. He should discuss the testing done to ensure that the addition of each of the MfADs served to increase the net contract liabilities. Also, if a margin is outside the range recommended in the CIA standards, the actuary must disclose and justify it. The actuary must present the assumptions in the order in which they appear in this Guide. For each assumption, he must describe the determination process, following the order for lines of business used in section 2, Summary of consolidated net contract liabilities and net provisions for adverse deviations, of his report. The use of independently reasonable assumptions is required. The use of explicit assumptions is also required, except in the situations provided for by the CIA s Standards of Practice. Any use of an implicit assumption must be disclosed. September 2015 B7.2

17 4.1.1 Mortality The actuary must indicate the extent to which the assumptions chosen are based on the insurer s own experience and/or the industry s experience. In any case, he must justify his choices, using, among other things, the credibility applied to the insurer s experience. If changes are made to the mortality tables published, they must be explicitly disclosed. If the mortality table used is not the most recent published by the CIA, the actuary must justify why. When the actuary takes the insurer s experience into account, he must provide a detailed description of the experience study and the main results thereof in his report. To that end, he must provide a table illustrating this experience over the past few years, using actual to expected experience ratios. For all the years indicated, the expected experience must be calculated using 100% of the mortality table used in the choice of mortality assumption at the valuation date. The table to be provided for the information used to determine the mortality experience ratio is as follows: Year of experience t-3 t-2 t-1 t TOTAL Mortality experience (1) Number of Gross actual deaths deaths (in $000) (2) Expected deaths (in $000) Experience ratio (1)/(2) The actuary must clearly explain the entire determination process for best estimate assumptions, from the experience ratios to the valuation assumptions chosen. He must describe, justify and quantify all adjustments made to the data, in particular to the experience ratios (e.g. for mortality improvement prior to the valuation date). The actuary must provide clear and complete explanations as to the expected mortality for the different groups of insureds, such as men/women and smokers/non-smokers. The actuary must explain how the best estimate assumption of mortality and margins for adverse deviations were determined for products priced on a preferential basis or with guaranteed issue. He must also explain how he took into account the fact that the mortality for products priced on a basis other than preferential may be influenced by preferentially priced products on the market. The actuary must indicate whether there are products that are death-supported. He must also clearly explain the treatment applied to the valuation of such contracts. September 2015 B8.1

18 i) Future mortality improvement The actuary must disclose whether the best estimate assumptions of mortality for life insurance or for non-active lives in accident and sickness insurance include a future mortality improvement assumption. He must justify his choices. The actuary must disclose the future mortality improvement assumption included in the best estimate assumption of mortality for annuity products and for the active lives in accident and sickness insurance. The actuary must justify his choices. ii) Margins for adverse deviations For all mortality-related assumptions, the actuary must describe and explicitly justify the MfADs chosen and their variation. He should discuss the testing done to ensure that the addition of each of the MfADs served to increase the net contract liabilities. Also, if a margin is outside the range recommended in the CIA standards, the actuary must disclose and justify it. iii) Credibility The actuary must indicate how he calculated the credibility factor(s) applied to the insurer s experience, and specify, in particular, the years of experience used to determine the number of deaths. The actuary must also justify the use of an overall credibility factor for the insurer or a factor for each product sub-category, as the case may be. The actuary must indicate whether the Normalized method was used and explain its application. If that method was not used, he must justify the use of another method. The following table must be provided: Number of deaths Credibility factor Actual/expected ratio Industry s experience Ratio calculated with credibility Assumption chosen (t) Assumption chosen (t-1) Mortality credibility Product sub-category (1) (2) (3) Etc. iv) Changes to mortality rates The actuary must discuss in detail changes made to mortality rates, and disclose the following: the impact of selective lapsation on mortality, particularly for renewable term insurance; the mortality improvement (as mentioned previously); the mortality for multiple life insurance policies; any other item affected by or influencing the determination of the assumption. September 2015 B8.2

19 4.1.2 Morbidity The explanations must focus on the morbidity incidence rates and the recovery rates (termination rates). The actuary must indicate the extent to which the assumptions chosen are based on the insurer s own experience and/or the industry s experience. In any case, he must justify his choices, using, among other things, the credibility applied to the insurer s experience. If changes are made to the contingency tables published, they must be explicitly disclosed. When the actuary takes the insurer s experience into account, he must provide a detailed description of the experience study and the main results thereof in his report. To that end, he must provide a table illustrating this experience over the past few years, using actual to expected experience ratios. For all the years indicated, the expected experience must be calculated using 100% of the contingency table used in the choice of morbidity assumption at the valuation date. The table must indicate whether the data were collected according to amount of insurance or number of disabled persons. The actuary must clearly explain the entire determination process for best estimate assumptions, from the experience ratios to the valuation assumptions chosen. He must describe, justify and quantify all adjustments made to the data, in particular to the experience ratios (e.g. to take into account of a morbidity improvement trend prior to the valuation date). The following table must be provided for the recovery rate assumption: Disability duration < 1 year 1 year 2 years 3 years 4 years 5 years 6-10 years 10 + years Actual terminations Expected terminations Experience and morbidity assumption Recovery rate Year of experience xxxx at yyyy Actual/expected ratio (%) Credibility (%) % of Name of the contingency table Best estimate (%) MfAD (%) Total (%) The actuary must provide clear and complete explanations as to the expected morbidity for the different groups of insureds, such as men/women disabled, and for the different durations of disability. September 2015 B9.1

20 i) Future morbidity improvement The actuary must disclose whether the best estimate assumptions of morbidity in accident/sickness insurance include a morbidity improvement trend. He must justify his choices. ii) Margins for adverse deviations For all morbidity-related assumptions, the actuary must describe and explicitly justify the MfADs chosen and their variation. He should discuss the testing done to ensure that the addition of each of the MfADs served to increase the net contract liabilities. Also, if a margin is outside the range recommended in the CIA standards, the actuary must disclose and justify it. iii) Credibility The actuary must indicate how he calculated the credibility factor(s) applied to the insurer s experience, and specify, in particular, the following for each factor: the group of insureds chosen (all insureds or a sub-group); the basis used for calculating the factor (expected disabilities or actual disabilities); the years of experience chosen. iv) Changes to morbidity rates The actuary must discuss in detail changes made to morbidity rates, and disclose the following: the possibility of anti-selection by insureds; the morbidity improvement (as mentioned previously); any other item affected by or influencing the determination of the assumption. September 2015 B9.2

21 4.1.3 Economic assumptions The actuary must include a table in Appendix 3 of his report that provides segmentation of the insurer s non-consolidated assets and liabilities. For insurance contracts, the actuary must describe and justify all economic assumptions chosen. In particular, he must discuss the following points and he must discuss any changes in methodology, especially areas where material judgment or discretion may be required for interpretation/implementation of the revisions to the CIA Standards of Practice. i) Cash flows projected from assets For each type of asset, the actuary must describe the assumptions used to produce the forecast cash flows as well as the corresponding MfADs, where necessary. He must indicate whether certain assumptions used for forecast cash flows from certain assets were provided by a source other than the insurer. Fixed income assets The actuary must specify the duration of the projected cash flows. Non-fixed income assets In the event that the actuary uses non-fixed income assets, the assumptions concerning investment income (e.g. dividends) and capital gains (losses) must be described and justified separately for the various asset categories (stocks, real estate, etc.). The actuary must mention if the best estimate assumption on a non-fixed income asset comes from reliable historical data. The actuary must indicate, among other things, the name and reference period of any index published or a description and summary of the internal studies he used to develop the assumptions chosen. He must indicate and explain the difference between the yield from historical data and the assumption chosen. He must also indicate the duration of the projected cash flows and the link between these assumptions and the interest rate scenarios. If reliable historical information is not available for a non-fixed September 2015 B10.1

22 income class of assets, the actuary must discuss how he determines the best estimate assumption and the MfADs. In addition, concerning the MfADs for the common share and real estate capital gains assumption, the actuary must describe and justify the one-time shock, as a percentage of the market value that is added to the MfADs of 20% of the best estimate. He must discuss the time and financial repercussions of such shock. The shock would occur at the time when the change is most adverse for the insurer. The actuary would disclose how he provided for it. The actuary must discuss and justify the MfADs of the dividend/income return assumption for each type of asset and he must ensure compliance with CIA s Standard of Practice The following table must be provided: Non-fixed Income Assets Assumptions used in Valuation Asset Category Equities Dividend/Income Return Capital Gain Market Shock Best Best estimate (%) MfAD (%) estimate (%) MfAD (%) (%) of the MV Year of the shock Real Estate Other (please specify) In addition, the actuary must mention if he complies with the CIA s Standard of Practice on the proportion of reinvestments in non-fixed income assets that support liabilities. The discount rate used in calculating the maximum non-fixed income assets at each projection period must be disclosed. The following table must be provided: September 2015 B10.2

23 Projected Percentage retained Projected Percentage of Non-fixed Income Assets Relative to Total Asset Value Asset Segment Projected Percentage permitted by the investment strategy Projected Percentage permitted by the CIA Standard of Practice Duration (year) Maximum % over the projection year The projection year when the maximum % is reached The projected percentage retained at the valuation date indicated in the first line and first column of the table above should be the same as the proportion it is possible to calculate from the Appendix 3 presenting the segmentation of assets and liabilities, for each segment. In the case there is a difference, the actuary must explain it. Also, the actuary must justify any increase in the projected percentage retained (increase of the percentages indicated in the first line of the table above) in the years after the valuation date compared with the percentage indicated for the valuation date. If this investment strategy is used to calculate the actuarial liabilities, the actuary must present the increase in the actuarial liabilities that could result from keeping the percentage of non-fixed income assets for the years after the valuation date equal to the percentage retained at the valuation date. Finally, the actuary must present the increase in the actuarial liabilities that could result from the replacement of all non-fixed income assets by fixed income assets permitted by the insurer s investment policy to calculate the actuarial liabilities. The fixed income assets used to replace the non-fixed income assets in this calculation must be indicated. In these two tests above, all the impact related to non-fixed income assets on the actuarial liabilities must be included, as the loss of the tax benefit of dividends on shares of Canadian Companies. ii) Treatment of net projected cash flows The actuary must provide the following information: the expected reinvestment rate curve by type of asset as well as the source of such data (including the date risk-free interest rates are set); September 2015 B10.3

24 the projected investment policy for each future year by type of investment and term; the link between the actual and projected investment policy; the treatment of negative net cash flows and the methodology used to offset leverage. The actuary must discuss the application of the CIA s Standard of Practice The assumptions concerning the credit spreads must be described and justify separately for each type of asset. The actuary must also indicate the duration of the projected cash flows and the link between these assumptions and the interest rate scenarios. The actuary must discuss how he determines the best estimate assumption of credit spreads for each type of asset. The actuary must also indicate, among other things, the name and reference period of any index published or a description and summary of the internal studies he used to develop the assumptions chosen. If some data are excluded from the reference period ( outliers ), the actuary must justify it. He must indicate and explain the difference between the credit spread from historical data and the assumption chosen. The actuary must indicate explicitly the MfADs. The actuary must provide a table illustrating the best estimate assumptions and the MfADs, for each type of asset, of the credit spreads and the asset default risk factors (C-1 risk) for certain durations. The following table must be provided for each type of asset: Fixed income Assets Assumption Used in Valuation Type of asset and proportion Duration (year) Credit Spread Asset Default Risk Factors (C-1 risk) Net Credit Spread Best estimate (%) MfAD (%) Best estimate (%) MfAD (%) Total (%) September 2015 B10.4

25 iii) Asset default risk (C-1) This risk can be divided into three components: 1. The risk that performing assets become non-performing; 2. The risk of a further deterioration to the return of non-performing assets; 3. The risk that variable return assets generate a return lower than expected. The actuary must provide assumptions for all components relevant to the insurer. He must, among other things, take into account the following economic losses: interest losses from the date of insufficient return to the final disposal of the assets in question; capital losses on the sale of assets; extraordinary expenses related to management of the events causing the insufficient return. If a general provision is held in the assets on the balance sheet, the actuary should take it into account in determining the assumption related to the risk that performing assets will become non-performing. The actuary must indicate the extent to which the assumptions chosen are based on the insurer s own experience and/or the industry s experience. In any case, he must justify his choices. When he takes the insurer s experience into account, he must provide a detailed description of the experience study and the main results thereof in his report. When the industry s experience is used, he must refer to the source of the data used. The actuary must describe and explicitly justify the MfADs he chosen and their variation. The actuary must provide a table illustrating the best estimate assumptions and the MfADs, in basis points, for each type of asset. The following standard table must be used: September 2015 B10.5

26 Asset Default Risk Factors (C-1 risk) Type of Asset Best estimate (%) MfAD (%) Total (%) Federal bonds Provincial bonds Municipal bonds Corporate bonds AAA Corporate bonds AA Corporate bonds Etc. Insured mortgage loans Uninsured mortgage loans Policy loans Preferred shares Etc. iv) Investment expenses It is advisable for the actuary to establish investment expense assumptions according to a study of the insurer s experience on a non-consolidated basis. The actuary must include a detailed description of the study and the main results thereof in his report. He must also indicate the existing relationship between the expected investment expense assumptions and the actual investment expenses incurred by the insurer on a non-consolidated basis. The actuary must describe and explicitly justify the MfADs chosen and their variations. The actuary must provide a table illustrating the results of experience studies, comparing actual to expected investment expenses for the past few years. He must also provide a table illustrating the assumptions chosen as a percentage of assets for the best estimate and the MfADs for each type of asset. The following table must be provided: September 2015 B10.6

27 Asset Category Actual investment expenses Investment expenses Results of the experience study Expected investment expenses Expected/actual ratio Valuation assumption Best estimate MfAD Total Long-term deposits Bonds Equities Mortgage loans Etc. Total $000 Basis point $000 Basis point (expected $ / actual $) Basis point Basis point Basis point v) Provision for adverse deviations for interest rate risk (C-3) In order to determine net insurance contract liabilities using CALM, the actuary must test all interest rate scenarios prescribed by the CIA s Standards of Practice, as well as other scenarios according to the insurer s characteristics. If the actuary doesn t test additional scenarios, he must indicate that he complies with the CIA s Standard of Practice The following table must be provided: Segments [Segment 1] TOTAL NET INSURANCE CONTRACT LIABILITIES AND PROVISION FOR ADVERSE DEVIATIONS (C-3) (net of reinsurance assets) (in $000) Base scenario Net liabilities Scenario 1 (1) chosen (2) PfADs C-3 (2) (1) This table must include the net insurance contract liabilities obtained according to the following scenarios: the base scenario; each of the prescribed scenarios; each additional scenario, if applicable; the scenario chosen that produces the highest net contract liabilities for each segment. The provision for adverse deviations for interest rate risk (C-3) is defined, for each segment, as the difference between the net insurance contract liabilities chosen and the net insurance contract liabilities calculated according to the base scenario. Note that the PfADs indicated in the table above must correspond with the sum of the September 2015 B10.7

28 PfADs for interest rate risk (C-3) and the additional PfADs for that risk indicated in the table in section 2.2. The information in the table above must be provided for each of the insurer s segments and for all the insurer s segments on a non-consolidated basis. The net insurance contract liabilities chosen by segment must correspond with the insurance contract liabilities net of the reinsurance assets related to those contracts, as presented in the table in Appendix 3 Segmentation of assets and liabilities. The actuary must justify the provision for adverse deviations for interest rate risk (C-3) held globally for the insurer on a non-consolidated basis. He must also explain his method of allocation by segment. The AMF expects that the provision for a given segment to be positive, that the actuary recognize only the synergies between permanent and actual segments, and that the method of allocation be applied consistently over time. If the actuary determines the provision for adverse deviations for interest rate risk (C-3) using a stochastic model, the following information must be described: a description of the stochastic model; the random number generator; the number of scenarios; the estimation of the stochastic model parameters; the investment yield assumptions chosen; the model calibration results; the CTE percentage chosen and its justification according to investment yield, estimate of parameters and model risk. The actuary must confirm that he complies with the CIA s Standard of Practice et ; any approximation used in the model; any other information deemed relevant by the actuary. September 2015 B10.8

29 vi) Interest rate sensitivity testing The actuary must present the increase in net contract liabilities resulting from the application of the two tests below. The actuary must present the increase in net contract liabilities separately for each test. The actuarial liability s increase represents the difference between the highest actuarial liabilities obtained (before tax) when recalculated according to each test below and the highest net contract liabilities obtained according to the CIA prescribed scenarios applicable in each test. 1. The first test consists of the recalculation of the net contract liabilities in all CIA prescribed scenarios with a uniform decrease of 10 basis points of the interest rates curve at the valuation date. The ultimate interest rates must not be changed. If the scenario retained by the actuary is an additional scenario, he must present the impact compared with the CIA prescribed scenario that gives the highest net contract liabilities between the 8 CIA prescribed scenarios. 2. The second test consists of the recalculation of the net contract liabilities with a decrease of 10 basis points of the ultimate risk-free reinvestment rate-low as promulgated by the ASB, in the CIA prescribed scenarios where these rates are applicable, i.e. in the prescribed scenarios 1, 3, 4, 5 and 6. If the CIA prescribed scenario that gives the highest net contract liabilities is not the prescribed scenario 1, 3, 4, 5 or 6, this test is not necessary. If the scenario retained by the actuary is an additional scenario, he must present the impact compared with the CIA prescribed scenario that gives the highest net contract liabilities between prescribed scenario 1, 3, 4, 5 or 6, but only if one of these scenarios gives the highest net contract liabilities between the 8 CIA prescribed scenarios and the actuary would have retained one of them if he didn t retain an additional scenario. vii) Inflation The choice of inflation assumptions must be justified. The actuary must, in particular, justify the degree of correlation between the inflation assumptions and interest rate scenarios. September 2015 B10.9

30 viii) Foreign currency exchange rates The choice of assumptions on foreign currency exchange rates must be justified. The actuary must also describe the method used to determine the associated provision for adverse deviations. ix) Specific securities Inter-segment transactions The actuary must describe, if appropriate, the inter-segment transactions and justify their use. He must indicate the segments involved as well as the number and structure of transactions (amount, maturity, and yield). The way in which the price of transactions was established must be clearly explained. The treatment of cash flows movements from the transactions in the calculation of net contract liabilities and the margin for asset default risk (C-1) applied to such movements must be described and justified. In addition, the actuary must describe the methods and procedures used to ensure the monitoring and control of these transactions. Derivative instruments The actuary must describe his use of derivative instruments. He must also explain how cash flows were projected and, in particular, their link with interest rate scenarios. September 2015 B10.10

31 4.1.4 Expenses It is advisable for the actuary to establish expense assumptions according to a study of the insurer s experience on a non-consolidated basis. A detailed description of that study and the main results of it must be included in the report. In order to justify the sufficiency of assumptions for maintenance expenses before MfADs, the actuary must provide the table presented further on in this section of the Guide. He must explain any situation where: 1- The total amount of actual expenses to be funded is greater than the total amount of expected expenses in the net contract liabilities (before MfADs) in the past year; 2- The total amount of actual expenses to be funded is greater than the total amount of maintenance expenses expected in the budget, when the budget was used to determine the maintenance expense assumption; 3- The total amount of maintenance expenses expected in the budget is greater than the total amount of expenses expected in the net contract liabilities (before MfADs) in the past year, when the budget was used to determine the maintenance expense assumption. In addition, the actuary must explain any significant deviation when: 1- The total amount of actual expenses to be funded is less than the total amount of expected expenses in the net contract liabilities (before MfADs) in the past year; 2- The total amount of actual expenses to be funded is less than the total amount of maintenance expenses expected in the budget, when the budget was used to determine the maintenance expense assumption; 3- The total amount of maintenance expenses expected in the budget is less than the total amount of expenses expected in the net contract liabilities (before MfADs) in the past year, when the budget was used to determine the maintenance expense assumption. Explanation concerning the budget may be omitted if the budget was not used to determine the maintenance expense assumption. September 2015 B11.1