SESSION/SÉANCE : 47 CALM for thoughts. SPEAKER)/CONFÉRENCIER : Jean-Yves Rioux, Deloitte

Transcription

1 SESSION/SÉANCE : 47 CALM for thoughts SPEAKER)/CONFÉRENCIER : Jean-Yves Rioux, Deloitte

2 AGENDA Roll-forward Concepts Preliminary results from the survey on Roll-forward 2

3 ROLL-FORWARD To improve the time needed to report, many companies use approximations where CALM testing is performed at a period prior to the reporting period The past years numerous changes to accounting standards and the recent market changes (including increase in market volatilities) caused the practices relating to roll-forward to be more important in making the CALM approximations relevant as at the reporting date 3

4 ROLL FORWARD CONSIDERATIONS Annual reporting process vs. Interim reporting process Approximations Basis for the PPM discount rate If each roll-forward adjustment will be made automatically, only if increases reserves, only if increases reserves when combined, not at all Use of a company scenario and frequency of determination If any conservatism (such as C-3 in excess of the required C-3) in the methodology is allowed to absorb the roll-forward adjustment Accuracy of the adjustment 4

5 LEADING TO ROLL-FORWARD FRAMEWORK Under PPM Expected movement under PPM (related to liability/ inforce) 0V x = apv 0 Ben(valn) + apv 0 Exp(valn) apv 0 Prem(valn) = apv 0 Ben(valn) 1 + apv 0 Exp(valn) 1 apv 0 Prem(valn) 1 + v 1 p x 1 V x (1+i) l x 0 V x = (1+i) l x apv 0 Ben(valn) 1 + (1+i) l x apv 0 Exp(valn) 1 (1+i) l x apv 0 Prem(valn) 1 + l x+1 1 V Starting point l x 0 V x Total reserve Inforce changes + i l x 0 V x - (1+i) l x apv 0 Ben(valn) 1 - (1+i) l x apv 0 Exp(valn) 1 + (1+i) l x apv 0 Prem(valn) 1 + Required return on total reserve - EOP value of total benefits in period - EOP value of total expenses in period + EOP value of total premium in period Ending point = l x+1 1 V x Total reserve which needs to be updated with the Assets and Reinvestments 5

6 NEED FOR ROLL-FORWARD ADJUSTMENT Changes Risk-Free Interest Rates Risk Premiums (Credit Spreads, Liquidity Premium) Future Equity Returns (growth, dividend/income) Impact on Market Value of Current Assets Changes via discount rate used in the market valuation and/or to expected CF on linked instruments Changes via discount rate used in the market valuation May or may not be in MV of Assets (disconnect between CALM assumption and market assumption) Impact on Current Asset CF Earned returns on 'linked' instruments Impact of Reinvestments CF Earned returns Impact on Liability CF Interest rate crediting on 'linked' investment accounts & potentially the inflation on inflatable CF None Earned returns Interest rate crediting on 'linked' investment accounts Earned returns assumed Earned returns assumed Interest rate crediting on 'linked' investment accounts (depends on earned returns assumed) MV of Equity Changes Earned returns (based on assumed ) Future asset default/ Downgrades and impairments May be in MV differently than under CALM CF Earned returns (based on assumed ) Earned returns Earned returns None Crediting on linked investment accounts 6

7 NEED FOR ROLL-FORWARD ADJUSTMENT Changes Impact on Market Value of Current Assets Impact on Current Asset CF Impact of Reinvestments CF Impact on Liability CF Asset assumption update e.g. investment expenses None Net earned returns Net earned returns None Asset Transactions Different assets will have different MV Different assets will have different CF None None Reinvestment Strategy/Practices None None Changes future purchases/sales and future earned returns & CF None Inforce changes None None Changes as different timing/ amount of net CF and application of reinvestment strategy Changes Liability assumption updates None None Changes as different timing/ amount of net CF and application of reinvestment strategy Changes 7

8 WHAT IS CAPTURED BY THE DISCOUNT RATE UNDER A PPM APPROXIMATION Category Current Asset Value Current Assets Cash Flow Reinvestment Assets Cash Flow (Assumptions) Current/Reinvestment Assets Cash Flow (Assumptions) Sales/ Purchases (Total) C3 Margin Liability Cash Flow (Dependent on Economic Environment) Item Asset Value Future returns (risk-free, risk premium) on debt assets currently owned Future returns (growth, dividend/income) on equity assets currently owned Future returns (risk-free, risk premium) on debt assets purchased in the future (reinvestments) Future returns (growth, dividend/income) on equity assets purchased in the future (reinvestments) Future investment expenses on assets currently owned & assets purchased in the future (reinvestments) Future defaults on assets currently owned & assets purchased in the future (reinvestments) Reinvestment strategy Asset-Liability matching and the related C3 margin Cash flow level and timing due to inflation Cash Flow level and timing due to future interest rate crediting under the 'selected scenario' 8

9 NEED FOR ROLL-FORWARD ADJUSTMENT Changes subsequent to CALM testing Risk-Free Interest Rates Impact on PPM Liability None for discounting of Insurance CF; crediting scenario and account value rate likely not updated Impact on Market Value of Current Assets / MV Adjust. Changes via discount rate used in the market valuation and/or to expected CF on linked instruments Other Roll-forward Adjustments Impact from changes in future earned income, material inflation related differences & differences in linked account values Risk Premiums (Credit Spreads, Liquidity Premium) None Changes via discount rate used in the market valuation Impact from changes in future earned income & differences in linked account values Future Equity Returns (growth, dividend/income) None for discounting of Insurance CF; crediting scenario and account value rate likely not updated May or may not be in MV of Assets (disconnect between CALM assumption and market assumption) Impact from changes in future earned income & differences in linked account values MV of Equity None Changes Impact from changes in future earned income from different base (MV of Equity) Future asset default/ Downgrades and impairments None May be in MV differently than under CALM CF Impact of replacing the CF. Because the CF would typically be replaced assets would be purchased whose MV should be equivalent to the write down/loss in value 9

10 NEED FOR ROLL-FORWARD ADJUSTMENT Changes subsequent to CALM testing Asset assumption update e.g. investment expenses Impact on PPM Liability Impact on Market Value of Current Assets/ MV Adjust. Other Roll-forward Adjustments None None Impact from changes in Asset CF Asset Transactions None Different assets will have different MV Impact from changes in future earned returns on assets and from differences in matching (transactions not likely replacing the cash flow) Reinvestment Strategy/Practices None None Impact due to future earned returns and matching differences Inforce changes Changes None None; changes typically presumed to have been captured by updating the Liability CF in the PPM Approximation and matching impact in subsequent CALM testing Liability assumption updates Changes None None; changes typically presumed to have been captured by updating the Liability CF in the PPM Approximation and matching impact in subsequent CALM testing 10

11 NEED FOR ROLL-FORWARD ADJUSTMENT Adjustment relating to Fair Value of supporting Assets Changes impacting future reinvestment cash flow will, within the investment policy/prescribed scenario/booking scenario constraints, impact the liabilities Change impacting cash flow on currently owned assets impact liabilities as the assumption of replacing/reducing the cash flow will increase/decrease the liabilities 11

12 ROLL-FORWARD FRAMEWORK REVISITED Inforce changes Other Liability changes Asset related changes Reinvestmen t related changes ALM Income Impact from reserve - i (l x 0 V x + l x Prem(valn) 1 ) + l x Ben(valn) 1 + l x Exp(valn) 1 - Inforce update, including New Business Reserve - Liability Basis Change impact - Change in value of supporting assets - Impact from CALM asset rebalancing/optimization - Impact of Asset Basis Change and CF proj. chance impact - Valuation (Mfadded) Asset CF 1 + asset return difference on asset supporting New Business - Impact due to change in reinvestment policy/practice - Impact due to Change in CRR, URR and spread - Impact of change in matching Income Impact from non-reserve items (such as CF) + Actual NII + Actual Prem - Actual Ben 1 - Actual Exp 1 + New Business CF, incl. Prem., Exp + Change in value of supporting assets + Actual Asset CF 12

13 ADJUSTMENT CALCULATIONS WILL DIFFER If using different approaches: PPM (BV Basis) FV BV PPM (FV Basis) Change in FV Change in FV (anticipated in CALM) Roll-forwarding prior CALM result Change in FV 13

14 INDUSTRY SURVEY Simplified survey of 15 companies/business units Intend to expand, follow-up and prepare a report on industry report From the framework developed some items were regrouped and some were detailed (e.g. interest rate in CRR and URR) 14

15 INDUSTRY SURVEY 15

16 PRELIMINARY RESULTS FROM THE SURVEY a) Adjustment for change in fair value of supporting assets N/A 50% Automatically 50% 16

17 PRELIMINARY RESULTS FROM THE SURVEY b) Adjustment for changes in Asset CF projections included in CALM Automatically 29% N/A 50% Not formally 7% Reflected only if increases AL 14% 17

18 PRELIMINARY RESULTS FROM THE SURVEY c) Adjustment for changes in Liability CF projections included in CALM PRELIMINARY N/A 50% Automatically 43% Not formally 7% 18

19 PRELIMINARY RESULTS FROM THE SURVEY d) Adjustment for change in risk-free Current Rate of Returns (CRRs) under the booking scenario Automatically 29% N/A 50% Reflected only if increases AL 7% Not formally 14% 19

20 PRELIMINARY RESULTS FROM THE SURVEY e) Adjustment for change in risk-free Ultimate Rate of Returns (URRs) under the booking scenario Automatically 14% N/A 43% Reflected only if increases AL 14% Not formally 29% 20

21 PRELIMINARY RESULTS FROM THE SURVEY f) Adjustment for change in Spreads (return in excess of the risk-free rates) Automatically 29% N/A 50% Reflected only if increases AL 7% Not formally 14% 21

22 PRELIMINARY RESULTS FROM THE SURVEY g) Adjustments for different returns on new supporting assets for significant new business Automatically 29% N/A 57% Reflected only if increases AL Not formally 7% 7% 22

23 PRELIMINARY RESULTS FROM THE SURVEY h) Assets' gains/losses not in changes in FV adjustments, such experience gains/losses Automatically 29% N/A 50% Not formally 7% Reflected only if increases AL 14% 23

24 PRELIMINARY RESULTS FROM THE SURVEY i) Adjustment for changes in Asset-Liability CF matching due to significant changes in Liability CF or Asset CF Automatically 22% N/A 50% Reflected only if increases AL 7% Not formally 21% 24

25 PRELIMINARY RESULTS FROM THE SURVEY 2) PPM discount basis N/A 50% BV basis 29% FV basis 21% 25

26 PRELIMINARY RESULTS FROM THE SURVEY 3) Adjustment approach N/A 62% Manual dollar adjustment 38% Adjustment to discount rate 0% 26

27 KEY REFERENCES Standards of Practice - Practice-Specific Standards for Insurance [Part_2000_Jan_2012_E] Educational Note: Approximations to Canadian Asset Liability Method (CALM) [206133] 27

28 CLOSING Questions? 28