Canadian Institute of Actuaries Institut canadien des actuaires

Transcription

1 Canadian Institute of Actuaries Institut canadien des actuaires Seminar Colloque for the Appointed Actuary pour l'actuaire désigné September 22 23, 2011 DoubleTree by Hilton Toronto Airport Hotel Les 22 et 23 septembre 2011 Hôtel Hilton DoubleTree Aéroport de Toronto Session: PD-4 Bill C-57: Are You Ready? Speaker: Lesley Thomson 1

2 BACKGROUND Bill C-57 was passed November 2005 ICA amendments provide enhanced corporate governance of participating and adjustable products Board of Directors must adopt 3 policies: Dividend (bonus) policy Policy for management of participating accounts Criteria for making changes to adjustable policies Appointed Actuaries must opine on the fairness of these policies and their application Increased disclosure requirements 2

3 BACKGROUND Regulations outlining more detailed requirements were registered November 2010 Dividend policy must comply by June 1, 2011 All other requirements in effect December 1, 2011 OSFI Draft Guideline E-16 includes additional clarifications and requirements Comment period ended; final not yet published 3

4 BACKGROUND CIA Task Force on Bill C-57 created in 2006 Flurry of work, then long period awaiting Regulations Draft Educational Note made available two weeks ago Guidance on Fairness Opinions Required Under the ICA Challenge to harmonize with OSFI Guideline Standard of Practice issued September 2011 Standard wording for unqualified fairness opinions 4

5 DRAFT EDUCATIONAL NOTE General Management of Participating Accounts Dividend Policy Adjustable Policies 5

6 DRAFT EDUCATIONAL NOTE General Section Purpose/Background/Applicability Summary of Requirements General Considerations of Fairness General Principles Considerations Other Items 6

7 Applicability Requirements apply to: Canadian incorporated life insurance companies Including any branch operations outside Canada Requirements do not apply to: Provincially incorporated insurance companies Fraternal benefit societies Foreign subsidiaries of a Canadian insurance company Canadian branch business of a foreign insurance company 7

8 Effective Dates Dividend Policy June 1, 2011 A few new requirements Other policies December 1, 2011 Require Board approval Actuarial opinions December 1, 2011 Opinion on adjustments to adjustable policies only applies to adjustments made after the policy is in force 8

9 Summary of Policies and Actuarial Opinions Required ICA Reference Policy Actuarial Opinion 165(2)(e) Dividend/Bonus policy (revised) Fairness of policy (new) 165(3)(1) 464 (2) Dividend actions - in accordance with policy (existing) and fair (new) 165(2)(e.1) 165(3.2) 165(2)(e.2) 165(3.3) Policy on management of participating accounts (new) Criteria for changes to adjustable policies (new) Fairness of policy (new) Fairness of criteria (new) and adjustments made are in accordance with criteria and fair (new) 457 Fairness of method of allocation of investment income (existing) 458 Fairness of method of allocation of expenses/taxes (existing) 9

10 Fairness EN does not attempt a precise definition Fairness balances interests of parties involved Fairness is neither unique nor immutable More than one method may be fair Fairness may depend on circumstances General principles and considerations are given 10

11 Fairness General Principles Dividend classes or cohorts of policies would be established at issue Not expected to change to the detriment of a class or cohort post issue except as justified or required by external circumstances Policies would be applied consistently over time Methods for determining dividends/bonuses and changes to adjustable policies would be based on objective quantifications Actual scales and changes would be consistent with contracts, communications, policies Cross-subsidization would be avoided to the extent practicable 11 11

12 Fairness Considerations Consistency Between dividend policy and policy on management of par account Completeness Policies should address all items in Regulations, OSFI Guideline, and CIA Standards Verification Actuaries would satisfy themselves that policies are applied appropriately Materiality Assess from policy owners perspectives as well (subject to practical constraints) 12 12

13 Fairness Other Considerations Volatility management and cross-subsidization Some averaging of experience would be allowed/desirable Documented approach established in advance, altered only in ways that are demonstrably not unfair Approach would be consistent with terms of the contract and PRE Policy owners Reasonable Expectations (PRE) An important consideration in fairness 13 13

14 Other Items Documentation Where judgment has been applied Controls in place Classification All policies called par comply with par requirements and not adjustable requirements Transition If C-57 requires changes to your practices Changes to policies Situations where revisions would be considered 14 14

15 Canadian Institute of Actuaries Institut canadien des actuaires Seminar Colloque for the Appointed Actuary September 22 23, 2011 DoubleTree by Hilton Toronto Airport Hotel pour l'actuaire désigné Les 22 et 23 septembre 2011 Hôtel Hilton DoubleTree Aéroport de Toronto Session: PD-4 Bill C-57: Are You Ready? Speaker: John Dark 1

16 Management of Participating Account Policy Net new requirement to document what you have always been doing Required: by December 1, 2011 if you have any par business Before you can begin issuing Par business Only required by Canadian Companies not foreign branches 2

17 Management of Participating Account Policy Authorities and Guidance Sections 456 to 464 of the ICA plus Policyholders Disclosure Regulations, Part I Section 3, Content of Management Policy. Pending OSFI Guideline E16 ASB Standards for Fairness Opinions Historical 1993 Guidance Note on Allocations of Expenses, Taxes and Investment Income 1982/1986 Recommendations on.dividend determination and Illustrations 3

18 Management of Participating Account Two steps to begin AA must give a fairness opinion to the Board on proposed policy Board must adopt by December 1, 2011 Annually AA must give opinion that the policy is still fair Additionally there are requirements for Disclosure to Policyholders on the policy and its application 4

19 Management of Participating Account Policy Contents Structure Description of participating accounts and policies For closed blocks due to demutualization how is fairness preserved Factors the Company would use to decide to change the Policy 5

20 Management of Participating Account Investment Policy Investment policy for participating accounts (likely a subset of overall Investment policy) hardest part E16: a description of the asset segment(s) supporting par policies; a description of methods used to allocate investment income among the various lines of business, including if the assets are commingled with those supporting other lines of business; the investment strategy, policies, and procedures to be followed in respect of assets supporting the par accounts and the factors that drive the company s investment strategy; any changes from the previous year; any external constraints on the company s investment policy; the company s investment policy with respect to the quality of assets supporting the par accounts, including different classes of assets, credit quality and liquidity the company s policy on the use of derivatives to support the par accounts; any constraints on the company s exposure to any one counter-party; the approval process that a company follows before investing the assets supporting the par accounts in new investment instruments; and the period between formal reviews of the par accounts investment strategy. 6

21 Allocations Allocations For many years (1992?) Companies have had these approved by the Board and the AA commented every year that they were fair and equitable. May need updating for E16 guidance Description in Par Management Policy

22 Investment Income Allocation Description of allocation of Investment income to participating accounts The method of investment income allocation describes a company s procedures for allocating investment income between shareholders and par policyholders. A description of the income allocation method is expected to include: the effect of any commingling of assets between different par accounts; the company s degree of reliance on income generated by assets that support both the par and non-par accounts; and the extent of any latitude for change in the share of profits/losses allocated to each par account.

23 Expense (including taxes) Allocation Description of allocation of Expenses and taxes to participating accounts The method of expense allocation to par accounts should explain how expenses arise and are charged to par accounts and should include an explanation of how the level of expenses is affected by the nature of the business and of the assets supporting the par account. A meaningful method will include the following descriptions: the overall aim of the company s approach with respect to the basis of allocation of expenses; a general description of the charges that a company currently applies and the expenses that are currently apportioned to major classes of par policies; the criteria that the company will apply when it has to make a judgement about how to apply charges and apportion expenses between par accounts or between a par account and a shareholder account; and the circumstances under which the company will charge expenses to the par account at an amount other than allocated cost and the reasons why the company will do so.

24 Management of Participating Account Policy Contents ctd Surplus Management and use of Surplus of Participating Accounts If Par closed to new Business how would the Company manage and dispose of the Surplus 10

25 Canadian Institute of Actuaries Institut canadien des actuaires Seminar Colloque for the Appointed Actuary pour l'actuaire désigné September 22 23, 2011 DoubleTree by Hilton Toronto Airport Hotel Les 22 et 23 septembre 2011 Hôtel Hilton DoubleTree Aéroport de Toronto Session: PD-4 Bill C-57: Are You Ready? Speaker: Phil Watson 1

26 Dividend Policy Existing requirement but content requirements expanded and additional opinions required Required: Board Policy by June 1, 2011 if you have any par business Before you can begin issuing Par business Fairness opinions by December 1, 2011 if you have any par business 2 2

27 Dividend Policy 1.3 Applicability The participating and adjustable policies requirements referred to in the ICA apply to Canadian incorporated life insurance companies, including any branch operations outside of Canada. These requirements of the ICA do not apply to provincially-incorporated insurance companies, to fraternal benefit societies, to foreign subsidiaries of a Canadian insurance company or to the Canadian branch business of a foreign insurance company. Nevertheless this Educational Note may be a useful reference for actuaries doing work related to participating and adjustable business not falling within the scope of Bill C

28 Dividend Policy New Opinion Requirements: Dividend Policy Fairness Annually the actuary must opine on the fairness to the policyholders of the Dividend Policy Dividend Determination Fairness Annually the actuary must opine on the fairness of any dividend, bonus or other benefit determined for distribution to the participating policyholders and whether it is in compliance with the Dividend Policy 4 4

29 Dividend Policy Fairness Dividend policy opinion I have reviewed the policy established by the Board of Directors for determining the dividends [and bonuses or other benefits] of [the Company], [including amendments made during the most recent 12 months]. I conducted my review in accordance with accepted actuarial practice in Canada and pursuant to the guidance of the Superintendent of Financial Institutions. In my opinion, the policy is fair to the participating policyholders. Mary F. Roe Fellow, Canadian Institute of Actuaries [Place of issue of opinion] [Date of opinion] 5 5

30 Dividend Determination Fairness Dividend declaration opinion I have reviewed the proposed dividends [and bonuses or other benefits], determined by the Board of Directors of [the company] with respect to policy years [ending between XX and YY], and have considered whether they have been determined in accordance with the policy established by the Board. I conducted my review in accordance with accepted actuarial practice in Canada and pursuant to the guidance of the Superintendent of Financial Institutions. In my opinion, the proposed dividends [and bonuses or other benefits] are in accordance with the policy established by the Board and are fair to the participating policyholders. Mary F. Roe Fellow, Canadian Institute of Actuaries [Place of issue of opinion] [Date of opinion] 6 6

31 Requirements of Dividend Policy Principles used to determine the dividend scale: Explain use of Contribution Principle or Alternate Participating contracts that the policy covers Explain Terminal Dividends (if any) Outline Contribution to Surplus Philosophy What part of participating earnings is not distributed How often is Dividend scale reviewed What would cause a change in this policy? 7 7

32 Requirements of Dividend Policy Principles -ctd: Mutual Company considerations How are Dividend classes determined, generally shouldn t change Dividend Determination methodology Consistency of Practice over time and across cohorts 8 8

33 Dividend Policy Principles continued Averaging methods used and rationale Policyholders Reasonable Expectations Needs to be consistent with the information the Company has provided through marketing, point of sale material etc. 9 9

34 Requirements of Dividend Policy Factors used to determine Dividends : Definition of a Dividend Non-Guaranteed nature Principal and secondary factors in calculation Effects of policyholder Behaviour on Dividends Allocations between Dividend classes expense, tax, investment Averaging used in scales Underlying Investment approach Note some overlap with Management policy 10 10

35 Canadian Institute of Actuaries Institut canadien des actuaires Seminar Colloque for the Appointed Actuary pour l'actuaire désigné September 22 23, 2011 DoubleTree by Hilton Toronto Airport Hotel Les 22 et 23 septembre 2011 Hôtel Hilton DoubleTree Aéroport de Toronto Session: PD-4 Bill C-57: Are You Ready? Speaker: Nick Bauer 1

36 Adjustable policies What is an adjustable policy? An adjustable policy is an individual nonparticipating life insurance policy for which the company, may at its sole discretion, directly or indirectly, change the premium or charge for insurance, the amount of insurance, or the policy s surrender value

37 Adjustable policies What is clearly not an adjustable policy Participating policies (even if they have adjustable like features) Annuities Group Reinsurance A & S Immaterial or accessory variable features (e.g. interest on premiums or dividends on deposit)

38 Adjustable policies What may or may not be an adjustable policy UL Adjustable if e.g. COI, expense charge, MER on variable funds (set by company) or interest rate on existing deposits may be changed Perhaps not adjustable if insured can select alternative investment options without loss of value or imperiling coverage

39 Adjustable policies What may or may not be an adjustable policy Individual segregated fund policies Mostly annuities, so not adjustable but If material death benefit component, it is likely an IVI policy and may be adjustable depending on its terms

40 Adjustable policies What may or may not be an adjustable policy If renewal premiums set equal to then current rates, likely not adjustable but What if no new business being sold? What if new premiums impacted by in force? In general TF can offer no bright line benchmark, so up to company to determine contract by contract whether adjustable

41 Fairness opinions Required with respect to Board criteria for making changes Annually on continuing fairness of criteria Annually, with respect to changes made to policies in preceding 12 months

42 Concepts of Fairness Since company has unilateral control, favouring the company is not fair Desirable preconditions Contract is clear as to what is adjustable Contract is clear on reasons for adjusting Sales, illustration and any other policyholder material are clear and consistent with contract Often will not fully exist, so judgment is essential

43 Concepts of Fairness

44 Concepts of Fairness Actual changes made conform to Board criteria, contract terms, and PRE As a reasonably informed policyholder, would I find changes fair? Document, document, document Justification of why changes fair Evidence reviewed (experience studies etc) Consider periodic external review

45 Managing volatility Reasonable averaging helps prevent undesirable short-term volatility (from both policyholder and company perspective) By definition entails some cross-subsidies Averaging policy should be established in advance and not altered thereafter Exception: force majeure No recovery of losses on one cohort due to guarantees from another

46 Thank you Questions?