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					Canadian                  L’Institut
 Institute                canadien
        of                des
Actuaries                 actuaires

 2007 General Meeting
Assemblée générale 2007
   Montréal, Québec
     2007 General Meeting
    Assemblée générale 2007               PD 15


                            OSFI Update

             Stuart Wason



2
                                         Agenda

                          •   OSFI first impressions
                          •   OSFI introduction
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                          •   DCAT reviews
                          •   Insurer solvency frameworks




                                                            3
                                OSFI First Impressions

                          •   Language
                          •   Group dynamics
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                          •   Controls
                          •   Rewards




                                                         4
                             Language – No problem use
                                    acronyms!
                          AA AAR ABM ACI ACL AFC AFID AFTR AG AICPA ALAE
                          ALCO ALM AML APB APD APM ASB ATF ATIA AuG-15 AuG
                          43 BA BAA BAAC BAAT BCP BDN BID BoD BP BPS BRP BSII
                          BTW BU CAD CAG CALM CAMEL CAO CAPSA CAR CaR CAS
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                          CBA CBO CBRS CCIR CCMD CCRA CD CDE CDIC CDO CDS CE
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                          CEO CFO CFR CGAAP CIA CIAA CICA CID CIM CIO CIRC
                          CLHIA CLIFR CLO CMD CMHC CMO CMPF CMRAS CMS COB
                          COO CPAB CPC CRAD CRC CRD CRM CRO CROAS CRR CSIS
                          CSV CSWS CTE CVaR DAR DAT DCAT DEM DoF DPAC DPAE
                          DPB DSO DSS DST DTI DTIAAC DTIC EAG EAP EBIT EC EDF
                          EDMS EDP EL EM EMU EO EPM EPR EPS ETH EV FADM FAQ
                          FAS FASB FBB FBI FCAC FCG FIC FIFO FIG FIRP FIRS FIS FISC
                          FMV FRA FRB FRC FRDB FRFI FRIDB FRI FSA FSAP FSCO
                          FSTD FTE FVO FX FYE GA GAAP GAAS GATS GATT GBP GFI
                          GIL GNAIE GNPL GRS HKIA HKMA HL HRMS IAA IAASB IAG
                          IAIS IAR IAS IASB IBC IBG IBNR ICA ICAO IDA IFA IG IEM
                          IFRS IIF IM IMF IMM IPO IPU IRB IRR ISR IT IVaR JIT JPS JPY
                          JUMP KOB LAD L&PI LoC LCMS LDC LDF LE LIAAC LIBOR
                          LIFO LIIC LLE LLP LOB LRA LTP MAC MfAD MAS MASD MAT
                          MBS MCCSR MCT MDB MD&A MIRS MIS MOU MRV MTM


                                                                                    5
                              OSFI First Impressions

                          • Group dynamics – Bumper to
                            bumper meetings!
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                          • Controls – No worries, there is a
                            form for almost everything….
                          • Rewards – That’s easy, the people,
                            responsibilities, industry
                            relationships!

                                                                 6
                                  OSFI Introduction

                          • Julie Dickson – Superintendent
                             – Ted Price – Assistant Superintendent,
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                               Supervision Sector
                             – Bob Hanna – Assistant Superintendent,
                               Regulation Sector
                             – Coleen Volk – Assistant Superintendent,
                               Corporate Services Sector
                             – Jean-Claude Ménard – Chief Actuary
                             – JoAnne Bagnall – Senior Director, Audit &
                               Consulting Services
                                                                           7
                                 OSFI Introduction

                          • Ted Price – Assistant
                            Superintendent, Supervision
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                            – Kent Andrews – Senior Director,
                              Financial Conglomerates Group
                            – Karen Badgerow-Croteau – Senior
                              Director, Financial Institutions Group
                            – Other direct reports


                                                                   8
                                  OSFI Introduction

                          • Bob Hanna – Assistant Superintendent,
                            Regulation
                            – Patty Evanoff – Senior Director, Legislation
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                              & Approvals
                            – Gilbert Ménard – Senior Director, Capital
                              Division
                            – Nick Burbidge – Senior Director,
                              Compliance
                            – Kim Norris – Managing Director,
                              International Advisory Group
                            – Alain Prévost – General Counsel
                            – Stuart Wason – Senior Director, Actuarial
                              Division
                                                                         9
                                   OSFI Introduction

                          • Stuart Wason – Senior Director,
                            Actuarial Division
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                            –   David Oakden – Managing Director
                            –   Helmut Engels – Director
                            –   Sheldon Selby – Actuarial Specialist
                            –   6 other Actuarial Division staff



                                                                       10
                            Actuarial Division Mandate

                          • Ensure appropriate actuarial
                            knowledge, advice and standards
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                            are applied in OSFI’s regulatory
                            and supervision systems so
                            policyholders are safeguarded from
                            undue loss and public confidence is
                            enhanced


                                                              11
                              Actuarial Division Roles

                          • Identify insurer specific risk in
                            conjunction with Supervision
                          • Review insurer AAR’s, DCAT’s,
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                            external reviews
                          • Lead insurer model approval process
                          • Monitor & analyze emerging risks
                          • Share actuarial expertise within
                            Supervision and Regulation Sectors
                          • Active participant in relevant
                            committees of CIA, IAA and IAIS

                                                                  12
                                    DCAT Reviews

                          • Actuarial Division will use common
                            template to review and score majority of
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                            DCAT’s (both life and P&C) in coming
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                            months
                          • Feedback to industry on non-
                            confidential findings via open forum
                            spring 2008
                          • Goal: Strengthen this valuable and
                            useful risk & capital management tool
                                                                   13
                          Insurer Solvency Frameworks

                          • Global developments
                            – IASB IFRS 4 Phase II January 1, 2011
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                              (2012?)
                            – Solvency II in Europe
                            – IAA & IAIS Guidance papers
                          • Canadian developments
                            – Life MCCSR II project underway
                            – P&C need for MCT II becoming important


                                                                     14
                                  IASB Developments

                          •   Move to IFRS
                          •   Importance to OSFI
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                          •   Key Impacts
                          •   Overview of Proposed Accounting for
                              Insurance Contracts
                          •   What OSFI is doing
                          •   Implementation Challenges
                          •   Other IFRS to watch for
                          •   Further Questions
                                                                    15
                               The Move to International
                             Financial Reporting Standards
                                        (IFRS)

                          Canada will adopt IFRS for “publicly
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                          accountable enterprises” on January 1, 2011
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                          - so all regulated financial institutions will
                          need to convert.

                          The move to IFRS will more than likely
                          include a new standard on accounting for
                          Insurance Contracts

                                                                      16
                           Importance of IFRS to OSFI

                          • Accounting measurement is important
                            as we try to meet our objectives of:
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                             – Continued use of reliance framework on
                               auditors work and thus the financial
                               statements
                             – Understanding arbitrage possibilities
                               between banks and insurers due to
                               accounting differences
                             – Reliable financial statement values that can
                               be incorporated into regulatory capital

                                                                          17
                                International Accounting for
                                    Insurance Contracts
                          “The IASB has been working on the insurance contracts project
                             with little respite for ten years. If it were easy, it would have
                             been completed ten years ago.”
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                          Past:
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                               –   Issues Paper (1999)
                               –   Draft Statement of Principles (2001)
                               –   ED 5 (2003)
                               –   IFRS 4, Insurance Contracts (2004)
                          Current:
                               – Phase II Discussion Paper (comments due)
                          Future:
                               – Finalization of a new Insurance Accounting
                                 Standard (2009/10)
                               – Implementation of a new Insurance Accounting
                                 Standard (2011)
                                                                                             18
                          Key Impacts for Non-Life Insurers

                          • Unearned Premium Reserve gone (but
                            may serve as a proxy for pre-claims
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                            liabilities)
                          • Deferred policy acquisition costs gone –
                            include in future cash flows
                          • Impacts to key financial ratios
                          • Explicit margins



                                                                   19
                           Key Impacts for Life Insurers

                          • CALM gone (no linkage of assets to
                            liabilities; no ALM or asset credit risk in
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                            liabilities; discount rate not tied to assets
                            on the book)
                          • Reinsurance presented gross
                          • Investment contracts accounted for as
                            financial instruments
                          • Investment components unbundled
                          • Devil is always in the details – there
                            could be more                               20
                             Insurance Contracts Accounting

                          • Same accounting principles apply to Life
                            and Non-Life Insurance Contracts – a
                            change
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                          • Contracts without significant insurance
                            risk are accounted for as financial
                            instruments – i.e. non-life contingent
                            annuity – a change
                          • Measurement attribute is current exit
                            value – “the amount the insurer would
                            expect to pay at the reporting date to
                            transfer it’s remaining contractual rights
                            and obligations immediately to another
                            entity”                                  21
                              Insurance Contracts Accounting

                          • The current exit value is not typically
                            observable, so three basic building blocks
                            serve as a proxy:
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                             – An estimate of the future cash flows
                             – The effect of the time value of money
                             – A margin




                                                                       22
                              Insurance Contracts Accounting
                                    Future Cash Flows

                          • Current estimates
                          • Unbiased
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                          • Probability weighted (expected value)
                          • Use observable market inputs, where
                            they exist
                          • Principles, not detailed guidance



                                                                    23
                           Insurance Contracts Accounting
                                   Discount Rate

                          • Both Life and Non-Life discounted
                          • Current market interest rate - some
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                            interpret as “risk-free” rate
                          • Expected returns on actual assets are not
                            relevant (no linkage) – unless they
                            affect liability cash flows




                                                                    24
                           Insurance Contracts Accounting
                                      Margins

                          • Explicit
                          • Required by market participants for
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                            bearing risk and providing service
                          • Not a shock-absorber
                          • Principles based – likely Cost of Capital
                          • Issue of calibration – profit at issue



                                                                    25
                                  What OSFI is doing

                          • OSFI monitors developments in IFRS
                            and provides input to standard setters
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                            mainly through the BCBS and IAIS
                          • OSFI’s solicits input from interested
                            parties – FI’s, other regulators, auditors,
                            industry associations
                          • OSFI has a priority project on the Move
                            to IFRS


                                                                      26
                               Implementation Challenges
                                 for OSFI & Insurers

                          •   Time is short – 3 years
                          •   Resources are limited
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                          •   Standards are complicated
                          •   Competing priorities
                          •   Lessons learned from EU introduction
                              of IFRS 4 Phase I:
                              1.   Start early
                              2.   Devil is in the details
                              3.   Don’t underestimate the time and effort
                              4.   Educate users of financial information
                                                                             27
                                Other IFRS to watch for

                          •   Fair Value Measurements
                          •   Revenue Recognition
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                          •   Derecognition/Consolidation
                          •   Financial Statement Presentation
                          •   Conceptual Framework
                          •   Liabilities & Equity
                          •   Improvements to Financial Instruments


                                                                      28
                                Solvency II in Europe

                          • Proposal for Framework Directive on
                            Solvency II to the European Parliament
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                            and European Council on July 10, 2007
                          • Provides for target & minimum capital
                            requirements for insurers
                          • Target can use internal model approach
                            (subject to supervisor approval)
                          • Applies to life & non-life in 2011
                            (2012?)
                          • Quantitative Impact Studies            29
                           IAIS Solvency Developments

                          • Recent Guidance Papers
                            – ERM for capital adequacy and solvency
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                              purposes
                            – Use of internal models for risk and capital
                              management by insurers
                            – Structure of regulatory capital requirements
                          • Expected Guidance Papers
                            – Group issues
                            – Valuation of assets and liabilities, including
                              technical provisions for solvency purposes
                            – Capital resources, the forms of capital      30
                           IAA Solvency Developments

                          • Recent Guidance Papers
                            – Use of internal models for risk and capital
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                              management by insurers
                            – Risk margins
                            – Enterprise risk management




                                                                            31
                             Canadian Insurer Solvency
                            Framework - Forces of change

                          • Emergence of IASB standards for
                            insurance accounting means that CICA
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                            will cease to be an accounting standards
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                            setter for insurers
                          • Advanced probabilistic models,
                             – Now used by larger insurers for internal
                               risk & capital management
                             – Solvency II
                             – Existing framework not capable of
                               reflecting advanced products and risk
                               mitigation
                             – Allowed by Basel II                        32
                             Canadian Insurer Solvency
                            Framework - Forces of change

                          • Current standard approach
                             – Originally designed and calibrated many
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                               years ago before market values used
                             – Market risk component uses simple factor
                             – No allowance for diversification or
                               concentration
                             – Increasingly includes fairly complex to
                               calculate elements (i.e. no longer a
                               “standard” approach?)
                             – Not suitable for IASB insurance liabilities
                                                                             33
                                 Work completed/underway
                          2006
                             Life insurer stakeholder working group formed
                              (MAC)
                             Agreement on solvency framework principles
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                             Agreement on working framework for “technical”
                              aspects of the capital model
                          2007
                             Agreement on advanced modeling best practice
                              guidelines
                             Agreement on “Vision” for structure of future
                              regulatory solvency regime
                             Initiate work on new standard approach
                            ? Finalize market risk advanced approach
                                                                         34
                                          Key milestones
                          2008
                             - Work on non-life (P&C) issues commences
                             - Finalize credit risk advanced approach
                             - Finalize framework for risk aggregation for advanced
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                               approach
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                             - Draft standard approach ready for QIS
                          2009
                             - Further QIS on revised standard approach
                             - Standard approach finalized
                          2010
                             - Implementation measures necessary for new standard
                               approach put in place
                          2011
                             - New standard approach takes effect January 1, 2011
                             - Approval of new advanced approach for large insurers?
                                                                                35
                                      MAC Vision concepts
                          Future solvency financial requirements should:
                             – take into account all credit, market, underwriting &
                               operational risks
                             – recognize all cash flows from all of the assets and
                               liabilities
                             – value the cash flows consistently and realistically
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                             – reflect the risk mitigation strategies used by the insurer
                             – consider the dependencies within risks and between risks
                               and recognize when appropriate and measurable
                             – ensure that insurer assets are sufficient, with high degree
                               of confidence, to withstand adversity emerging over a
                               defined regulatory control time horizon (e.g. might be
                               one year)
                             – ensure that there are sufficient assets at the end of the
                               defined time horizon to provide for the:
                                 • transfer of the remaining obligations to another
                                   insurer or
                                 • run-off of the remaining obligations
                                                                                    36
                                            MAC Vision

                               Minimum                    Target Asset
                                 Asset                    Requirement
                              Requirement
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                                                    Threshold investment grade
                           Regulatory control
                                                     security level – regulator
                                 level
                                                        going concern level


                            Determined using      Determined using “advanced”
                          “standard” approach        or “standard” approach


                                                Target 1 year CTE(99) sufficiency


                                                                             37
                                              MAC Vision
                              Advanced Approach                 Standard Approach


                          • Uses company models              • Industry formulaic,
                          • Sophisticated scenario             factor based or stress
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                            modeling integrated with ERM       scenario
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                          • Measures all risks & risk        • Not as advanced but
                            mitigation                         developed to be
                          • Risk dependencies modeled          consistent & reflect key
                                                               risks & mitigation of
                          • Requires regulatory approval       advanced approach
                          • Encouraged for large insurers,   • Risk dependencies
                            technically able insurers &        partially recognized
                            those with complex risks
                                                             • Designed to produce an
                          • Selection of advanced approach     appropriate requirement
                            separate for credit, market,       across the industry
                            insurance and operational risk


                                                                                   38
                                      Key Discussion Points

                           Risk horizon will be one year (working hypothesis)
                           Risk measure will be CTE (working hypothesis:
                            CTE99)
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                           Hedgeable risks at post-stress market consistent
                            valuations
                           Non-hedgeable risks at post-stress BEL + post-
                            stress risk margin (working hypothesis: CTE
                            based)
                           How will standard approach differ from advanced
                            approach?
                                                                             39
                               Focus on Target Asset Requirement
                          Required capital to be determined indirectly:
                          Required          =        Target Asset   -     Reported IFRS
                          Capital                    Requirement          Liabilities
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                                                        Assets          Liabilities
                                                                        & Capital



                                                                                      required capital
                                          solvency
                                           buffer
                                                                          margins

                          target asset
                          requirement                                     best        IFRS liabilities
                                           expected                       estimate
                                             asset                        policy
                                         requirement                      liability




                                                                                                40
                                       Risk Horizon

                          • Working Hypothesis: One year extreme
                            risk horizon (but coupled with Terminal
                            Provision that reflects lifetime risk
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                            horizon)
                          • Focuses extreme event risk analysis and
                            management on actionable time frame
                          • When coupled with appropriate
                            Terminal Provision at end of One Year
                            that reflects full distribution of post-
                            stress risk events, also incorporates long
                            term risk horizon

                                                                     41
                                            Risk Measure
                          • Working Hypothesis: CTE99 over one year

                                                               90%
                                                                     95%
                                                                           CTE90
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                          • Considered Percentile (VaR/CL) but CTE (TailVaR
                            or Exp Shortfall) chosen as theoretically superior:
                          • CTE more robustly reflects the “fatness” of the tail.



                                                                             42
                                                 Risk Margins
                          • Working hypothesis: Risk margins are implicit in
                            post-stress market consistent values for hedgeable
                            risks, and to be CTE based for non-hedgeable risks
                          Hedgeable: if robust market     Risks closed out/hedged at post-
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                          and prices available and        stress market consistent prices;
                          intent to close                 risk margin implicit in MV
                          Non-hedgeable: if lack of       Risks retained for lifetime with
                          robust market and prices or     Terminal Provision set at post-
                          no intent to close              stress BEL plus risk margin
                                                          based on conservative CTE
                                                          using post-stress “real world”
                                                          scenario projections

                          • Reflect 1st yr stress scenario fully for Hedgeable
                            and Non-hedgeable risks & full lifetime post-stress
                            risk distribution for Non-hedgeable risks         43
                                     Frameworks Compared
                          Canadian Framework:
                          Assets required today to ensure that assets at end of 1 year are
                          sufficient to support obligations under CTE99 stress scenarios,
                          where sufficiency means:
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                           • MVA exceeds MV obligations for Hedgeable risks AND
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                           • Assets exceed BEL + post-stress CTE risk margin for Non-
                             hedgeable risks


                          Solvency II: (Technical Provisions + SII Capital Required)
                          MVA required today to ensure that MVA at end of 1 year exceeds
                          MVL with 99.5% confidence, where:
                           • MVL = BEL + MVM for Non-hedgeable risks, with MVM assumed
                             to be unchanged (?) post-stress

                                                                                        44
                                    Key Elements of Frameworks
                                                              Solvency II                                Canada
                              Cover All Risks                         P                                       P

                           Company Risk Profile                       P                                       P

                                Two Tiers                      SCR and MCR                            TAR and MAR
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                                                                      P                                       P
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                           Standard vs Advanced

                                                                      P
                                                                                                              P
                                                    Significant implementing assumptions
                          Use of Approximations                                                Extent of approximations unclear
                                                           and approximations being
                                                                 contemplated
                                                                       P                                       P
                          Total Asset Requirement    Defines both technical provisions and      Defines total asset requirement
                                                                capital required                            directly
                               Risk Horizon                           P                                       P
                               Risk Measure          VAR 99.5%                               CTE99%
                                                     Implicit in MV if Hedgeable, with       Implicit in MV if Hedgeable; with
                                                      ability criteria only                    ability and intent criteria
                               Risk Margins          CoC MVM if Non-Hedgeable                RW CTE if Non-Hedgeable
                                                     Does NOT reflect post-stress            Reflects post-stress risk
                                                      distribution                             distribution
                                                                                                                       45
                                        Frameworks align                    Frameworks differ
                               Assessment of progress

                          • Progress has been slow
                             – Advanced frameworks taking time to
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                               develop
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                             – Resource crunch (a few companies
                               providing most resources)
                             – Standard approach is just getting started
                          • Much to be done but ability of insurers
                            to perform many of the calculations
                            already exists
                          • 2011 and the move to IASB standards is
                            a “hard” date for changes to Canadian
                            solvency framework
                                                                           46
                                          Key issues

                          • Who will provide the guidance needed to
                            supplement the IASB insurance accounting
                            standard?
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                          • What will Solvency II and other frameworks
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                            look like?
                          • How to decide the issue of allowances for risk
                            diversification & concentration?
                          • Since the standard approach must be ready by
                            2011, what is the relative priority for the
                            advanced approach?
                          • How best should the work requiring the
                            cooperation and participation of the entire
                            industry be organized?
                                                                         47
Questions and
 Discussion

				
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