2009 Annual Meeting ● Assemblée annuelle 2009Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

AGENDA• Denise Lang

• Overview of the GMWB product, need it fills and impact of the economic crisis

• Pierre Vincent• Risks in the product – modeling, risk

appetite, risk & capital management• Dave Wylie

• Product Perspective – different approaches to risks in the product, product changes, industry reaction

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AGENDA

• Background - Demographic changes

• Retirement Challenges

• Needs in Retirement

• Typical GMWB (Guaranteed Minimum Withdrawal Benefit) product features

• Impact of the economic crisis

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Some headlines & research findings• Boomers age 47 to 60 make up roughly 22% of Canadian

population – Boomers & retirees in Canada Secondary research – July /06

• In under 10 years Canadians 55 years of age and older will control over 70% of investment assets – Investor Economics, household balance sheet report 2005

• Of leading edge boomers only 15% feel prepared for retirement, 45% feel they need same or more income – Strategic Guidance Consulting

• 50% of Canadians expect to live into their 90’s – BMO Retirement study findings quoted in Investment Executive article Jun 1 /06

• 48% of 50-something boomers are unsure of the best choices for retirement savings, 32% are worried their standard of living will drop once they reach retirement – Jonathan Chevreau, National post articles “Boomer gender battle in retirement?”, Jul 17/06 and “Stressed Boomers”, Jul 13/06

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Changing Demographics in Canada• Canadian population is aging • Life expectancy continues to increase• Implications

Consumer focus will shift from wealth accumulation to management and payout of accumulated wealth

Savings must fund a longer retirement period

Product allocation increasingly important as more baby boomers approach and enter retirement years

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New Challenges in Retirement

• Longevity• Interest Rates and Inflation• Market Volatility• Inflation• Control and Access

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Challenge: Market Volatility• Investors will face their greatest risks and

challenges in the few years just before and after retirement

• Choosing the right investment products is critical

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Accumulation Phase Same Average Return = Same Accumulation Result

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$0$50,000

$100,000$150,000$200,000$250,000$300,000$350,000$400,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Average return is key during accumulation

Payout PhaseSequence of returns makes a big difference

in the distribution phase

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Distribution

$793,304

$0$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Strong Early ReturnsReversed: Poor Early Returns

What do Canadians want?• The majority of Canadians prefer a

monthly income stream in retirement• Many are concerned that they may outlive

their savings• Canadians will have a strong preference

for products that provide • risk management • income management • tax efficiency

• GMWB products designed for these needs

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GMWB Products• Income is predictable, sustainable and

potentially increasing• Products allow investments in a variety of

funds – usually a limit on equity exposure • Initially a 20 year guarantee - now ‘for life’• Upside potential in guarantees

– resets - lock in market gains– Annual bonus (on guarantee withdrawal

balance) if no withdrawal taken

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How do guarantees work?Product example:• Lifetime guarantee 5% p.a. if start at age 65• 5% bonus on WB annually if no withdrawals • Guaranteed value resets every 3rd anniversary • 100% Death benefit • Client deposits $500,000

At issue:• Guaranteed Withdrawal Benefit = $500,000• Death Benefit Guarantee = $500,000

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Guarantee Example - #1• Client starts taking 5% withdrawals in first year All numbers in table are in thousands and GWB – Guaranteed Withdrawal

Benefit, DB – Death Benefit, MV – Market value of funds

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* At end of Year 3, If MV < 425K: GWB = DB = $425K If MV > 425K: GWB = DB = MV

Date GWB at End of Policy Year

Income During Policy Year

DB at End of Policy Year

Issue 500 500Year 1 475 25 475Year 2 450 25 450Year 3 * 25 *

Guarantee Example - #2• Client does not take any withdrawals in early years

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• At end of Policy Year 3, If MV < 500K: DB = 500K, GWB = 575K If 500 < MV < 575: DB = MV, GWB = 575K, If MV > 575: DB = MV, GWB = MV• If MV > 500K at 3rd anniversary, the annual bonus amount will typically be reset to 5% of that MV going forward

Date GWB at End of Policy Year

Bonus Income During Yr

DB at End of Policy Year

Issue 500 500

Year 1 525 25 0 500

Year 2 550 25 0 500

Year 3 * 25 0 *

Impact of the Economic Crisis• Reserves and required capital are typically very small at

issue for GMWB products

• When equity market declines occur, actuarial liabilities and capital increase considerably even though– benefits are very long dated with guarantees stretching

many years into the future– guaranteed benefits cannot be accelerated by the

policyholder– the best estimate liability for the guarantees is typically

very small compared to the liability required

• Reserves and capital can also be very sensitive to interest rate changes

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Impact of the Economic Crisis

The increases in reserves and capital have caused companies to take a number of actions, including:

– Raising capital

– Increasing risk management activities (e.g. hedging, reinsurance)

– Product design and pricing changes to reduce risks

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