Fair Value Accounting and the Minimum Capital Test

September 21, 2006

Toronto

Jane Voll, Vice-President and Chief Economist&

Grant Kelly, Director, Policy Development and Assistant Chief Economist

Agenda

Fair Value Accounting

Status update on the MCT

Outstanding concerns regarding the MCT

Fair Value Accounting

OSFI guidelines:

Regulatory capital treatment of certain items

under the new financial instruments standards

Guideline D-10: Accounting for financial

instruments designated as “Held for Trading”

(Fair Value Option)

Fair Value Accounting

Industry position on OSFI’s guidelines:

Insurance risk should not be classified as “financial” risk.

Concern over the timeline

Permanence of assets

Tax impacts

Impact on hedging own credit risk, loans and receivables

P&C insurance cycle is volatile

OSFI guideline D-10 should be open to P&C insurance

Fair Value Accounting

Aggregate industry statistics (2005):

BV bonds $51.1 billion (MV $51.8 billion)

BV portfolio excl real estate $60.9 billion (MV $63.4 billion)

Bonds BV yield 4.83% (MV yield 4.76%)

Bond investment income $2.5 billion

Liabilities net of reinsurance $35.5 billion* Source: IBC with data from MSA.

Fair Value Accounting

IBC member survey:

Average duration of bonds: 4.05 years

(Max 11.1 years; Min 0.3 years)

Average duration of claims liabilities: 2.81 years

(Max 5.0 years; Min 0.25 years)

MV/BV Bonds: 100.8%

(Max 103.6%; Min 98.0%)

* Sample of 21 companies/groups (51% of aggregate industry bonds; 57.5% of liabilities). Results are

weighted based on portfolio.

Fair Value Accounting

IBC member survey:

Investment split for co’s that selected an investment option*:

24.4% HFT; 75.3% AFS; 0.3% HTM

% of surveyed co’s that selected 100% HFT: 9.5%

% of surveyed co’s that selected 100% AFS: 42.9%

% of surveyed co’s choosing a mixed of investment categories: 23.8%

* 16 out of 21 companies/groups sampled.

Fair Value Accounting

IBC recommendations/comments to Dept of Finance Canada:

No amendment to the definition of specified debt obligations “SDO’s” as

market to market properties (142.2(1) (b) of the Income Tax Act “ITA”)

If Finance considers a transition period for the expected income tax

reserve change, a 3-4 year period would be appropriate and reasonable.

Maintain the current methodology for calculating balances of the

Canadian Investment Fund and related values for investment property in

Part XXIV of the ITA regulations.

Matching (P&C vs life)???

Agenda

Fair Value Accounting

Status update on the MCT

Outstanding concerns regarding the MCT

Status update on the MCT

IBC recommendations to CCIR on the MCT Review:

Canadian P&C regulatory capital requirements remain

significantly higher than other nations with similar or higher

risk profiles

Capital factors for P&C insurers are higher than other FI’s.

Margins on margins

Status update on the MCT

IBC recommendations to CCIR on the MCT Review (con’t):

Penalty (margin) on cessions to sister companies should be

eliminated, since these companies are already regulated under OSFI

Regarding group vs legal entity supervision, the MCT should recognize

group level transferability of capital within a group

Canadian standards will need to evolve to incorporate both standard

tests and internal modeling for risk and solvency assessment

Status update on the MCT

3 stages to MCT review:

1) Immediate: Changes to the test for 2007

2) Medium term: Asset factor review (IBC survey)

3) Long Term: Internal modeling for capital/risk

management

Outstanding concerns with the MCT

Margins on Margins

Asset factors (risk sensitivity)

Solvency requirements vs international

Thank you