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1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted Steven Appointed Actuary Seminar September 21, 2004 Montréal, Québec

1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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Page 1: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT

Charles L. Gilbert (Chairperson)Dave GillilandGilbert LacosteCatherine MurphyDavid RossTed Steven

Appointed Actuary SeminarSeptember 21, 2004

Montréal, Québec

Page 2: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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Further education and research in the area of ALM

Survey industry practice

Identify areas where there exists a wide range of practice or where techniques not well developed

Improve understanding of life insurance practices compared to banking practices

Promote ALM best practices

CIA Working Group on ALM formed in 2000

Page 3: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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Key activities: 2000 – present

2000 2002 2003 20042001

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Page 4: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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Low interest rate environment– previously mismatched portfolios now face reinvestment at lower rates

than assumed in pricing guaranteeing loss No fixed income assets available to match long term

liabilities– no more 30 year government

Significant credit exposure– pressure to make spreads

Equity market volatility– proliferation of equity-based products

• investment guarantees = embedded derivatives

• fee income is based on AUM

Current ALM issues insurance companies facing

Page 5: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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Pre-funding problem for products that have positive liability cash flows in early years– assets not available at issue to fund future benefits

– substantial reinvestment exposure arises from early net cash flows Cost of enriched guarantees not priced

– Q-measure price is substantially higher than actual price of product Par may have little or no room in dividend scale

– treat as guaranteed product if unable to pass on adverse experience Basis risk on pass-through products Lack of diversification of liability portfolio Impact of changes in assumptions

Companies deal with many internal challenges

Page 6: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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“Living” document captures current practice Wide range of practice exists in some areas

– projecting cash flows with MfADs

– modeling equities Document records all discussion points

– objective to reflect current practice (for better or for worse) “Unsound” practices to be identified Best Practices to be described

Page 7: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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Future deliverables:

ALMPA Mtgs

ALM List Serve

Discussion Point Doc

Educational Note

Other Developments

Page 8: 1 UPDATE: CIA WORKING GROUP ON ASSET LIABILITY MANAGEMENT Charles L. Gilbert (Chairperson) Dave Gilliland Gilbert Lacoste Catherine Murphy David Ross Ted

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Your opportunity to define ALM practice

Get involved

Join the ALM PA today

Attend meeting this afternoon at 3:00PM