Sun Life 2010 Annual Report Download - page 28

In determining these provisions, we ensure that:
• when taken one at a time, each provision is reasonable with respect to the underlying best estimate assumption and the extent of
uncertainty present in making that assumption; and
• in total, the cumulative effect of all provisions is reasonable with respect to the total actuarial liabilities.
With the passage of time and the resulting reduction in estimation risk, excess provisions are released into income. In recognition of
the long-term nature of policy liabilities, the margin for possible deviations generally increases for contingencies further in the future.
The best estimate assumptions and margins for adverse deviations are reviewed annually, and revisions are made where deemed
necessary and prudent.
Significant factors affecting the determination of policyholders’ benefits, the methodology by which they are determined, their
significance to the Company’s financial condition and results of operations are described below.
Equity Market Movements
The determination of our actuarial liabilities requires that we make estimates about equity market movements. We are exposed to
equity markets through our segregated fund and annuity products that provide guarantees linked to underlying fund performance. We
have implemented hedging programs involving the use of derivative instruments, in order to help mitigate a portion of the equity
market-related volatility in the cost of providing these guarantees to reduce our exposure to this particular class of equity market risk.
For these blocks we use stochastic modelling techniques, which test a large number of different scenarios of future market returns, to
estimate the actuarial liability for the various guarantees.
In addition, the value of our policyholder obligations for certain insurance products is dependent on assumptions about the future level
of equity markets. The calculation of actuarial liabilities for equity market-sensitive products includes provisions for moderate changes
in rates of equity market return with provisions determined using scenario testing under the standards established by the Canadian
Institute of Actuaries. The majority of equities which are designated as HFT support our participating and universal life products where
investment returns are passed through to policyholders through routine changes in the amount of dividends declared or in the rate of
interest credited. In these cases changes in equity values are largely offset by changes in actuarial liabilities.
Interest Rates
The determination of our actuarial liabilities requires that make estimates about interest rate movements. The value of our policyholder
obligations for all policies is sensitive to changes in interest rates. The calculation of actuarial liabilities for all policies includes
provisions for moderate changes in interest rates with provisions determined using scenario testing under the standards established by
the Canadian Institute of Actuaries. The major part of this sensitivity is offset with a similar sensitivity in the value of the Company’s
assets held to support actuarial liabilities.
For certain products, including participating insurance and certain forms of universal life policies and annuities, policyholders share
investment performance through routine changes in the amount of dividends declared or in the rate of interest credited. These products
generally have minimum interest rate guarantees. Hedging programs are in place to help mitigate the impact of interest rate
movements.
Mortality
Our actuarial liabilities include estimates for mortality. Mortality refers to the rates at which death occurs for defined groups of people.
Insurance mortality assumptions are generally based on our five-year average experience. For annuities, our experience is generally
combined with industry experience, since our own experience is not sufficient to be statistically valid. In general, assumed mortality
rates for life insurance contracts do not reflect any future expected improvement, except in some instances where the net effect of
reflecting future improvement increases the policy liabilities. For annuities where lower mortality rates result in an increase in liabilities,
assumed future mortality rates are adjusted to reflect estimated future improvements.
Morbidity
Our actuarial liabilities include estimates for morbidity. Morbidity refers to both the rates of accident or sickness and the rates of
recovery therefrom. Most of our disability insurance is marketed on a group basis. In Canada and in Asia, we offer critical illness
policies on an individual basis, and in Canada, we offer long-term care on an individual basis. Medical stop-loss insurance is offered on
a group basis in the United States and Canada. In Canada, group morbidity assumptions are based on our five-year average
experience, modified to reflect the trend in recovery rates. For long-term care and critical illness insurance, assumptions are developed
in collaboration with our reinsurers and are largely based on their experience. In the United States, our experience is used for both
medical stop-loss and disability assumptions, with some consideration for industry experience. Larger provisions for adverse deviation
are used for those benefits where experience is limited.
Policy Termination Rates
Our actuarial liabilities include estimates for policy termination rates. Policy termination rates refer to the rate at which policies
terminate prior to the end of the contractual coverage period. Policyholders may allow their policies to terminate prior to the end of the
contractual coverage period by choosing not to continue to pay premiums or by exercising a surrender option in the contract.
Assumptions for termination experience on life insurance are generally based on our five-year average experience. Termination rates
may vary by plan, age at issue, method of premium payment, and policy duration. For universal life contracts, it is also necessary to set
assumptions about premium cessation occurring prior to termination of the policy. Industry experience is considered for certain
products where our experience is not sufficient to be statistically valid.
Operating Expenses and Inflation
Actuarial liabilities include estimates for future policy-related expenses. These include the costs of premium collection, claims
adjudication and processing, actuarial calculations, preparation and mailing of policy statements and related indirect expenses and
overheads. Expense assumptions are mainly based on our recent experience using an internal expense allocation methodology.
Future expense assumptions reflect inflation and are consistent with the future interest rates used in the scenario testing under the
standards established by the Canadian Institute of Actuaries.
24 Sun Life Financial Inc. Annual Report 2010 Management’s Discussion and Analysis