Sun Life 2012 Annual Report Download - page 130

7. Insurance Risk Management
7. Insurance Risk
Risk Description
Insurance risk is the uncertainty of product performance due to differences between the actual experience and expected assumptions
affecting amounts of claims, benefits payments, expenses and the cost of embedded options and guarantees related to insurance
risks. This risk class includes risk factors relating to product development and pricing, mortality, morbidity, longevity, policyholder
behaviour, expense and reinsurance.
Insurance Risk Management Governance and Control
Insurance risk is managed through a number of enterprise wide controls addressing a wide range of insurance risk factors, as follows:
• Enterprise risk appetite and tolerance limits have been established for longevity, mortality and morbidity risk
• Ongoing monitoring and reporting of insurance risk sensitivities against pre-established risk tolerance limits
• Enterprise-insurance underwriting and claims management policy product design and pricing policy and reinsurance ceded policy
• Our global underwriting manual aligns underwriting practices with our corporate risk management standards and ensures a
consistent approach in insurance underwriting. Policies and procedures, including criteria for approval of risks and for claims
adjudication are established for each business segment
• Product design and pricing policy requires detailed risk assessment and provision for material insurance risks
• Insurance contract liability provisions are established in accordance with the Canadian actuarial standards of practice
• Target capital levels exceed regulatory minimums
• Board approved maximum retention limits (amounts issued in excess of these limits are reinsured)
• Various limits, restrictions and fee structures are introduced into plan designs in order to establish more homogeneous policy risk
profile and limit potential for anti-selection
• Enterprise underwriting and risk selection standards with oversight by corporate underwriting and claims risk management function
• Diversification and risk pooling is managed by aggregation of broad exposures across product lines, geography, distribution
channels etc.
• Company specific and industry level experience studies and Source of Earnings analysis are monitored and factored into ongoing
valuation, renewal and new business pricing processes
• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse movements in insurance
risk factors
• Reinsurance ceded policy establishes acceptance criteria and protocols to monitor the level of reinsurance ceded to any single
reinsurer or group of reinsurers. Our reinsurance counterparty risk profile is monitored closely, including through annual reporting to
the Risk Review Committee of the Board
We use reinsurance to limit losses, minimize exposure to significant risks and to provide additional capacity for growth. Our
Underwriting and Claims Liability Management Policy sets maximum global retention limits and related management standards and
practices which are applied to reduce our exposure to large claims. Amounts in excess of the Board approved maximum retention limits
are reinsured. Our maximum global retention limits are unchanged from 2011. On a single life or joint-first-to-die basis our retention
limit is $25 in Canada and is US$25 outside of Canada. For survivorship life insurance, our maximum global retention limit is $30 in
Canada and is US$30 outside of Canada. In certain markets and jurisdictions retention levels below the maximum are applied.
Reinsurance is utilized for numerous products in most business segments, and placement is done on an automatic basis for defined
insurance portfolios and on a facultative basis for individual risks with certain characteristics. Reinsurance is used to provide
catastrophic mortality and morbidity coverage for the Canadian group benefits business.
Our reinsurance coverage is well-diversified and controls are in place to manage exposure to reinsurance counterparties. Reinsurance
exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk. While reinsurance arrangements
provide for the recovery of claims arising from the liabilities ceded, we retain primary responsibility to the policyholders.
The components of insurance risk are discussed below. The sensitivities provided below reflect the impact of any applicable ceded
reinsurance arrangements.
Product Design and Pricing Risk
Risk Description
Product design and pricing risk is the risk a product does not perform as expected causing adverse financial consequences. This risk
may arise from deviations in realized experience versus assumptions used in the pricing of products. Risk factors include uncertainty
concerning future investment yields, policyholder behaviour, mortality and morbidity experience, sales levels, mix of business,
expenses and taxes. Although some of our products permit us to increase premiums or adjust other charges and credits during the life
of the policy or contract, the terms of these policies or contracts may not allow for sufficient adjustments to maintain expected
profitability.
Product Design and Pricing Governance and Control
Our Product Design and Pricing Policy, approved by the Risk Review Committee of the Board of Directors, establishes the framework
governing our product design and pricing practices and is designed to align our product offerings with our strategic objectives and risk
taking philosophy. Consistent with this policy, product development, design and pricing processes have been implemented throughout
the Company. New products follow a stage-gate process with defined management approvals based on the level of the initiative, and
each initiative is subject to a risk assessment process to identify key risks and risk mitigation requirements and must be approved by
multi-disciplinary committees. An annual compliance assessment is performed by all business segments to confirm compliance with the
policy and related operating guidelines.
128 Sun Life Financial Inc. Annual Report 2012 Notes to Consolidated Financial Statements