Sun Life 2012 Annual Report Download - page 131

Pricing models, methods and assumptions are subject to periodic internal peer reviews.
Experience studies, sources of earnings analysis and product dashboards are used to monitor actual experience against those
assumed in pricing and valuation.
On experience rated products, participating and adjustable products, emerging experience is reflected through changes in policyholder
dividend scales as well as other policy adjustment mechanisms such as premium and benefit levels.
Limits and restrictions may be introduced into the design of products to mitigate adverse policyholder behaviour or apply upper
thresholds on certain benefits.
Policyholder Behaviour Risk
Risk Description
We can incur losses due to adverse policyholder behavior relative to assumptions used in the pricing and valuation of products with
regard to lapse of policies or exercise of other embedded policy options.
Uncertainty in policyholder behaviour can arise from several sources including unexpected events in the policyholder’s life
circumstances, the general level of economic activity (whether higher or lower than expected), changes in pricing and availability of
current products, the introduction of new products, changes in underwriting technology and standards as well as changes in our
financial strength or reputation. Uncertainty in future cash flows affected by policyholder behaviour can be further exacerbated by
irrational behaviour during times of economic turbulence or at key option exercise points in the life of an insurance contract.
For individual life insurance products where fewer terminations would be financially adverse to us, net income and equity would be
decreased by about $220 ($270 in 2011) if the termination rate assumption were reduced by 10%. For products where more
terminations would be financially adverse to us, net income and equity would be decreased by about $70 ($65 in 2011) if the
termination rate assumption were increased by 10%. These sensitivities reflect the impact of any applicable ceded reinsurance
arrangements.
Policyholder Behaviour Risk Management Governance and Control
Various types of provisions are built into many of our products to reduce the impact of uncertain policyholder behaviour. These
provisions include:
• Surrender charges which adjust the payout to the policyholder by taking into account prevailing market conditions
• Limits on the amount that policyholders can surrender or borrow
• Restrictions on the timing of policyholders’ ability to exercise certain options
• Restrictions on both the types of funds customers can select and the frequency with which they can change funds
• Policyholder behaviour risk is also mitigated through reinsurance on some insurance contracts
Mortality and Morbidity Risk
Risk Description
Mortality and morbidity risk is the risk that future experience could be worse than the assumptions used in the pricing and valuation of
products. Mortality and morbidity risk can arise in the normal course of business through random fluctuation in realized experience,
through catastrophes, or in association with other risk factors such as product development and pricing or model risk. Adverse mortality
and morbidity experience could also occur through systemic anti-selection, which could arise due to poor plan design or underwriting
process failure or the development of investor owned and secondary markets for life insurance policies.
During economic slowdowns, the risk of adverse morbidity experience increases, especially with respect to disability coverages. This
introduces the potential for adverse financial volatility in disability results.
For life insurance products for which higher mortality would be financially adverse to the Company, a 2% increase in the best estimate
assumption would decrease net income and equity by about $20 ($15 in 2011). These sensitivities reflect the impact of any applicable
ceded reinsurance arrangements.
For products where morbidity is a significant assumption, a 5% adverse change in that assumption would reduce net income and equity
by about $125 ($120 in 2011). These sensitivities reflect the impact of any applicable ceded reinsurance arrangements.
We do not have a high degree of concentration risk to single individuals or groups due to our well diversified geographic and business
mix. The largest portion of mortality risk within the Company is in North America.
Mortality and Morbidity Risk Management Governance and Control
Detailed uniform underwriting procedures have been established to determine the insurability of applicants and to manage exposure to
large claims. These underwriting requirements are regularly scrutinized against industry guidelines and oversight is provided through a
corporate underwriting and claim management function.
Individual and group insurance policies are underwritten prior to initial issue and renewals, based on risk selection, plan design and
rating techniques.
Underwriting and claims risk policies approved by the Risk Review Committee of the Board of Directors include limits on the maximum
amount of insurance that may be issued under one policy and the maximum amount that may be retained. These limits vary by
geographic region and amounts in excess of limits are reinsured to ensure there is no exposure to unreasonable concentration of risk.
Longevity Risk
Risk Description
Longevity risk is the potential for economic loss, accounting loss or volatility in earnings arising from uncertain adverse changes in
rates of mortality improvement relative to the assumptions used in the pricing and valuation of products. This risk can manifest itself
slowly over time as socioeconomic conditions improve and medical advances continue. It could also manifest itself more quickly, for
example, due to significant medical breakthroughs that significantly extend life expectancy. Longevity risk affects contracts where
benefits are based upon the likelihood of survival (for example, annuities, pensions, pure endowments and specific types of health
contracts).
Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2012 129