Sun Life 2012 Annual Report Download - page 136

11. Insurance Contract Liabilities and Investment Contract Liabilities
11.A Insurance Contract Liabilities
11.A.i Description of Business
The majority of the products sold by the Company are insurance contracts. These contracts include all forms of life, health and critical
illness insurance sold to individuals and groups, life contingent annuities, accumulation annuities, and segregated fund products with
guarantees.
11.A.ii Assumptions and Methodology
General
The liabilities for insurance contracts represent the estimated amounts which, together with estimated future premiums and net
investment income, will provide for outstanding claims, estimated future benefits, policyholders’ dividends, taxes (other than income
taxes) and expenses on in-force insurance contracts.
In determining our liabilities for insurance contracts, assumptions must be made about mortality and morbidity rates, lapse and other
policyholder behaviour, interest rates, equity market performance, asset default, inflation, expenses and other factors over the life of
our products. Most of these assumptions relate to events that are anticipated to occur many years in the future. Assumptions require
regular review and, where appropriate, revision.
We use best estimate assumptions for expected future experience and apply margins for adverse deviations to provide for uncertainty
in the choice of the best estimate assumptions. The amount of insurance contract liabilities related to the application of margins for
adverse deviations to best estimate assumptions is called a provision for adverse deviations.
Best Estimate Assumptions
Best estimate assumptions are intended to be current, neutral estimates of the expected outcome as guided by Canadian actuarial
standards of practice. The choice of best estimate assumptions takes into account current circumstances, past experience data
(Company and/or industry), the relationship of past to expected future experience, anti-selection, the relationship among assumptions
and other relevant factors. For assumptions on economic matters, the assets supporting the liabilities and the expected policy for
asset-liability management are relevant factors.
Margins for Adverse Deviations
The appropriate level of margin for adverse deviations on an assumption is guided by Canadian actuarial standards of practice. For
most assumptions, the standard range of margins for adverse deviations is 5% to 20% of the best estimate assumption, and the
actuary chooses from within that range based on a number of considerations related to the uncertainty in the determination of the best
estimate assumption. The level of uncertainty, and hence the margin chosen, will vary by assumption and by line of business and other
factors. Considerations that would tend to indicate a choice of margin at the high end of the range include:
• The statistical credibility of the Company’s experience is too low to be the primary source of data for choosing the best estimate
assumption
• Future experience is difficult to estimate
• The cohort of risks lacks homogeneity
• Operational risks adversely impact the ability to estimate the best estimate assumption; and
• Past experience may not be representative of future experience and the experience may deteriorate
Provisions for adverse deviations in future interest rates are included by testing a number of scenarios of future interest rates, some of
which are prescribed by Canadian actuarial standards of practice, and determining the liability based on the range of possible
outcomes. A scenario of future interest rates includes, for each forecast period between the balance sheet date and the last liability
cash flow, interest rates for risk-free assets, premiums for asset default, rates of inflation, and an investment strategy consistent with
the Company’s investment policy. The starting point for all future interest rate scenarios is consistent with the current market
environment. If few scenarios are tested, the liability would be the largest of the outcomes. If many scenarios are tested, the liability
would be within a range defined by the average of the outcomes that are above the 60th percentile of the range of outcomes and the
corresponding average for the 80th percentile.
Provisions for adverse deviations in future equity returns are included by scenario testing or by applying margins for adverse deviations.
In blocks of business where the valuation of liabilities employs scenario testing of future equity returns, the liability would be within a
range defined by the average of the outcomes that are above the 60th percentile of the range of outcomes and the corresponding
average for the 80th percentile. In blocks of business where the valuation of liabilities does not employ scenario testing of future equity
returns, the margin for adverse deviations on common share dividends is between 5% and 20%, and the margin for adverse deviations
on capital gains would be 20% plus an assumption that those assets reduce in value by 25% to 40% at the time when the reduction is
most adverse. A 30% reduction is appropriate for a diversified portfolio of North American common shares and, for other portfolios, the
appropriate reduction depends on the volatility of the portfolio relative to a diversified portfolio of North American common shares.
In choosing margins, we ensure that, when taken one at a time, each margin is reasonable with respect to the underlying best estimate
assumption and the extent of uncertainty present in making that assumption, and also that, in aggregate, the cumulative impact of the
margins for adverse deviations is considered reasonable with respect to the total amount of our insurance contract liabilities. Our
margins are generally stable over time and are generally only revised to reflect changes in the level of uncertainty in the best estimate
assumptions. Our margins tend to be at the high end of the range for expenses and future equity and real estate returns and in the mid-
range for mortality, morbidity, policyholder behaviour, and future interest rates. When considering the aggregate impact of margins, the
actuary assesses the consistency of margins for each assumption across each block of business to ensure there is no double counting
or omission and to avoid choosing margins that might be mutually exclusive. In particular, the actuary chooses similar margins for
blocks of business with similar characteristics, and also chooses margins that are consistent with other assumptions, including
assumptions about economic factors. The actuary is guided by Canadian actuarial standards of practice in making these professional
judgments about the reasonableness of margins for adverse deviations.
134 Sun Life Financial Inc. Annual Report 2012 Notes to Consolidated Financial Statements