Sun Life 2015 Annual Report Download - page 65

General Account Insurance and Annuity Products
Most of our expected sensitivity to changes in interest rates and about two-thirds of our expected sensitivity to changes in equity
markets are derived from our general account insurance and annuity products. We have implemented market risk management
strategies to mitigate a portion of the market risk related to our general account insurance and annuity products.
Individual insurance products include universal life and other long-term life and health insurance products. Major sources of market risk
exposure for individual insurance products include the reinvestment risk related to future premiums on regular premium policies, asset
reinvestment risk on both regular premium and single premium policies and the guaranteed cost of insurance. Interest rate risk for
individual insurance products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment
policy or guidelines. Targets and limits are established so that the level of residual exposure is commensurate with our risk appetite.
Exposures are monitored frequently, and assets are re-balanced as necessary to maintain compliance within policy limits using a
combination of assets and derivative instruments. A portion of the longer-term cash flows are backed with equities and real estate.
For participating insurance products and other insurance products with adjustability features, the investment strategy objective is to
provide a total rate of return given a constant risk profile over the long term.
Fixed annuity products generally provide the policyholder with a guaranteed investment return or crediting rate. Interest rate risk for
these products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment guidelines.
Targets and limits are established such that the level of residual exposure is commensurate with our risk appetite. Exposures are
monitored frequently, and are re-balanced as necessary to maintain compliance within prescribed tolerances using a combination of
fixed income assets and derivative instruments.
Certain insurance and annuity products contain minimum interest rate guarantees. Market risk management strategies are
implemented to limit potential financial loss due to reductions in asset earned rates relative to contract guarantees. These typically
involve the use of hedging strategies utilizing interest rate derivatives such as interest rate floors, swaps and swaptions.
Certain insurance and annuity products contain features which allow the policyholders to surrender their policy at book value. Market
risk management strategies are implemented to limit the potential financial loss due to changes in interest rate levels and policyholder
behaviour. These typically involve the use of hedging strategies such as dynamic option replication and the purchase of interest rate
swaptions.
Certain products have guaranteed minimum annuitization rates. Market risk management strategies are implemented to limit the
potential financial loss and typically involve the use of fixed income assets, interest rate swaps and swaptions.
Segregated Fund Guarantees
Approximately one-third of our equity market sensitivity and a small amount of interest rate risk sensitivity as at December 31, 2015 are
derived from segregated fund products. These products provide benefit guarantees, which are linked to underlying fund performance
and may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing these guarantees is uncertain and
depends upon a number of factors including general capital market conditions, our hedging strategies, policyholder behaviour and
mortality experience, each of which may result in negative impacts on net income and capital.
The following table provides information with respect to the guarantees provided for our segregated fund products.
Segregated Fund Risk Exposures ($ millions)
December 31, 2015
Fund
value
Amount
at Risk(1)
Value of
guarantees(2)
Insurance
contract
liabilities(3)
SLF Canada 12,304 424 11,109 575
SLF U.S. 5,400 509 5,789 275
Run-off reinsurance(4) 2,950 569 2,129 570
Total 20,654 1,502 19,027 1,420
December 31, 2014
Fund
value
Amount at
Risk(1)
Value of
guarantees(2)
Insurance
contract
liabilities(3)
SLF Canada 13,039 217 11,202 273
SLF U.S. 5,194 259 5,236 96
Run-off reinsurance(4) 2,800 501 1,999 526
Total 21,033 977 18,437 895
(1) The Amount at Risk represents the excess of the value of the guarantees over fund values on all policies where the value of the guarantees exceeds the fund value. The
Amount at Risk is not currently payable as the guarantees are only payable upon death, maturity, withdrawal or annuitization if fund values remain below guaranteed values.
(2) For guaranteed lifetime withdrawal benefits, the value of guarantees is calculated as the present value of the maximum future withdrawals assuming market conditions
remain unchanged from current levels. For all other benefits, the value of guarantees is determined assuming 100% of the claims are made at the valuation date.
(3) The insurance contract liabilities represent management’s provision for future costs associated with these guarantees and include a provision for adverse deviation in
accordance with Canadian actuarial standards of practice.
(4) The Run-off reinsurance business includes risks assumed through reinsurance of variable annuity products issued by various North American insurance companies between
1997 and 2001. This line of business is part of a closed block of reinsurance, which is included in the Corporate segment.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 63