Sun Life 2015 Annual Report Download - page 69

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.
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. Individual and group insurance policies are
underwritten prior to initial issue and renewals, based on risk selection, plan design, and rating techniques.
The Insurance Risk Policy approved by the Risk Review Committee includes 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
Longevity risk is the potential for economic loss, accounting loss or volatility in earnings arising from 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 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, segregated funds, and specific types of health contracts).
Additionally, our longevity risk exposure is exacerbated for certain annuity products such as guaranteed annuity options by an increase
in equity market levels.
To improve management of longevity risk, we monitor research in the fields which could result in mortality improvement. Stress-testing
techniques are used to measure and monitor the impact of extreme mortality improvement on the aggregate portfolio of insurance and
annuity products as well as our own pension plans.
Policyholder Behaviour Risk
We can incur losses due to adverse policyholder behaviour relative to the 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.
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.
Product Design and Pricing Risk
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. This could have an adverse effect on our profitability and capital position.
Our Product Design and Pricing Policy, approved by the Risk Review Committee, 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 significance 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. Additional governance and control procedures have been listed below:
• 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, 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.
Expense Risk
Expense risk is the risk that future expenses are higher than the assumptions used in the pricing and valuation of products. This risk
can arise from general economic conditions, unexpected increases in inflation, slower than anticipated growth, or reduction in
productivity leading to increases in unit expenses. Expense risk occurs in products where we cannot or will not pass increased costs
onto the customer and will manifest itself in the form of a liability increase or a reduction in expected future profits.
We closely monitor expenses through an annual budgeting process and ongoing monitoring of any expense gaps between unit
expenses assumed in pricing and actual expenses.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2015 67