Sun Life 2015 Annual Report Download - page 84

illness insurance, assumptions are developed in collaboration with our reinsurers and are largely based on their experience. In the
United States, our experience is used for both medical stop-loss and disability assumptions, with some consideration of industry
experience.
Policy Termination Rates
Policyholders may allow their policies to lapse prior to the end of the contractual coverage period by choosing not to continue to pay
premiums or by surrendering their policy for the cash surrender value. Assumptions for lapse experience on life insurance are generally
based on our five-year average experience. Lapse rates vary by plan, age at issue, method of premium payment, and policy duration.
Premium Payment Patterns
For universal life contracts, it is necessary to set assumptions about premium payment patterns. Studies prepared by industry or the
actuarial profession are used for products where our experience is insufficient to be statistically valid. Premium payment patterns
usually vary by plan, age at issue, method of premium payment, and policy duration.
Operating Expenses and Inflation
Future policy-related expenses include the costs of premium collection, claims adjudication and processing, actuarial calculations,
preparation and mailing of policy statements, and related indirect expenses and overheads. Expense assumptions are mainly based on
our recent experience using an internal expense allocation methodology. Inflationary increases assumed in future expenses are
consistent with the future interest rates used in scenario testing.
Asset Default
As required by Canadian actuarial standards of practice, insurance contract liabilities include a provision for possible future default of
the assets supporting those liabilities. The amount of the provision for asset default included in the insurance contract liabilities is
based on possible reductions in future investment yield that vary by factors such as type of asset, asset credit quality (rating), duration,
and country of origin. The asset default assumptions are comprised of a best estimate plus a margin for adverse deviations, and are
intended to provide for loss of both principal and income. Best estimate asset default assumptions by asset category and geography
are derived from long-term studies of industry experience and the Company’s experience. Margins for adverse deviation are chosen
from the standard range (of 25% to 100%) as recommended by Canadian actuarial standards of practice based on the amount of
uncertainty in the choice of best estimate assumption. The credit quality of an asset is based on external ratings if available (public
bonds) and internal ratings if not (mortgages and loans). Any assets without ratings are treated as if they are rated below investment
grade.
In contrast to asset impairment provisions and changes in FVTPL assets arising from impairments, both of which arise from known
credit events, the asset default provision in the insurance contract liabilities covers losses related to possible future (unknown) credit
events. Canadian actuarial standards of practice require the asset default provision to be determined taking into account known
impairments that are recognized elsewhere on the statement of financial position. The asset default provision included in the insurance
contract liabilities is reassessed each reporting period in light of impairments, changes in asset quality ratings, and other events that
occurred during the period.
Sensitivities to Best Estimate Assumptions
Our sensitivities relative to our best estimate assumptions are included in the table below. The sensitivities presented below are
forward-looking statements. They are measures of our estimated net income sensitivity to changes in the best estimate assumptions in
our insurance contract liabilities based on a starting point and business mix as of December 31, 2015 and as at December 31, 2014.
They reflect the update of actuarial method and assumption changes described in this MD&A under the heading Assumption Changes
and Management Actions. Where appropriate, these sensitivities take into account hedging programs in place as at December 31,
2015 and December 31, 2014. A description of these hedging programs can be found in this MD&A under the heading Market Risk.
The sensitivity to changes in our accounting estimates in the table below represents the Company’s estimate of changes in market
conditions or best estimate assumptions that are reasonably likely based on the Company’s and/or the industry’s historical experience
and industry standards and best practices as at December 31, 2015 and December 31, 2014.
82 Sun Life Financial Inc. Annual Report 2015 Management’s Discussion and Analysis