Sun Life 2010 Annual Report Download - page 111

Future equity returns
A 100 basis point reduction in assumed future equity and real estate returns would result in an estimated decrease in net income of
about $350 to $450.
Policy termination rates
Policyholders may allow their policies to terminate prior to the end of the contractual coverage period by choosing not to continue to
pay premiums or by exercising one of the non-forfeiture options in the contract. Assumptions for termination experience on life
insurance are generally based on our five-year average experience. Termination rates may vary by plan, age at issue, method of
premium payment, and policy duration. For universal life contracts, it is also necessary to set assumptions about premium cessation
occurring prior to termination of the policy. Industry experience is considered for certain products where our experience is not sufficient
to be statistically valid.
For individual life insurance products where fewer terminations would be financially adverse to us, a 10% decrease in the termination
rate assumption would decrease net income by about $225. For products where more terminations would be financially adverse to us,
a 10% increase in the termination rate assumption would decrease net income by about $80.
Operating expenses and inflation
Actuarial liabilities provide for future policy-related expenses. These 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. Future expense
assumptions reflect inflation. The sensitivity of actuarial liabilities to a 5% increase in unit expenses would result in a decrease in net
income of about $140.
9.G Reinsurance agreements
Reinsurance is used primarily to limit exposure to large losses. We have an individual life insurance retention policy and limits which
require that such arrangements be placed with well-established, highly rated reinsurers. Coverage is well-diversified and controls are in
place to manage exposure to reinsurance counterparties. While reinsurance arrangements provide for the recovery of claims arising
from the liabilities ceded, we retain primary responsibility to the policyholders. In addition, we assumed by retrocession a substantial
amount of business from reinsurers which was sold on December 31, 2010 as described further in Note 3. The effect of these
reinsurance arrangements on premiums and payments to policyholders, beneficiaries and depositors is summarized as follows:
For the years ended December 31 2010 2009 2008
Premiums:
Direct premiums $ 14,324 $ 16,193 $ 14,124
Reinsurance assumed 554 797 585
Reinsurance ceded (1,380) (1,480) (1,122)
$ 13,498 $ 15,510 $ 13,587
Payments to policyholders, beneficiaries and depositors:
Direct payments $ 13,423 $ 14,112 $ 13,863
Reinsurance assumed 667 689 657
Reinsurance ceded (1,012) (1,344) (745)
$ 13,078 $ 13,457 $ 13,775
Actuarial liabilities as at December 31 are shown net of ceded reinsurance of $3,158 in 2010 ($2,532 in 2009).
9.H Role of the Appointed Actuary
The Appointed Actuary is appointed by the Board and is responsible for ensuring that the assumptions and methods used in the
valuation of policy liabilities are in accordance with accepted actuarial practice, applicable legislation and associated regulations or
directives.
The Appointed Actuary is required to provide an opinion regarding the appropriateness of the policy liabilities at the balance sheet date.
Examination of supporting data for accuracy and completeness and analysis of our assets for their ability to support the amount of
policy liabilities are important elements of the work required to form this opinion.
The Appointed Actuary is required each year to analyze the financial condition of the Company and prepare a report for the Board. The
2010 analysis tested our capital adequacy until December 31, 2014, under various adverse economic and business conditions. The
Appointed Actuary reviews the calculation of our Canadian capital and surplus requirements. In addition, our foreign operations and
foreign subsidiaries must comply with local capital requirements in each of the jurisdictions in which they operate. These conditions
affect our ability to distribute our retained earnings. We calculated an appropriation of retained earnings of $4,306 ($4,829 in 2009).
Notes to the Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2010 107