10.A Insurance Contract Liabilities

10.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.

10.A.ii Methods and Assumptions

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 significant judgment and 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


•	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 statement of financial position 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 at least as great as 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 uses 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 use 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 20% to 50% 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 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 in the mid-range or higher for other assumptions. 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.

The best estimate assumptions and margins for adverse deviations are reviewed at least annually and revisions are made when appropriate. The choice of assumptions underlying the valuation of insurance contract liabilities is subject to external actuarial peer review.

Mortality

Mortality refers to the rates at which death occurs for defined groups of people. Life insurance mortality assumptions are generally based on the past five to ten years of experience. Our experience is combined with industry experience where our own experience is insufficient to be statistically valid. Assumed mortality rates for life insurance and annuity contracts include assumptions about future mortality improvement based on recent trends in population mortality and our outlook for future trends.

Morbidity

Morbidity refers to both the rates of accident or sickness and the rates of recovery therefrom. Most of our disability insurance is marketed on a group basis. We offer critical illness policies on an individual basis in Canada and Asia, long-term care on an individual basis in Canada, and medical stop-loss insurance is offered on a group basis in the U.S. In Canada, group morbidity assumptions are based on our five-year average experience, modified to reflect any emerging trend in recovery rates. For long-term care and critical illness insurance, assumptions are developed in collaboration with our reinsurers and are largely based on their experience. In the U.S., our experience is used for both medical stop-loss and disability assumptions, with some consideration of industry experience.

Lapse and Other Policyholder Behaviour

Lapse

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.

Expense

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 overhead. 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.

Investment Returns

Interest Rates

We generally maintain distinct asset portfolios for each major line of business. In the valuation of insurance contract liabilities, the future cash flows from insurance contracts and the assets that support them are projected under a number of interest rate scenarios, some of which are prescribed by Canadian actuarial standards of practice. Reinvestments and disinvestments take place according to the specifications of each scenario, and the liability is set based on the range of possible outcomes.

Non-Fixed Income Rates of Return

We are exposed to equity markets through our segregated fund products (including variable annuities) that provide guarantees linked to underlying fund performance and through insurance products where the insurance contract liabilities are supported by non-fixed income assets.

For segregated fund products (including variable annuities), we have implemented hedging programs involving the use of derivative instruments to mitigate a large portion of the equity market risk associated with the guarantees. The cost of these hedging programs is reflected in the liabilities. The equity market risk associated with anticipated future fee income is not hedged.

The majority of non-fixed income assets that are designated as FVTPL support our participating and universal life products where investment returns are passed through to policyholders through routine changes in the amount of dividends declared or in the rate of interest credited. In these cases, changes in non-fixed income asset values are largely offset by changes in insurance contract liabilities.

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.

10.A.iii Insurance Contract Liabilities

Insurance contract liabilities consist of the following:



As at December 31, 2018	SLF Canada			SLF U.S.			SLF Asia			Corporate⁽¹⁾			Total
Individual participating life		$	21,095		$	5,785	$	6,651			$	1,076	$	34,607
Individual non-participating life and health		11,435			13,239		12,463				391		37,528
Group life and health		9,591			5,674		32				—		15,297
Individual annuities		9,267			25		(44		)		5,608		14,856
Group annuities		12,461			6		147				—		12,614
Insurance contract liabilities before other policy liabilities		63,849			24,729		19,249				7,075		114,902
Add: Other policy liabilities⁽²⁾		3,049			1,457		2,276				239		7,021
Total insurance contract liabilities		$	66,898		$	26,186	$	21,525			$	7,314	$	121,923

⁽¹⁾Primarily business from the U.K. and run-off reinsurance operations. Includes U.K. business of $980 for Individual participating life, $240 for Individual non-participating life and health, $5,214 for Individual annuities, and $170 for Other policy liabilities.

⁽²⁾Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds.



As at December 31, 2017	SLF Canada			SLF U.S.⁽¹⁾		SLF Asia⁽¹⁾			Corporate⁽²⁾			Total
Individual participating life		$	20,918	$	5,582	$	6,705			$	1,186	$	34,391
Individual non-participating life and health		11,161		12,024		11,449				394		35,028
Group life and health		9,131		5,427		33				11		14,602
Individual annuities		9,178		25		(68		)		6,215		15,350
Group annuities		11,607		7		106				—		11,720
Insurance contract liabilities before other policy liabilities		61,995		23,065		18,225				7,806		111,091
Add: Other policy liabilities⁽³⁾		3,088		1,345		2,032				229		6,694
Total insurance contract liabilities		$	65,083	$	24,410	$	20,257			$	8,035	$	117,785

⁽¹⁾ Balances in 2017 have been changed to conform with current year presentation as a result of the resegmentation described in Note 4.


⁽²⁾	Primarily business from the U.K. and run-off reinsurance operations. Includes U.K. business of $1,089 for Individual participating life, $250 for Individual non-participating life and health, $5,692 for Individual annuities, and $158 for Other policy liabilities.


⁽³⁾	Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds.

10.A.iv Changes in Insurance Contract Liabilities and Reinsurance Assets

Changes in Insurance contract liabilities and Reinsurance assets are as follows:



For the years ended December 31,		2018											2017
	Insurance contract liabilities				Reinsurance assets				Net			Insurance contract liabilities				Reinsurance assets				Net
Balances, before Other policy liabilities and assets as at January 1,		$	111,091			$	3,503		$	107,588			$	108,411			$	4,541		$	103,870
Change in balances on in-force policies		(3,094		)		(129		)	(2,965		)		2,757				(779		)	3,536
Balances arising from new policies		3,780				128			3,652				2,941				156			2,785
Method and assumption changes		(374		)		(96		)	(278		)		(371		)		(198		)	(173		)
Increase (decrease) in Insurance contract liabilities and Reinsurance assets		312				(97		)	409				5,327				(821		)	6,148
Foreign exchange rate movements		3,499				247			3,252				(2,647		)		(217		)	(2,430		)
Balances before Other policy liabilities and assets		114,902				3,653			111,249				111,091				3,503			107,588
Other policy liabilities and assets		7,021				488			6,533				6,694				525			6,169
Total Insurance contract liabilities and Reinsurance assets, December 31		$	121,923			$	4,141		$	117,782			$	117,785			$	4,028		$	113,757

10.A.v Impact of Method and Assumption Changes

Impacts of method and assumption changes on Insurance contract liabilities net of Reinsurance assets are as follows:



For the year ended December 31, 2018	Net increase (decrease) before income taxes				Description
Mortality / Morbidity		$	(337	)	Updates to reflect mortality/morbidity experience in all jurisdictions. The largest items were favourable mortality in SLF Asia International, SLF Canada Group Retirement Services and SLF U.K.
Lapse and other policyholder behaviour		563			Updates to lapse and other policyholder behaviour in all jurisdictions. The largest items, which all had unfavourable impacts, were updated lapse assumptions in SLF U.S. and SLF Asia International.
Expenses		6			Updates to reflect expense experience in all jurisdictions including updates to SLF Canada participating life accounts.
Investment returns		(331		)	Updates to various investment-related assumptions across the Company including updates to SLF Canada participating life accounts.
Model enhancements and other		(179		)	Various enhancements and methodology changes across all jurisdictions. The largest items were a favourable change to the participating provisions for adverse deviation in SLF Canada and SLF U.S., partially offset by a change in reinsurance provisions in SLF U.S.
Total impact of method and assumption changes		$	(278	)



For the year ended December 31, 2017	Net increase (decrease) before income taxes				Description
Mortality / Morbidity		$	(286	)	Updates to reflect mortality/morbidity experience in all jurisdictions. The largest items were favourable mortality in SLF U.S. In-force Management and SLF Asia International insurance and favourable mortality improvement in SLF U.K.
Lapse and other policyholder behaviour		149			Updates to reflect lapse and other policyholder behaviour experience in all jurisdictions. The largest items were lower lapse rates on lapse supported business in SLF U.S. and updated lapse assumptions in SLF Canada's individual insurance business.
Expenses		71			Updates to reflect expense experience in all jurisdictions. The largest items were a refinement to the allocation of expenses in SLF Canada and increased expenses in the closed block of business in SLF Asia International wealth.
Investment returns		(62		)	Updates to various investment related assumptions across the Company. This included a reduction of the provision for investment risk in SLF Canada and other updated investment related assumptions, offset partially by updates to promulgated ultimate reinvestment rates.
Model enhancements and other		(45		)	Various enhancements and methodology changes across all jurisdictions. Includes the favourable impact on insurance contract liabilities from the resolution of tax uncertainties in a U.S. subsidiary and updates to the SLF Canada participating individual life business, partially offset by changes due to U.S. tax reform and updates to reflect reinsurance market conditions.
Total impact of method and assumption changes		$	(173	)

10.B Investment Contract Liabilities

10.B.i Description of Business

The following are the types of Investment contracts in-force:


•	Term certain payout annuities in Canada


•	Guaranteed Investment Contracts in Canada


•	Unit-linked products issued in the U.K. and Hong Kong


•	Non-unit-linked pensions contracts issued in the U.K. and Hong Kong

10.B.ii Method and Assumption Changes

Investment Contracts with Discretionary Participation Features

Investment contracts with DPF are measured using the same approach as insurance contracts.

Investment Contracts without Discretionary Participation Features

Investment contracts without DPF are measured at FVTPL if by doing so, a potential accounting mismatch is eliminated or significantly reduced or if the contract is managed on a fair value basis. Other investment contracts without DPF are measured at amortized cost.

The fair value liability is measured through the use of prospective discounted cash-flow techniques. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit liability amounts on a fair value basis if required. For non-unit-linked contracts, the fair value liability is equal to the present value of cash flows.

Amortized cost is measured at the date of initial recognition as the fair value of consideration received, less the net effect of principal payments such as transaction costs and front-end fees. At each reporting date, the amortized cost liability is measured as the present value of future cash flows discounted at the effective interest rate where the effective interest rate is the rate that equates the discounted cash flows to the liability at the date of initial recognition.

10.B.iii Investment Contract Liabilities

Investment contract liabilities consist of the following:



As at December 31, 2018	SLF Canada			SLF Asia		Corporate			Total
Individual participating life		$	—	$	—		$	6	$	6
Individual non-participating life and health		—		254			3		257
Individual annuities		2,646		—			43		2,689
Group annuities		—		212			—		212
Total investment contract liabilities		$	2,646	$	466		$	52	$	3,164

Included in the Investment contract liabilities of $3,164 are liabilities of $515 for investment contracts with DPF, $2,646 for investment contracts without DPF measured at amortized cost, and $3 for investment contracts without DPF measured at fair value.



As at December 31, 2017	SLF Canada			SLF Asia		Corporate			Total
Individual participating life		$	—	$	—		$	8	$	8
Individual non-participating life and health		—		260			3		263
Individual annuities		2,517		—			48		2,565
Group annuities		—		246			—		246
Total investment contract liabilities		$	2,517	$	506		$	59	$	3,082

Included in the Investment contract liabilities of $3,082 are liabilities of $562 for investment contracts with DPF, $2,517 for investment contracts without DPF measured at amortized cost, and $3 for investment contracts without DPF measured at fair value.

10.B.iv Changes in Investment Contract Liabilities

Changes in investment contract liabilities without DPF are as follows:



For the years ended December 31,		2018							2017
	Measured at fair value			Measured at amortized cost				Measured at fair value			Measured at amortized cost
Balance as at January 1		$	3		$	2,517			$	3		$	2,305
Deposits		—			483				—			470
Interest		—			53				—			47
Withdrawals		—			(420		)		—			(322		)
Fees		—			(8		)		—			(5		)
Other		—			21				—			19
Change in assumptions		—			—				—			3
Balance as at December 31		$	3		$	2,646			$	3		$	2,517

Changes in investment contract liabilities with DPF are as follows:



For the years ended December 31,	2018				2017
Balance as at January 1		$	562			$	605
Change in liabilities on in-force		(84		)		(10		)
Liabilities arising from new policies		—				1
Increase (decrease) in liabilities		(84		)		(9		)
Foreign exchange rate movements		37				(34		)
Balance as at December 31		$	515			$	562

10.C Gross Claims and Benefits Paid

Gross claims and benefits paid consist of the following:



For the years ended December 31,	2018		2017
Maturities and surrenders	$	2,609	$	2,389
Annuity payments	1,876		1,849
Death and disability benefits	3,948		3,836
Health benefits	6,421		6,079
Policyholder dividends and interest on claims and deposits	1,132		1,200
Total gross claims and benefits paid	$	15,986	$	15,353

10.D Total Assets Supporting Liabilities and Equity

The following tables show the total assets supporting total liabilities for the product lines shown (including insurance contract and investment contract liabilities) and assets supporting equity and other:



As at December 31, 2018	Debt securities			Equity securities			Mortgages and loans			Investment properties			Other		Total
Individual participating life		$	19,624		$	2,557		$	7,978		$	4,736	$	4,397	$	39,292
Individual non-participating life and health		18,720			1,303			14,398			1,638		9,058		45,117
Group life and health		6,271			70			9,217			—		2,882		18,440
Individual annuities		11,918			49			5,769			—		959		18,695
Group annuities		6,448			35			6,298			—		822		13,603
Equity and other		11,462			620			3,162			783		17,591		33,618
Total assets		$	74,443		$	4,634		$	46,822		$	7,157	$	35,709	$	168,765

As at December 31, 2017	Debt securities			Equity securities			Mortgages and loans			Investment properties			Other		Total
Individual participating life		$	18,855		$	3,190		$	7,458		$	4,645	$	4,508	$	38,656
Individual non-participating life and health		18,560			1,720			12,360			1,348		8,702		42,690
Group life and health		6,003			73			8,799			—		2,667		17,542
Individual annuities		12,001			50			5,506			—		1,303		18,860
Group annuities		6,076			45			5,840			—		538		12,499
Equity and other		11,124			942			2,842			1,074		16,491		32,473
Total assets		$	72,619		$	6,020		$	42,805		$	7,067	$	34,209	$	162,720

10.E 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 and reinsurance recoverables are in accordance with accepted actuarial practice in Canada, applicable legislation, and associated regulations or directives.

The Appointed Actuary is required to provide an opinion regarding the appropriateness of the policy liabilities net of reinsurance recoverables at the statement dates to meet all policy obligations of the Company. Examination of supporting data for accuracy and completeness and analysis of our assets for their ability to support the amount of policy liabilities net of reinsurance recoverables are important elements of the work required to form this opinion.

The Appointed Actuary is required each year to investigate the financial condition of the Company and prepare a report for the Board. The 2018 analysis tested our capital adequacy until December 31, 2022, under various adverse economic and business conditions. The Appointed Actuary reviews the calculation of our Life Insurance Capital Adequacy Test ("LICAT") Ratios.