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.

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 ("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 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.

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:

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 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 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.

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.

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.

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.

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.

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.

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.


As at December 31, 2020	Canada			U.S.			Asia		Corporate(1)			Total
Individual participating life		$	25,839		$	5,374	$	11,981		$	952	$	44,146
Individual non-participating life and health		15,533			15,010		12,183			373		43,099
Group life and health		11,167			5,578		40			23		16,808
Individual annuities		10,497			22		5			5,382		15,906
Group annuities		17,670			7		97			—		17,774
Insurance contract liabilities before other policy liabilities		80,706			25,991		24,306			6,730		137,733
Add: Other policy liabilities(2)		3,521			1,807		2,499			213		8,040
Total insurance contract liabilities		$	84,227		$	27,798	$	26,805		$	6,943	$	145,773

(1) Primarily business from the UK and run-off reinsurance operations. Includes UK business of $851 for Individual participating life, $237 for Individual non-participating life and health, $5,162 for Individual annuities, and $163 for Other policy liabilities.


As at December 31, 2019	Canada			U.S.			Asia		Corporate(1)			Total
Individual participating life		$	23,526		$	5,611	$	8,497		$	987	$	38,621
Individual non-participating life and health		13,527			13,832		12,188			386		39,933
Group life and health		10,493			5,541		39			14		16,087
Individual annuities		9,529			24		(17)			5,335		14,871
Group annuities		14,276			7		99			—		14,382
Insurance contract liabilities before other policy liabilities		71,351			25,015		20,806			6,722		123,894
Add: Other policy liabilities(2)		2,959			1,724		2,401			206		7,290
Total insurance contract liabilities		$	74,310		$	26,739	$	23,207		$	6,928	$	131,184

(1) Primarily business from the UK and run-off reinsurance operations. Includes UK business of $893 for Individual participating life, $238 for Individual non-participating life and health, $5,107 for Individual annuities, and $156 for Other policy liabilities.


For the years ended December 31,		2020								2019
	Insurance contract liabilities			Reinsurance assets			Net		Insurance contract liabilities			Reinsurance assets			Net
Balances, before Other policy liabilities and assets as at January 1,		$	123,894		$	3,395	$	120,499		$	114,902		$	3,653	$	111,249
Change in balances on in-force policies(1)		9,919			(107)		10,026			8,559			268		8,291
Balances arising from new policies(1)		5,004			82		4,922			3,171			136		3,035
Method and assumption changes		(63)			(179)		116			(363)			(376)		13
Increase (decrease) in Insurance contract liabilities and Reinsurance assets		14,860			(204)		15,064			11,367			28		11,339
Other(2)		—			—		—			(123)			(123)		—
Foreign exchange rate movements		(1,021)			(65)		(956)			(2,252)			(163)		(2,089)
Balances before Other policy liabilities and assets		137,733			3,126		134,607			123,894			3,395		120,499
Other policy liabilities and assets		8,040			717		7,323			7,290			629		6,661
Total Insurance contract liabilities and Reinsurance assets, December 31		$	145,773		$	3,843	$	141,930		$	131,184		$	4,024	$	127,160

For the year ended December 31, 2020

Net increase (decrease)
before income taxes

Description

Mortality / Morbidity

113

Updates to reflect mortality/morbidity experience in all jurisdictions. The largest items were unfavourable mortality impacts in individual life and health in Canada and In-force Management in the U.S., partially offset by favourable group disability government pension plan offsets in Canada.

Policyholder behaviour

207

Updates to policyholder behaviour in all jurisdictions. The largest item was in In-force Management in the U.S.

Expenses

(28)

Updates to reflect expense experience in all jurisdictions.

Investment returns

(10)

Updates to various investment-related assumptions across the Company.

Model enhancements and other

(166)

Various enhancements and methodology changes across all jurisdictions.

Total impact of method and assumption changes

116

For the year ended December 31, 2019

Net increase (decrease)
before income taxes

Description

Mortality / Morbidity

(347)

Updates to reflect mortality/morbidity experience in all jurisdictions. The largest items were favourable mortality impacts in the UK in Corporate and in Group Retirement Services in Canada.

Policyholder behaviour

102

Updates to policyholder behaviour in all jurisdictions. The largest item was an unfavourable lapse update in International in Asia.

Expenses

Updates to reflect expense experience in all jurisdictions.

Investment returns

Updates to various investment-related assumptions across the Company, partially offset by updates to promulgated ultimate reinvestment rates.

Model enhancements and other

246

Various enhancements and methodology changes across all jurisdictions. The largest item was an unfavourable strengthening of reinsurance provisions in In-force Management in the U.S., partially offset by a favourable change to participating accounts in the UK in Corporate and the Philippines in Asia.

Total impact of method and assumption changes

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.


As at December 31, 2020	Canada			Asia	Corporate				Total
Individual participating life		$	—		$	—	$	5		$	5
Individual non-participating life and health		—			269		2			271
Individual annuities		2,690			—		35			2,725
Group annuities		—			188		—			188
Total investment contract liabilities		$	2,690		$	457	$	42		$	3,189

For the year ended December 31, 2020, Investment contract liabilities of $3,189 are comprised of investment contracts with DPF of $497, investment contracts without DPF measured at amortized cost of $2,690, and for investment contracts without DPF measured at fair value of $2.


As at December 31, 2019	Canada			Asia	Corporate				Total
Individual participating life		$	—		$	—	$	5		$	5
Individual non-participating life and health		—			258		2			260
Individual annuities		2,612			—		39			2,651
Group annuities		—			200		—			200
Total investment contract liabilities		$	2,612		$	458	$	46		$	3,116

For the year ended December 31, 2019, Investment contract liabilities of $3,116 are comprised of investment contracts with DPF of $502, investment contracts without DPF measured at amortized cost of $2,612, and investment contracts without DPF measured at fair value of $2.


For the years ended December 31,		2020						2019
	Measured at fair value			Measured at amortized cost			Measured at fair value			Measured at amortized cost
Balance as at January 1		$	2		$	2,612		$	3		$	2,646
Deposits		—			467			—			360
Interest		—			59			—			57
Withdrawals		—			(457)			—			(464)
Fees		—			(7)			—			(6)

Other		—			16			—			20

Foreign exchange rate movements		—			—			(1)			(1)
Balance as at December 31		$	2		$	2,690		$	2		$	2,612


For the years ended December 31,	2020			2019
Balance as at January 1		$	502		$	515
Change in liabilities on in-force		2			2

Changes in assumptions or methodology		—			6
Increase (decrease) in liabilities		2			8
Foreign exchange rate movements		(7)			(21)
Balance as at December 31		$	497		$	502


For the years ended December 31,	2020		2019
Maturities and surrenders	$	2,993	$	2,956
Annuity payments	1,979		1,909
Death and disability benefits	4,594		4,246
Health benefits	6,913		7,222
Policyholder dividends and interest on claims and deposits	1,828		1,088
Total gross claims and benefits paid	$	18,307	$	17,421


As at December 31, 2020	Debt securities			Equity securities			Mortgages and loans			Investment properties			Other		Total
Individual participating life		$	25,574		$	4,601		$	8,992		$	4,950	$	5,331	$	49,448
Individual non-participating life and health		24,810			1,611			14,208			2,052		10,132		52,813
Group life and health		7,789			61			9,354			36		3,112		20,352
Individual annuities		11,979			47			6,219			—		1,185		19,430
Group annuities		9,598			48			8,142			—		909		18,697
Equity and other		9,339			263			3,031			478		23,239		36,350
Total assets		$	89,089		$	6,631		$	49,946		$	7,516	$	43,908	$	197,090

As at December 31, 2019	Debt securities			Equity securities			Mortgages and loans			Investment properties			Other		Total
Individual participating life		$	22,533		$	2,899		$	8,372		$	4,941	$	4,754	$	43,499
Individual non-participating life and health		21,301			1,418			14,145			1,790		9,353		48,007
Group life and health		6,858			72			9,301			—		2,897		19,128
Individual annuities		11,711			48			6,065			—		793		18,617
Group annuities		7,323			37			7,261			—		697		15,318
Equity and other		11,880			313			3,078			575		19,814		35,660
Total assets		$	81,606		$	4,787		$	48,222		$	7,306	$	38,308	$	180,229

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 2020 analysis tested our capital adequacy until December 31, 2024, under various adverse economic and business conditions. The Appointed Actuary reviews the calculation of our Life Insurance Capital Adequacy Test ("LICAT") Ratios.