Strategic Report Governance
Financial Statements
145
The table below sets out the significant estimates and assumptions and other estimates applied by the Group in measuring assets and liabilities.
Note
Significant estimate
Description
1.7, 22 Measurement of insurance contract
The measurement of insurance liabilities is determined by the present value of estimates of the projected future annuity payments and the cost of administering payments to policyholders. The key assumptions used in the determination of future cash flows are the mortality and annuity escalation assumptions and the level and inflation of costs of administration. Mortality assumptions are derived from the appropriate standard mortality tables, adjusted to reflect the future expected mortality experience of the policyholders. The Group considers any maintenance expenses to be directly attributable if they are required to be incurred to enable the insurance entities to continue to operate as insurance companies maintaining the contracts in force. Maintenance expenses are determined from expense analyses and are assumed to inflate at market-implied rates. The present value of future cash flows are discounted based on discount rates as at the valuation date. Discount rates are based on estimates of the yield of a reference portfolio including deductions for allowances for expected and unexpected credit default losses. Factors that may affect future levels of defaults, including historic trends and current spread levels, are closely monitored when determining deductions for credit risk. The measurement of the value of reinsurance assets and liabilities is determined by the present value of estimates of the projected future cash flows arising from the reinsurers’ share of the Group’s insurance liabilities including the risk adjustment. The key assumptions used in the valuation include mortality experience, discount rates and assumptions around the reinsurers’ ability to meet their claims obligations. Mortality assumptions are derived consistently with the approach described above for gross insurance contracts. Discount rates are derived consistently with the approach described above for gross insurance contracts with the following adjustments: – In instances where reinsurance cover is in place when underlying contracts are written, the reinsurance CSM is calculated using discount rates as at the start of the relevant treaty notice period. – In instances where reinsurance is transacted subsequently to the underlying business being written, the reinsurance CSM is calculated using discount rates as at the start date of the reinsurance treaty. Allowance is made for reinsurer credit default risk based on the net balance held with the reinsurer after allowing for collateral arrangements. The measurement of lifetime mortgages includes estimates of the projected future receipts of interest and loan repayments and the future costs of administering the loan portfolio. The key assumptions used as part of the valuation calculation include future property prices and their volatility, mortality, the rate of voluntary redemptions and the liquidity premium added to the swap curve and used to discount the mortgage cash flows. In addition, the costs of administering the loan portfolio are estimated using assumptions for future policy expense levels. The fair value of other illiquids is estimated using discounted cash flow valuation approaches and pricing from asset managers and other third party pricing sources. Discounted cash flow models include assumptions regarding unobservable inputs where the market is not active. The assumptions for unobservable inputs include management’s expectations regarding credit spreads and also credit ratings for privately-rated assets used in determining the discount rate for such investments. The Group notes the significant uncertainty regarding the outcome of the previous Government consultation and the 2024 King’s Speech regarding restriction of residential ground rents. In determining the valuation of the Group’s residential ground rents portfolio the Group considers the impact that this uncertainty has on the fair value that a market participant would be willing to exchange such assets. The value of these assets includes an adjustment to reflect an expected increase in credit spread and consequential increase in the credit risk deduction for defaults.
liabilities using assumptions for mortality, expenses, discount rates
1.7, 22 Measurement of
reinsurance contracts using assumptions for mortality, discount rates and credit default risk
1.13, 16(a) 16(d)
Measurement of fair value of lifetime mortgages, including measurement of the no-negative equity guarantee Measurement of fair value of other illiquid financial investments
16(a)
16
Measurement of the value of residential ground rents as a result of the ongoing
government consultation
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