Strategic Report Governance
Financial Statements
191
(h) Sensitivity analysis The Group has estimated the impact on fulfilment cash flows, contractual service margin and profit before tax for the year in relation to insurance contracts and related reinsurance from reasonably possible changes in key assumptions relating to financial assets and to liabilities. The sensitivities capture the liability impacts arising from the impact on the yields of the assets backing liabilities in each sensitivity. The impact of changes in the value of assets and liabilities has been shown separately to aid the comparison with the change in value of assets for the relevant sensitivities in note 16. The sensitivity factors are applied via financial models either as at the valuation date or from a suitable recent reporting period where appropriate to do so. The analysis has been prepared for a change in each variable with other assumptions remaining constant. In reality, such an occurrence is unlikely, due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts cannot necessarily be interpolated or extrapolated from these results. The extent of non-linearity grows as the severity of any sensitivity is increased. For example, in the specific scenario of property price falls, the impact on IFRS profit before tax from a 5% fall in property prices would be slightly less than half of that disclosed in the table below. Furthermore, in the specific scenario of a mortality reduction, a smaller fall in fulfilment cash flows than disclosed in the table below or a similar increase in mortality may be expected to result in broadly linear impacts. However, it becomes less appropriate to extrapolate the expected impact for more severe scenarios. The sensitivity factors take into consideration that the Group’s assets and liabilities are actively managed and may vary at the time that any actual market movement occurs. The sensitivities below cover the changes on all assets and liabilities from the given stress. Parameters that have had limited sensitivity both historically and currently are not included, such as inflation for which the risk is substantially hedged. The impact of these sensitivities on IFRS net equity is the impact on profit before tax as set out in the table below less tax at the current tax rate.
Sensitivity factor
Description of sensitivity factor applied
Interest rate and investment return
The impact of a change in the market interest rates by +/- 1% (e.g. if a current interest rate is 5%, the impact of an immediate change to 4% and 6% respectively). The test consistently allows for similar changes to both assets and liabilities
Expenses
The impact of an increase in maintenance expenses by 10%
Base mortality rates
The impact of a decrease in base table mortality rates by 5% applied to both Retirement Income liabilities and lifetime mortgages 1 The impact of a level increase in mortality improvement rates of 10% for both Retirement Income liabilities and LTMs 1 . This sensitivity applies a multiplicative adjustment to the improvement rates
Mortality improvement rates
Immediate property price fall The impact of an immediate decrease in the value of properties on lifetime mortgages 1 by 10% Future property price growth The impact of a reduction in future property price growth on lifetime mortgages 1 by 0.5% Future property price volatility The impact of an increase in future property price volatility on lifetime mortgages 1 by 1% Voluntary redemptions The impact of an increase in voluntary redemption rates on lifetime mortgages 1 by 10% Credit defaults The impact of an increase in the credit default assumption of 10bps
1 Including the impact from NNEG hedges. A guide to the sensitivity table is provided below:
Abbreviation Title
Impact
FCF
Fulfilment cash flows
Positive values represent cash inflows or lower cash outflows resulting in reductions in insurance contract liabilities or an increase in reinsurance contracts assets Negative values represent cash outflows or higher cash outflows resulting in increased insurance contract liabilities or a decrease in reinsurance contracts assets
CSM Contractual service margin Positive values represent a reduction in the CSM Negative values represent an increase in the CSM P&L Profit/(loss) before tax
Profit – increase in pre-tax profit (Loss) – decrease in pre-tax profit Sensitivities can result in an opposite impact on Profit/(loss) before and after allowance for the CSM due to the impact of the use of locked-in rates for the CSM
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