FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
23 INSURANCE CONTRACTS AND RELATED REINSURANCE continued 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 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. The impact on liabilities includes the net effect of the impact on reinsurance assets and liabilities. 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 loans secured by residential mortgages The impact of a level increase in mortality improvement rates of 0.25% for both Retirement Income liabilities and loans secured by residential mortgages
Mortality improvement rates
Immediate property price fall The impact of an immediate decrease in the value of properties by 10% Future property price growth The impact of a reduction in future property price growth by 0.5% Future property price volatility The impact of an increase in future property price volatility by 1% Voluntary redemptions
The impact of an increase in voluntary redemption rates on loans secured by residential mortgages by 10%
Credit defaults
The impact of an increase in the credit default assumption of 10bps
Impact on profit before tax (£m)
Immediate property price fall -10%
Future property price growth -0.5%
Future property price volatility +1%
Interest rates +1%
Interest rates -1% 3,118.9
Maintenance expenses +10%
Base mortality -5%
Mortality improvement +0.25%
Voluntary redemptions +10%
Credit defaults +10bps
2021
Assets
(2,602.0)
(6.5)
23.8
7.5
(90.8) (67.7)
(59.2) (67.7)
(41.2) (22.5) (63.7) (51.5) (43.9) (95.4)
(6.2)
(0.0)
Liabilities
2,076.3 (2,492.5)
(33.7) (40.2)
(140.6) (116.8)
(104.4)
(64.2) (70.4) (14.5) (83.8) (98.3)
(151.6) (151.6)
Total
(525.7)
626.4
(96.9)
(158.5)
(126.9)
(2,471.3)
2,955.9
(5.9)
35.3
15.6 (105.8)
(72.8) (83.8)
–
2020
Assets
Liabilities
1,974.6 (2,369.9)
(50.5) (56.4)
(149.6) (114.3)
(109.4)
(88.0) (193.8)
(150.6) (150.6)
Total
(496.7)
586.0
(93.8)
(156.6)
24 INVESTMENT CONTRACT LIABILITIES
Year ended 31 December 2021 £m
Year ended 31 December 2020 £m
42.8
At 1 January
54.0
1.1
Deposits received from policyholders Payments made to policyholders
1.0
(11.1)
(14.0)
0.8
Change in contract liabilities recognised in profit or loss
1.8
At 31 December
33.6
42.8
(a) Terms and conditions of investment contracts The Group has written Capped Drawdown products for the at-retirement market. These products are no longer available to new customers. In return for a single premium, these contracts pay a guaranteed lump sum on survival to the end of the fixed term. There is an option at outset to select a lower sum at maturity and regular income until the earlier of death or maturity. Upon death of the policyholder and subject to the option selected at the outset, there may be a return of premium less income received or income payable to a dependant until the death of that dependant.
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