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FINANCIAL STATEMENTS
23 INSURANCE CONTRACTS AND RELATED REINSURANCE continued (e) Sensitivity analysis
The Group has estimated the impact on 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 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 17. To further assist with this comparison, any impact on reinsurance assets has been included within the liabilities line item. The sensitivity factors are applied via financial models. 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 impacts indicated below for insurance contracts also reflect movements in financial derivatives, which are impacted by movements in interest rates. Related reinsurance assets are not impacted by financial derivatives. The sensitivities below cover the changes on all assets and liabilities from the given stress. 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%
Maintenance expenses +10%
Base mortality -5%
Mortality improvement +0.25%
Voluntary redemptions +10%
Credit defaults +10bps
2020
(2,471.3)
2,955.9
(5.9)
35.3
15.6 (105.8)
(72.8) (83.8) (156.6) (80.2) (72.7) (152.9)
(51.5) (43.9) (95.4) (55.6) (38.3) (93.9)
(14.5) (83.8) (98.3) (12.8) (87.7) (100.5)
–
Assets
1,974.6 (2,369.9)
(50.5) (56.4)
(149.6) (114.3)
(109.4)
(88.0) (193.8)
(150.6) (150.6)
Liabilities
Total
(496.7)
586.0
(93.8)
2019
Assets
(2,139.5)
2,551.3
(6.6)
29.8
14.0 (104.5)
–
Liabilities
1,744.3 (2,077.5)
(42.9) (49.5)
(128.0)
(78.5) (64.5)
(76.8) (181.3)
(85.8) (85.8)
Total
(395.2)
473.8
(98.2)
24 INVESTMENT CONTRACT LIABILITIES
Year ended 31 December 2020 £m
Year ended 31 December 2019 £m
54.0
At 1 January
197.8
1.0
Deposits received from policyholders Payments made to policyholders
26.7
(14.0)
(78.3) (92.2)
1.8
Change in contract liabilities recognised in profit or loss
At 31 December
42.8
54.0
During 2019 the Group closed its Flexible Pension Plan product to new business and completed the transfer of the business to an external provider.
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