STRATEGIC REPORT
GOVERNANCE
financial statements
23 INSURANCE CONTRACTS AND RELATED REINSURANCE continued The long-term improvement rates in the CMI 2021 model are 2.0% for males and 1.75% for females (2021: 2.0% for males and 1.75% for females). The period smoothing parameter in the modified CMI 2021 model has been set to 7.0 (2021: 7.0). The addition to initial rates (“A”) parameter in the model varies between 0% and 0.25% depending on product (2021: between 0% and 0.25% depending on product). All other CMI model parameters are the defaults (2021: other parameters set to defaults). Valuation discount rates Valuation discount rate assumptions are set by considering the yields on the assets allocated to back the liabilities. The yields on lifetime mortgage assets are derived using the assumptions described in note 17 with allowance for risk through the deductions related to the NNEG. An explicit allowance for credit risk is included by making an explicit deduction from the yields on debt and other fixed income securities, loans secured by commercial mortgages, and other loans based on an expectation of default experience of each asset class and application of a prudent loading. Allowances vary by asset category and by rating. Economic uncertainty relating to the Russian/Ukraine conflict, supply chain issues and inflation increases the risk of credit defaults. Our underlying default methodology allows for the impact of credit rating downgrades and spread widening and hence we have maintained the same methodology at 31 December 2022. The considerations around COVID-19 and macro-economic factors for property prices affecting the NNEG are as described in note 17.
2022 % 5.67 5.89 5.67 5.89 4.20 4.12
2021 % 2.73 2.87 2.73 2.87 1.03
Valuation discount rates – gross liabilities
Individually underwritten Guaranteed Income for Life Solutions (JRL) Individually underwritten Guaranteed Income for Life Solutions (PLACL)
Defined Benefit (JRL) Defined Benefit (PLACL)
Other annuity products (PLACL)
Term and whole of life products (PLACL) 1.03 The overall reduction in yield to allow for the risk of defaults from all non-LTM assets (including gilts, corporate bonds, infrastructure loans, private placements and commercial mortgages) and the NNEG from LTMs was 79 bps in JRL and 66bps in PLACL (2021: 64bps and 63bps respectively). Future expenses Assumptions for future policy expense levels, expressed as a per plan charge for GIfL and a per scheme member charge for DB, are determined from the Group’s recent expense analyses. The assumed future policy expense levels incorporate an annual inflation rate allowance of 4.15% (2021: 4.45%) derived from the long-term expected retail price and consumer price indices implied by inflation swap rates and an additional allowance for earnings inflation. Long-term inflation expectations have fallen during the period, resulting in a decrease in the inflation rate allowance. Inflation Assumptions for annuity escalation are required for LPI, RPI and CPI index linked liabilities, the majority of which are within the Defined Benefit business. The inflation curve assumed in each case is that which is implied by market swap rates, taking into account any escalation caps and/or floors applicable. A change in approach since 31 December 2021, to using a mark to model basis for LPI inflation instead of the previous approach which utilised market prices that were not actively traded, has been implemented. (c) Movements The following movements have occurred in the insurance contract balances during the year.
Gross £m
Reinsurance £m
Net £m
Year ended 31 December 2022
21,812.9 (2,533.5)
19,279.4 2,779.7
At 1 January 2022
2,982.5 (1,494.0)
(202.8)
Change due to new premiums Change due to new claims
231.6 (1,262.4)
612.7
(73.6)
539.1
Unwinding of discount
(5,418.7)
515.1 (4,903.6)
Changes in economic assumptions Changes in non-economic assumptions
(164.1)
95.2
(68.9) (11.5)
1.6
(13.1)
Other movements
At 31 December 2022
18,332.9 (1,981.1)
16,351.8
Gross £m
Reinsurance £m
Net £m
Year ended 31 December 2021
At 1 January 2021
21,118.4 (2,865.5)
18,252.9 2,331.9
Change due to new premiums Change due to new claims
2,298.1 (1,478.1)
33.8
239.0 (1,239.1)
Unwinding of discount
488.8 (595.1)
(62.1)
426.7
Changes in economic assumptions Changes in non-economic assumptions
135.4
(459.7)
(9.8) (9.4)
–
(9.8)
(14.1)
(23.5)
Other movements At 31 December 2021
21,812.9 (2,533.5)
19,279.4
169
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