STRATEGIC REPORT
GOVERNANCE
financial statements
23 INSURANCE CONTRACTS AND RELATED REINSURANCE continued 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. Sensitivities are generally of a smaller magnitude compared to the prior period due to the discounting effect of interest rate rises over the period. The reduction in the interest rate sensitivity is further due to the change in the interest rate hedging position adopted. The mortality and voluntary redemption sensitivities are further impacted by the interest rate increases observed during the period, as mentioned in the sensitivities to loans secured against residential mortgages in note 17.
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 Mortality improvement rates The impact of a level increase in mortality improvement rates of 0.25% for both Retirement Income liabilities and loans secured by residential mortgages 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%
Credit defaults +10bps
Voluntary redemptions +10%
Future property price volatility +1%
Future property price growth -0.5%
Mortality improvement +0.25%
Base mortality -5%
Maintenance expenses +10%
Interest rates -1% 1,837.6
Interest rates +1%
2022 Assets
(1,545.4)
(5.2)
(13.4)
(6.0)
(62.6) (34.3) (96.9) (90.8) (67.7) (158.5)
(37.1) (32.2) (69.3) (59.2) (67.7) (126.9)
(25.6) (16.1) (41.7) (41.2) (22.5) (63.7)
19.2
–
Liabilities
1,552.7 (1,848.6)
(27.0) (32.2)
(111.3) (124.7)
(81.9) (87.9)
(30.1) (123.2) (10.9) (123.2)
Total
7.3
(11.0)
2021 Assets
(2,602.0)
3,118.9
(6.5)
23.8
7.5
(6.2)
(0.0)
Liabilities
2,076.3 (2,492.5)
(33.7) (40.2)
(140.6) (116.8)
(104.4) (96.9)
(64.2) (151.6) (70.4) (151.6)
Total
(525.7)
626.4
24 INVESTMENT CONTRACT LIABILITIES
Year ended 31 December 2022 £m
Year ended 31 December 2021 £m
33.6 14.0
At 1 January
42.8
Deposits received from policyholders Payments made to policyholders
1.1
(12.5)
(11.1)
(2.6) 1
0.8
Change in contract liabilities recognised in profit or loss
At 31 December
32.5
33.6
1 This represents the £2.6m in the consolidated statement of comprehensive income less the impact for foreign exchange translation.
(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. Capped Drawdown pension business is classified as investment contracts as there is no transfer of longevity risk due to the premium protection option within these fixed term contracts. (b) Principal assumptions underlying the calculation of investment contracts Valuation discount rates Valuation discount rate assumptions for investment contracts are set with regard to yields on supporting assets. 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.
171
Powered by FlippingBook