139
FINANCIAL STATEMENTS
16 FAIR VALUE continued Recoveries from reinsurers on investment contracts Recoveries from reinsurers on investment contracts represent fully reinsured funds invested under the Flexible Pension Plan. During 2019 the Group closed its Flexible Pension Plan product to new business and completed the transfer of the business to an external provider. Investment contract liabilities These are valued using discounted cash flow analysis using prudent assumptions based on the repayment of the underlying loan. Principal assumptions underlying the calculation of investment contract liabilities Maintenance expenses Assumptions for future policy expense levels are based on the Group’s recent expense analyses. The assumed future expense levels incorporate an annual inflation rate allowance of 4.4% (2018: 4.6%). Sensitivity analysis The sensitivity of fair value to changes in maintenance expense assumptions in respect of investment contract liabilities is not material. Deposits received from reinsurers These are measured in accordance with the reinsurance contract and taking into account an appropriate discount rate for the timing of expected cash flows of the liabilities. Principal assumptions underlying the calculation of deposits received from reinsurers Discount rate The valuation model discounts the expected future cash flows using a contractual discount rate derived from the assets hypothecated to back the liabilities at a product level. The discount rates used for individual retirement and individual care annuities were 2.89% and 0.92% respectively (2018: 3.47% and 1.32% respectively). Credit spreads The valuation of deposits received from reinsurers includes a credit spread applied by the individual reinsurer. A credit spread of 82bps (2018: 142bps) was applied in respect of the most significant reinsurance contract. Sensitivity analysis Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the liabilities (see note 26 (b)). The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit spreads +100bps
Interest rates +100bps
Deposits received from reinsurers net increase/(decrease) in fair value (£m)
2019 2018
(81.2) (75.8)
(200.9) (196.4)
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