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- Notes to the MCEV basis supplementary information
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- E: Sensitivity tests
Notes to the MCEV basis supplementary information
For the year ended 31 December 2009
E1: Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2009 and the value of new business for the year ended 31 December 2009 to changes in key assumptions.
For each sensitivity illustrated all other assumptions have been left unchanged except where they are directly affected by the revised conditions. Sensitivity scenarios therefore include consistent changes in cash flows directly affected by the changed assumption(s), for example future bonus participation in changed economic scenarios.
In some jurisdictions the reserving basis that underlies shareholder distributable cash flows is dynamic, and in theory some sensitivities could change not only future experience but also reserving levels. Modelling of dynamic reserves is extremely complex and the effect on value is second-order. Therefore, in performing the sensitivities, reserving bases have been kept constant whilst only varying future experience assumptions with similar considerations applying to required capital. However the sensitivities for South Africa in respect of an increase/decrease of all pre-tax investment and economic assumptions, an increase/decrease in equity and property market values and increases in equity, property and swaption implied volatilities allow for the change in the time value of financial options and guarantees that form part of the IGR.
The sensitivities for an increase/decrease in all pre-tax investment and economic assumptions (with credited rates and discount rates changing commensurately) are calculated in line with a parallel shift in risk free reference spot rates rather than risk free reference forward rates. However, the 1% reduction is limited so that it does not lead to negative risk free reference rates.
The equity and property sensitivities make allowance for rebalancing of asset portfolios.
VNB sensitivities assume that the scenario arises immediately after point of sale of the contract. Therefore no allowance is made for the ability to re-price any contracts in the sensitivity scenarios, apart from the mortality sensitivities for the South African business where allowance is made for changes in the pricing basis for products with reviewable premiums.
Total covered business
£m |
|||
| At 31 December 2009 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | 6,027 |
3,212 |
167 |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | 6,076 |
3,262 |
172 |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 5,746 |
2,865 |
161 |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 6,346 |
3,589 |
167 |
| Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately | 6,080 |
3,266 |
169 |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | 6,401 |
3,447 |
179 |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | 5,671 |
2,996 |
157 |
| 50bps contraction on corporate bond spreads | 6,360 |
3,530 |
167 |
| 25% multiplicative increase in equity and property implied volatilities | 5,929 |
3,190 |
167 |
| 25% multiplicative increase in swaption implied volatilities | 5,906 |
3,092 |
161 |
| Voluntary discontinuance rates decreasing by 10% | 6,211 |
3,492 |
209 |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | 6,269 |
3,454 |
188 |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | 6,166 |
3,351 |
185 |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges | 5,989 |
3,175 |
167 |
| For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges | n/a |
n/a |
150 |
| Value of new business calculated on economic assumptions at the end of reporting period | n/a |
n/a |
153 |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | 6,160 |
3,345 |
173 |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | 5,932 |
3,118 |
161 |
Emerging Markets
£m |
|||
| At 31 December 2009 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | 2,463 |
1,158 |
65 |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | 2,506 |
1,201 |
68 |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 2,432 |
1,125 |
61 |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 2,483 |
1,179 |
67 |
| Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately | 2,470 |
1,165 |
66 |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | 2,567 |
1,225 |
66 |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | 2,358 |
1,090 |
63 |
| 50bps contraction on corporate bond spreads | 2,478 |
1,157 |
65 |
| 25% multiplicative increase in equity and property implied volatilities | 2,440 |
1,135 |
65 |
| 25% multiplicative increase in swaption implied volatilities | 2,456 |
1,150 |
65 |
| Voluntary discontinuance rates decreasing by 10% | 2,507 |
1,202 |
82 |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | 2,564 |
1,258 |
72 |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | 2,536 |
1,231 |
74 |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges* | 2,451 |
1,145 |
64 |
| For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges | n/a |
n/a |
57 |
| Value of new business calculated on economic assumptions at the end of reporting period | n/a |
n/a |
60 |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | 2,482 |
1,176 |
66 |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | 2,444 |
1,138 |
63 |
* No impact on with-profit annuities as the mortality risk is borne by policyholders.
Nordic
£m |
|||
| At 31 December 2009 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | 1,309 |
1,114 |
44 |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | 1,309 |
1,114 |
44 |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 1,284 |
1,088 |
43 |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 1,336 |
1,141 |
45 |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | 1,389 |
1,194 |
48 |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | 1,228 |
1,033 |
40 |
| 50bps contraction on corporate bond spreads | 1,309 |
1,114 |
44 |
| 25% multiplicative increase in equity and property implied volatilities | 1,309 |
1,114 |
44 |
| 25% multiplicative increase in swaption implied volatilities | 1,309 |
1,114 |
44 |
| Voluntary discontinuance rates decreasing by 10% | 1,348 |
1,153 |
52 |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | 1,345 |
1,150 |
46 |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | 1,310 |
1,115 |
44 |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges | 1,307 |
1,112 |
44 |
| For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges | n/a |
n/a |
42 |
| Value of new business calculated on economic assumptions at the end of reporting period | n/a |
n/a |
47 |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | 1,324 |
1,129 |
45 |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | 1,294 |
1,099 |
43 |
Retail Europe
£m |
|||
| At 31 December 2009 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | 531 |
453 |
(5) |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | 528 |
451 |
(5) |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 513 |
436 |
(8) |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 549 |
471 |
(3) |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | 541 |
463 |
(5) |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | 521 |
444 |
(5) |
| 50bps contraction on corporate bond spreads | 531 |
453 |
(5) |
| 25% multiplicative increase in equity and property implied volatilities | 531 |
453 |
(5) |
| 25% multiplicative increase in swaption implied volatilities | 522 |
444 |
(5) |
| Voluntary discontinuance rates decreasing by 10% | 545 |
468 |
(4) |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | 553 |
476 |
(3) |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | 534 |
456 |
(5) |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges | 531 |
453 |
(5) |
| For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges | n/a |
n/a |
(8) |
| Value of new business calculated on economic assumptions at the end of reporting period | n/a |
n/a |
(4) |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | 535 |
458 |
(5) |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | 525 |
447 |
(6) |
Wealth Management
£m |
|||
| At 31 December 2009 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | 1,844 |
1,468 |
49 |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | 1,848 |
1,472 |
49 |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 1,820 |
1,460 |
46 |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 1,916 |
1,521 |
54 |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | 1,900 |
1,524 |
56 |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | 1,810 |
1,434 |
46 |
| 50bps contraction on corporate bond spreads | 1,844 |
1,468 |
49 |
| 25% multiplicative increase in equity and property implied volatilities | 1,844 |
1,468 |
49 |
| 25% multiplicative increase in swaption implied volatilities | 1,844 |
1,468 |
49 |
| Voluntary discontinuance rates decreasing by 10% | 1,932 |
1,556 |
64 |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | 1,906 |
1,530 |
59 |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | 1,889 |
1,513 |
57 |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges | 1,844 |
1,468 |
49 |
| For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges | n/a |
n/a |
47 |
| Value of new business calculated on economic assumptions at the end of reporting period | n/a |
n/a |
54 |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | 1,853 |
1,477 |
51 |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | 1,826 |
1,450 |
48 |
US Life
£m |
|||
| At 31 December 2009 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | (318) |
(816) |
14 |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | (315) |
(813) |
14 |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | (575) |
(1,073) |
20 |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | (67) |
(565) |
3 |
| Recognising the present value of an additional 10bps of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately | (271) |
(769) |
15 |
| Recognising the present value of an additional 50% of liquidity spreads assumed on corporate bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately* | (90) |
(588) |
20 |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | (318) |
(816) |
14 |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | (318) |
(816) |
14 |
| 50bps contraction on corporate bond spreads | (12) |
(510) |
14 |
| 25% multiplicative increase in swaption implied volatilities | (420) |
(918) |
8 |
| Voluntary discontinuance rates decreasing by 10% | (290) |
(788) |
16 |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | (302) |
(800) |
14 |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | (302) |
(800) |
15 |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges | (342) |
(840) |
14 |
| For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges | n/a |
n/a |
12 |
| Value of new business calculated on economic assumptions at the end of reporting period | n/a |
n/a |
(4) |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | (269) |
(767) |
16 |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | (338) |
(836) |
13 |
* At 31 December 2009 the size of the base liquidity premium adjustment for US Life business of 100bps is greater than the base liquidity premium adjustment for OMSA's Retail Affluent Immediate Annuity business of 50bps. Therefore in addition to the 10bps liquidity spread sensitivity, that is also shown for Emerging Markets, a sensitivity was calculated to illustrate the impact of an additional 50% of liquidity spreads for US Life business.
Bermuda
£m |
|||
| At 31 December 2009 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | 198 |
(165) |
- |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | 202 |
(163) |
- |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 272 |
(171) |
- |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 130 |
(158) |
- |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | 322 |
(143) |
- |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | 72 |
(188) |
- |
| 50bps contraction on corporate bond spreads | 210 |
(153) |
- |
| 25% multiplicative increase in equity and property implied volatilities | 123 |
(164) |
- |
| 25% multiplicative increase in swaption implied volatilities | 196 |
(167) |
- |
| Voluntary discontinuance rates decreasing by 10% | 170 |
(97) |
- |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | 203 |
(159) |
- |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | 199 |
(163) |
- |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges | 198 |
(165) |
- |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | 235 |
(128) |
- |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | 183 |
(179) |
- |
Total covered business
£m |
|||
| At 31 December 2008 | MCEV |
Value of in-force business |
Value of new business |
| Central assumptions | 4,183 |
1,800 |
104 |
| Effect of: | |||
| Required capital equal to the minimum statutory requirement | 4,182 |
1,836 |
108 |
| Increasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 4,185 |
1,810 |
121 |
| Decreasing all pre-tax investment and economic assumptions by 1%, with credited rates and discount rates changing commensurately | 4,134 |
1,745 |
58 |
| Equity and property market value increasing by 10%, with all pre-tax investment and economic assumptions unchanged | 4,421 |
2,000 |
n/a |
| Equity and property market value decreasing by 10%, with all pre-tax investment and economic assumptions unchanged | 3,953 |
1,610 |
n/a |
| 10bps contraction on corporate bond spreads | 4,249 |
1,864 |
n/a |
| 25% multiplicative increase in equity and property implied volatilities | 5,466 |
3,924 |
171 |
| 25% multiplicative increase in swaption implied volatilities | 3,755 |
1,373 |
84 |
| Voluntary discontinuance rates decreasing by 10% | 4,429 |
2,047 |
140 |
| Maintenance expense levels decreasing by 10%, with no corresponding decrease in policy charges | 4,379 |
1,997 |
122 |
| Mortality and morbidity assumptions for assurances decreasing by 5%, with no corresponding decrease in policy charges | 4,267 |
1,885 |
115 |
| Mortality assumption for annuities decreasing by 5%, with no corresponding increase in policy charges | 4,150 |
1,768 |
104 |
| For value of new business, acquisition expenses other than commission and commission related expenses increasing by 10%, with no corresponding increase in policy charges | n/a |
n/a |
81 |
| Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable and non-hedgeable risks for covered business | 4,315 |
1,933 |
123 |
| Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence level which is targeted by an internal economic capital model | 4,095 |
1,713 |
96 |
