Group Finance Director's Report
The economic assumptions (gross of tax) used in the calculation of the embedded values are unchanged from those used at the end of 2006. These are as follows:
| As at 31.12.2007 % |
As at 31.12.2006 % |
|
| Risk discount rate* | 8.0 | 8.0 |
| Return on fixed income securities | 5.0 – 5.5 | 5.0 – 5.5 |
| Return on equities | 7.5 | 7.5 |
| Expense inflation rate | 3.0 | 3.0 |
* Included in the risk discount rate is an investment risk component which is chosen so as to avoid capitalising any investment risk premiums over the long term view of the risk free rate of return.
Sensitivities of Embedded Value related to Long Term Assurance
The table below indicates the stand alone impact of changes to certain key variables on long term insurance contracts and related assets:
| Change in Variable | Impact on profit after tax £m |
|
| Interest rates increase into perpetuity | 25bps | (23) |
| Equity/property market values fall and thereafter increase based on the long term view of the risk free rate | -10% | (106) |
| Maintenance expenses fall and thereafter increase by the estimated expense inflation rate | -10% | 43 |
| Mortality/morbidity decrease (policyholders live longer) across all non annuity policy types and age groups | -5% | 30 |
| Mortality rates decrease (policy holders live longer) across all annuity policy types and age groups | -5% | (20) |
| Lapse and surrender rates decrease across all policy types and cohorts over the duration of their lives (excluding paid-up policies) | -10% | 77 |
It should be noted that, in practice, some of the above variables are correlated and their impact may also be non-linear.
Life Insurance Regulatory Capital
In each of our life insurance entities, surplus capital in excess of the various regulatory requirements, including the individual capital assessment, is maintained in order to absorb changes in both the underlying businesses and the capital requirements over the short term. At 31 December 2007, the provisional available capital excluding the with-profit fund was 468% (2006 462%) of the provisional long term insurance capital requirement (‘LTICR’) and resilience capital requirements of £650m (2006 £555m). At 31 December 2007 the total provisional available capital including the with-profit fund on a realistic basis was 399% (2006 354%) of the provisional LTICR and resilience capital requirements of £1,116m (2006 £1,131m).