7. Principal economic assumptions - deterministic calculations
Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period. The same margins are applied on a consistent basis across the Group to gross risk-free yields to obtain investment return assumptions for ordinary shares and property and to produce risk discount rates. Expense inflation is derived as a fixed margin above a local measure of long-term price inflation. Risk-free rates and price inflation have been harmonised across territories within the Euro currency zone, except for expense inflation in Ireland where significant differences remain. Required capital is shown as a multiple of the EU statutory minimum solvency margin.
Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date. Assumptions about future investment mix are consistent with long-term plans. In most cases, the investment mix is assumed to continue unchanged throughout the projection period. The changes in assumptions between reporting dates reflect the actual movements in risk-free yields in the United Kingdom, the Eurozone and other territories. The principal economic assumptions used are as follows:
| United Kingdom | France | ||||
|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | ||
| Risk discount rate | 7.3% | 6.8% | 6.7% | 6.0% | |
| Pre-tax investment returns: | |||||
| Base government fixed interest | 4.6% | 4.1% | 4.0% | 3.3% | |
| Ordinary shares | 7.6% | 7.1% | 7.0% | 6.3% | |
| Property | 6.6% | 6.1% | 6.0% | 5.3% | |
| Future expense inflation | 3.4% | 3.2% | 2.5% | 2.5% | |
| Tax rate | 30.0% | 30.0% | 34.4% | 34.4% | |
| Required capital (% EU minimum) | 150% / 100% | 150% / 100% | 115% |
115% |
|
| Ireland | Italy | ||||
|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | ||
| Risk discount rate | 6.7% | 6.0% | 6.7% | 6.0% | |
| Pre-tax investment returns: | |||||
| Base government fixed interest | 4.0% | 3.3% | 4.0% | 3.3% | |
| Ordinary shares | 7.0% | 6.3% | 7.0% | 6.3% | |
| Property | 6.0% | 5.3% | 6.0% | 5.3% | |
| Future expense inflation | 4.0% | 4.0% | 2.5% | 2.5% | |
| Tax rate | 12.5% | 12.5% | 38.3% | 38.3% | |
| Required capital (% EU minimum) | 150% | 150% | 115% | 115% | |
| Netherlands | Poland | ||||
|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | ||
| Risk discount rate | 6.7% | 6.0% | 8.7% | 8.6% | |
| Pre-tax investment returns: | |||||
| Base government fixed interest | 4.0% | 3.3% | 5.0% | 4.9% | |
| Ordinary shares | 7.0% | 6.3% | 8.0% | 7.9% | |
| Property | 6.0% | 5.3% | n/a | n/a | |
| Future expense inflation | 2.5% | 2.5% | 3.4% | 3.3% | |
| Tax rate | 25.5% | 29.1% | 19.0% | 19.0% | |
| Required capital (% EU minimum) | 150% | 150% | 150% | 150% | |
| Spain | USA | ||||
|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | ||
| Risk discount rate | 6.7% | 6.0% | 7.4% | 7.2% | |
| Pre-tax investment returns: | |||||
| Base government fixed interest | 4.0% | 3.3% | 4.7% | 4.5% | |
| Ordinary shares | 7.0% | 6.3% | n/a | n/a | |
| Property | 6.0% | 5.3% | n/a | n/a | |
| Future expense inflation | 2.5% | 2.5% | 3.0% | 3.0% | |
| Tax rate | 30.0% | 35.0% | 35.0% | 35.0% | |
| Required capital (% EU minimum or equivalent) | 125% /110% | 125% /110% | 250% |
200% |
|
For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company. Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk. Following the change made to the required capital in Norwich Union Annuity Limited (NUA) in the third quarter of 2007, required capital in the United Kingdom is now 100% EU minimum for all life companies, the 150% shown in the table above refers to the start of year assumption for NUA. Required capital in Spain is 125% EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies. The level of required capital for the US business is 250% of the risk-based capital, at the company action level, set by the National Association of Insurance Commissioners.
Aviva plc is a company registered in England No. 2468686
Registered office
St Helen's 1 Undershaft London EC3P 3DQ
