12. Principal economic assumptions
(c) Other assumptions
Taxation
Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced.
Demographic assumptions
Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva's recent operating experience. Where appropriate, surrender and option take up rate assumptions that vary according to the investment scenario under consideration have been used in the calculation of the time value of options and guarantees, based on our assessment of likely policyholder behaviour in different investment scenarios.
Expense assumptions
Management expenses and operating expenses of holding companies attributed to life and related businesses have been included in the EEV calculations and split between expenses relating to the acquisition of new business, the maintenance of business in-force and project expenses. Future expense assumptions include an allowance for maintenance expenses and a proportion of recurring project expenses. Certain expenses of an exceptional nature, when they occur, are identified separately and are generally charged as incurred. No future productivity gains have been anticipated.
Where subsidiary companies provide administration, investment management or other services to businesses included in the European Embedded Value calculations, the value of profits or losses arising from these services have been included in the embedded value and new business contribution.
Valuation of debt
Borrowings in the EEV consolidated balance sheet are valued on an IFRS basis, consistent with the primary financial statements. At 31 December 2007 the market value of the Group's external debt, subordinated debt, preference shares including General Accident plc preference shares of £250 million (classified as minority interests) and direct capital instrument was £5,774 million (2006: £5,991 million).
| 2007 £m |
2006 £m |
|
|---|---|---|
| Borrowings per summarised consolidated balance sheet – EEV basis | 12,657 | 12,137 |
| Add: amount included within held for sale | 12 | - |
| Less: Securitised mortgage funding | (7,295) | (7,068) |
| Borrowings excluding non-recourse funding – EEV basis | 5,374 | 5,069 |
| Less: Operational financing by businesses | (1,063) | (874) |
| External debt and subordinated debt – EEV basis | 4,311 | 4,195 |
| Add: Preference shares (including General Accident plc) and direct capital instrument | 1,440 | 1,440 |
| External debt, subordinated debt, preference shares and direct capital instrument – EEV basis | 5,751 | 5,635 |
| Effect of marking these instruments to market | 23 | 356 |
| Market value of external debt, subordinated debt, preference shares and direct capital instrument | 5,774 | 5,991 |
Other
It has been assumed that there will be no changes to the methods and bases used to calculate the statutory technical provisions and current surrender values, except where driven by varying future investment conditions under stochastic economic scenarios.
