B14 Principal economic assumptions
Page 1 of 3
B14 – Principal economic assumptions
(a) 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.
In setting the risk-free rate we have, wherever possible used the mid-price swap yield curve for an AA-rated bank.
The curve is extrapolated if necessary to get rates suitable to the liabilities. For markets in which there is no reliable swap yield curve the relevant government bond yields are used.
Required capital is shown as a multiple of the EU statutory minimum solvency margin or equivalent.
The adjustments made to swap rates to derive a risk-free rate for immediate annuity type contracts and all US contracts are shown below the reference rate table.
The principal economic assumptions used are as follows:
Reference rate (spot, swap rates) and expense inflation
| United Kingdom | |||
|---|---|---|---|
| 2009 | 2008 | 2007 | |
| Reference rate | |||
| 1 year | 1.2% | 2.8% | 5.7% |
| 5 years | 3.5% | 3.2% | 5.1% |
| 10 years | 4.3% | 3.5% | 5.0% |
| 15 years | 4.6% | 3.8% | 4.9% |
| 20 years | 4.6% | 3.8% | 4.8% |
| Expense inflation | 3.3% | 2.4% | 3.6% |
| Delta Lloyd1 | |||
|---|---|---|---|
| 2009 | 2008 | 2007 | |
| Reference rate | |||
| 1 year | 1.3% | 2.5% | 4.7% |
| 5 years | 2.9% | 3.3% | 4.6% |
| 10 years | 3.7% | 3.8% | 4.7% |
| 15 years | 4.1% | 4.0% | 4.9% |
| 20 years | 4.2% | 3.9% | 5.0% |
| Expense inflation | 2.4% | 2.5% | 3.0% |
1.The economic assumptions used in Delta Lloyd differ from those in the Eurozone as the Dutch bank swap rate is used by Delta Lloyd.
| Eurozone (excluding Delta Lloyd) | |||
|---|---|---|---|
| 2009 | 2008 | 2007 | |
| Reference rate | |||
| 1 year | 1.3% | 2.5% | 4.8% |
| 5 years | 2.8% | 3.3% | 4.6% |
| 10 years | 3.7% | 3.8% | 4.7% |
| 15 years | 4.1% | 3.9% | 4.9% |
| 20 years | 4.2% | 3.9% | 4.9% |
| Expense inflation | 2.5% | 2.1% | 2.9% |
| Poland | |||
|---|---|---|---|
| 2009 | 2008 | 2007 | |
| Reference rate | |||
| 1 year | 4.5% | 4.4% | 6.2% |
| 5 years | 5.8% | 4.3% | 5.8% |
| 10 years | 5.8% | 4.2% | 5.5% |
| 15 years | 5.7% | 4.1% | 5.4% |
| 20 years | 5.5% | 4.0% | 5.4% |
| Expense inflation | 3.0% | 2.9% | 4.7% |
| United States | |||
|---|---|---|---|
| 2009 | 2008 | 2007 | |
| Reference rate | |||
| 1 year | 0.7% | 1.3% | 4.2% |
| 5 years | 3.1% | 2.2% | 4.2% |
| 10 years | 4.2% | 2.6% | 4.7% |
| 15 years | 4.6% | 2.9% | 4.9% |
| 20 years | 4.8% | 2.9% | 5.0% |
| Expense inflation | 3.0% | 3.0% | 3.5% |
For service companies, expense inflation relates to the underlying expenses rather than the fees charged to the life company.
In current markets, the following adjustments are made to the swap rate for immediate annuity type contracts and all US contracts. The risk-free rate is taken as the swap yield curve for the currency of the liability, adjusted by:
| New business | Embedded value | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 4Q 2009 | 3Q 2009 | 1H 2009 | 4Q 2008 | 3Q 2008 | 1H 2008 | 2009 | 2008 | ||
| UK | 0.90%/0.45% | 1.10%/0.95% | 1.50% | 1.45% | 0.85% | 0.55% | 1.00% | 1.50% | |
| France | n/a | n/a | n/a | n/a | n/a | n/a | 0.30% | 1.00% | |
| Spain | 0.30% | 0.75% | 1.00% | 0.95% | 0.55% | 0.35% | 0.30% | 1.00% | |
| Delta Lloyd | 0.20% | 0.40% | 1.50% | 0.75% | 0.45% | 0.30% | 0.15% | 0.80% | |
| US immediate annuities | 1.05% | 1.50% | 3.00% | 2.00% | 0.65% | 0.55% | 0.65% | 3.00% | |
| US deferred annuities and all other contracts | 0.90% | 1.25% | 2.50% | 1.50% | 0.65% | 0.55% | 0.55% | 2.50% |
Risk premium – used for operating profit, Implied Discount Rates (IDR), Internal Rates of Return (IRR) and payback period
For life and pensions operating earnings, Aviva uses normalised investment returns. For 2008, the normalised investment returns were expressed as one year swap returns plus an asset risk premium. For 2009, the normalised investment returns are expressed as a swap rate based on the typical duration of the assets held plus an asset risk premium. More detail is given in Note B1 - Basis of Preparation.
The use of asset risk premia only impacts operating earnings as expected returns reflect management’s long-term expectations of asset returns in excess of the reference rate from investing in different asset classes. This assumption does not impact the embedded value or value of new business as asset risk premia are not recognised until earned. The asset risk premia set out in the table below are added to the ten year swap rate to calculate expected returns.
| All territories | |||
|---|---|---|---|
| 2009 | 2008 | 2007 | |
| Equity risk premium | 3.5% | 3.5% | 3.5% |
| Property risk premium | 2.0% | 2.0% | 2.0% |
Future returns on corporate fixed interest investments are calculated from prospective yields less an adjustment for credit risk.
Required capital and tax
| Tax rates5 | Required capital (% EU minimum or equivalent) | |||||
|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | 2009 | 2008 | ||
| United Kingdom1 | 28.0% | 28.0% | 28.0% | 100%/110% | 100%/110% | |
| France | 34.4% | 34.4% | 34.4% | 110% | 110% | |
| Ireland | 12.5% | 12.5% | 12.5% | 150% | 150% | |
| Italy2 | 32.4% | 32.4% | 32.4% | 115%/184% | 115%/184% | |
| Poland | 19.0% | 19.0% | 19.0% | 150% | 150% | |
| Spain3 | 30.0% | 30.0% | 30.0% | 110%/125% | 110%/125% | |
| Delta Lloyd4 | 25.5% | 25.5% | 25.5% | 139% | 168% | |
| United States | 0.0% | 0.0% | 35.0% | 325% | 325% | |
1.The required capital in the United Kingdom under MCEV is 100% for unit-linked and other non-participating business and 110% for annuity business. with 200% for an immaterial amount of BPA business. In addition, the reattribution of the inherited Estate has led to additional capital being locked in to support the with profit business, and this has been included within required capital.
2.Required capital in Italy under MCEV is 184% of the EU minimum for Eurovita and 115% for other companies.
3.Required capital in Spain is 125% of the EU minimum for Aviva Vida y Pensiones and 110% for bancassurance companies.
4.This capital level is the aggregate capital required for Delta Lloyd.
5.Current tax legislation and rates have been assumed to continue unaltered except where changes in future tax rates have been announced.
Other economic assumptions
Required capital relating to with-profit business is generally assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders. Where the fund is insufficient, and additional shareholder support is required, this is included within required capital, including the RIEESA in the UK. Bonus rates on participating business have been set at levels consistent with the economic assumptions. The distribution of profit between policyholders and shareholders within the with-profit funds assumes that the shareholder interest in conventional with-profit business in the United Kingdom and Ireland continues at the current rate of one-ninth of the cost of bonus.
Page 1 of 3
Investor tools
Subscribe
