B15 Sensitivity analysis

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B15 – Sensitivity analysis

(a) Economic assumptions

The following tables show the sensitivity of the embedded value and the value of new business to:

– 10 basis point increase in the adjustment to risk free rates for immediate annuity type contracts and all US contracts;

– one and two percentage point increase and decrease in the risk-free rate, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

– 10% increase and decrease in market values of equity and property assets

– 25% increase in equity and swaption volatilities;

– 50 basis point increase and decrease in credit spreads; and

– decrease in the level of required capital to 100% EU minimum (or equivalent).

In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns. Some of the sensitivity scenarios may have consequential effects on valuation bases, where the basis for certain blocks of business is actively updated to reflect current economic circumstances. Consequential valuation impacts on the sensitivities are allowed for where an active valuation basis is used. Where businesses have a target asset mix, the portfolio is re-balanced after a significant market movement otherwise no re-balancing is assumed.

For new business, the sensitivities reflect the impact of a change immediately after inception of the policy.

In general, the magnitude of the sensitivities will reflect the size of the embedded values, though this will vary as the sensitivities have different impacts on the different components of the embedded value. In addition, other factors can have a material impact, such as the nature of the options and guarantees, as well as the types of investments held.

The credit spread sensitivities assume that the change relates to credit risk and not liquidity riskin practice, credit spread movements may be partially offset due to changes in liquidity risk.

Sensitivities will also vary according to the current economic assumptions, mainly due to the impact of changes to both the intrinsic cost and time value of options and guarantees. Options and guarantees are the main reason for the asymmetry of the sensitivities where the guarantee impacts to different extents under the different scenarios. This can be seen in the sensitivity of a 1%–2% movement in the interest rate for Delta Lloyd and US, where there is a significant amount of business with investment return guarantees.

Embedded value

			Interest rates
2009 Embedded value (net of tax and minority interest)	As reported on page 106 £m	10bp increase in adjustment to risk-free rates £m	1% increase £m	1% decrease £m	2% increase £m	2% decrease £m
United Kingdom	5,903	120	(155)	85	(350)	255
France	2,773	5	(170)	100	(380)	60
Ireland	888	—	(30)	35	(60)	55
Italy	660	—	20	(25)	25	(80)
Poland	1,141	—	(50)	60	(100)	135
Spain	612	5	(10)	10	(25)	20
Other Europe	259	—	(5)	10	(15)	15
Aviva Europe	6,333	10	(245)	190	(555)	205
Delta Lloyd	1,531	50	250	(460)	380	(1,210)
Europe	7,864	60	5	(270)	(175)	(1,005)
North America	694	110	235	(225)	(5)	(1,275)
Asia	540	—	15	(30)	15	(120)
Australia	—	—	—	—	—	—
Asia Pacific	540	—	15	(30)	15	(120)
Total	15,001	290	100	(440)	(515)	(2,145)

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