Aviva 2002 Annual Report Download - page 111

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Principal economic assumptions continued
Spain
2002 2001 2000
Risk discount rate 7.7% 8.3% 8.4%
Pre-tax investment returns:
Base government fixed interest 4.6% 5.3% 5.4%
Ordinary shares 7.6% 8.3% 8.4%
Property 6.1% 6.8% 6.9%
Future expense inflation 3.0% 3.2% 4.0%
Tax rate 35.0% 35.0% 35.0%
Other assumptions
•Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have
been announced.
•Assumed future mortality, morbidity and lapse rates have been derived from an analysis of Aviva’s recent operating experience.
•The management expenses of Aviva attributable to long-term business operations have been split between expenses relating to the
acquisition of new business and to the maintenance of business in-force. Certain expenses of an exceptional nature have been
identified separately and the discounted value of projected exceptional costs has been deducted from the value of in-force business.
A realistic estimate of future fund management expenses that will be charged to long-term businesses by Group companies not
included in the long-term business covered by the achieved profits method has been included within the value of in-force business.
•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.
•The value of in-force business allows for future premiums under recurring single premium business where collection of future single
premiums is expected and where the receipt of further single premiums is not regarded as new business at the point of receipt. It does
not allow for future premiums under non-contractual increments, or for future Department of Social Security (DSS) rebate premiums,
and the value arising therefrom is included in the value of new business when the premiums are received.
•The value of the in-force business has been determined after allowing for the effect of holding solvency margins equal to the
minimum EU solvency requirement (or equivalent for non-EU operations). Solvency margins relating to with-profit business are
assumed to be covered by the surplus within the with-profit funds and no effect has been attributed to shareholders.
•Bonus rates on with-profit business have been set at levels consistent with the economic assumptions and Aviva’s medium-term bonus
plans. 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.
Alternative assumptions
Economic assumptions
The table below shows the sensitivity to a one percentage point increase in interest rates and in the discount rate for new business
contribution and embedded value.
New business contribution Embedded value
Interest rates Discount rate Interest rates Discount rate
£m £m £m £m
United Kingdom 25 (45) (225) (275)
Europe (excluding UK)
France 7(8) (60) (65)
Ireland 3(3) (5) (15)
Italy 2(2) – (10)
Netherlands (including Belgium and Luxembourg) 7(7) (70) (110)
Poland –(1) – (15)
Spain (2) (8) (15) (15)
Other 1(1) – (5)
International – (5) (5) (15)
43 (80) (380) (525)
Profits are affected by a change in underlying interest rates. When interest rates change, expected future investment returns will also
change and this in turn will affect projected cash flows. A change in interest rates will also result in a change in the discount rate used to
calculate the present value of the projected cash flows. The impact of an increase of one percentage point in interest rates incorporates
all such changes. In addition, the impact on embedded value includes the impact of the reduction that would occur in the market value
of fixed interest investments if interest rates increased by one percentage point. Market values of other asset classes are assumed to
reduce in proportion to movements in the market value of fixed interest investments of an appropriate term.
The impact of an increase of one percentage point in the discount rate is calculated with all other assumptions remaining unchanged.
Non-economic assumptions
Sensitivity calculations have been performed to identify the non-economic assumptions to which new business contribution and the value
of in-force business within embedded value are particularly sensitive. The calculations have been based on similar percentage movements
in each assumption from the base assumption used to calculate the published new business contribution and value of in-force business.
Based on this, the Group’s new business contribution is most, and broadly equally, sensitive to changes in future maintenance expenses
and discontinuance rates, whereas the value of in-force business is most sensitive to changes in levels of future maintenance expense.
97 Aviva plc
Annual report + accounts 2002