Aviva 2006 Annual Report Download - page 241

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 237
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. Additional country-specific risk margins are applied to smaller businesses
to reflect additional economic, political and business-specific risk, which result in the application of risk margins ranging from 3.7% to
8.7% in our eastern European and Asian business operations. 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 or equivalent.
Investment return assumptions are generally derived by major product class, based on hypothecating the assets at the valuation date.
Future assumed reinvestment rates are consistent with implied market returns at 31 December 2006. Rates have been derived using
rates from the current yield curve at a duration based on the term of the liabilities, or directly from forward yield curves where considered
appropriate. 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:
UK France
2006 2005 2004 2006 2005 2004
Risk discount rate 7.3% 6.8% 7.3% 6.7% 6.0% 6.4%
Pre-tax investment returns:
Base government fixed interest 4.6% 4.1% 4.6% 4.0% 3.3% 3.7%
Ordinary shares 7.6% 7.1% 7.6% 7.0% 6.3% 6.7%
Property 6.6% 6.1% 6.6% 6.0% 5.3% 5.7%
Futureexpense inflation 3.4% 3.2% 3.3% 2.5% 2.5% 2.5%
Tax rate 30.0% 30.0% 30.0% 34.4% 34.4% 34.9%
Required Capital (% EU minimum) 150% / 150% / 200% / 115% 115% 115%
100% 100% 100%
Ireland Italy
2006 2005 2004 2006 2005 2004
Risk discount rate 6.7% 6.0% 6.4% 6.7% 6.0% 6.4%
Pre-tax investment returns:
Base government fixed interest 4.0% 3.3% 3.7% 4.0% 3.3% 3.7%
Ordinary shares 7.0% 6.3% 6.7% 7.0% 6.3% 6.7%
Property 6.0% 5.3% 5.7% 6.0% 5.3% 5.7%
Futureexpense inflation 4.0% 4.0% 4.0% 2.5% 2.5% 2.5%
Tax rate 12.5% 12.5% 12.5% 38.3% 38.3% 38.3%
Required Capital (% EU minimum) 150% 150% 150% 115% 115% 115%
Netherlands Poland
2006 2005 2004 2006 2005 2004
Risk discount rate 6.7% 6.0% 6.4% 8.7% 8.6% 9.7%
Pre-tax investment returns:
Base government fixed interest 4.0% 3.3% 3.7% 5.0% 4.9% 6.0%
Ordinary shares 7.0% 6.3% 6.7% 8.0% 7.9% 9.0%
Property 6.0% 5.3% 5.7% n/ a n/a n/a
Futureexpense inflation 2.5% 2.5% 2.5% 3.4% 3.3% 3.4%
Tax rate 25.5% 29.1% 31.5% 19.0% 19.0% 19.0%
Required Capital (% EU minimum) 150% 150% 150% 150% 150% 150%