The Group’s insurance assumptions, described below, relate exclusively to the UK insurance business. The non-UK businesses do not constitute a material component of the Group’s operations and consideration of geographically determined assumptions is therefore not included.
Non-participating business
For its non-participating business the Group seeks to make prudent assumptions about its future experience based on current market conditions and recent experience. The approach used to set non-participating assumptions is generally similar to that used to determine the assumptions used for [FSA] statutory peak 1, although the actual assumptions may sometimes differ from those used for regulatory reporting purposes. These assumptions incorporate prudent margins in excess of our best estimate assumptions to reduce the possibility of actual experience being less favourable than assumed.
Valuation rates of interest and discount rates
The valuation interest rate for each contract type is based on the yield on the assets backing the contract adjusted for the risk that asset proceeds are not received by the Group. For some business, this yield is the gross redemption yield on fixed interest securities and the running yield on variable interest securities. For other business it is the Internal Rate of Return on the portfolio of backing assets.
In 2008 the Group established reserves to protect against a significant short term uplift in defaults. In 2009 the Group decided that it was prudent to have a short term uplift in default allowance and increase the long term default allowance to 36bps (2008: 30bps) per annum for unapproved securities backing non-profit business, 35bps (2008: 30bps) per annum for unapproved securities backing with-profits business, and to remain at 3bps per annum for approved securities and swaps. The total credit default allowances equate to £1.5bn, or 68bps per annum (2008: £1.2bn and 68bps repesctively) for unapproved securities backing non-profit annuity business when expressed over the duration of the assets held. A similar methodology has been used for assets backing with-profits business.
The Group believes the total default allowance is prudent to cover all reasonably foreseeable circumstances.
For equity investments, the yield is based on the current dividend yield, adjusted for prudence.
For property holdings, yields are based on the rental income payable calculated by considering different categories of tenant separately, adjusted for the possibility of default. Default rates used in the calculations vary by tenant category.
Mortality and morbidity
Mortality and morbidity assumptions are set with reference to standard tables drawn up by the Continuous Mortality Investigation Bureau (CMIB) of the Institute and Faculty of Actuaries. These tables are based on industry-wide experience.
The majority of internal statistical investigations are carried out at least annually to determine the extent to which the Group’s experience differs from that of the industry and suggest appropriate adjustments which need to be made to the valuation assumptions.
Persistency
The Group monitors its persistency experience and carries out detailed investigations annually. Persistency can be volatile and past experience may not be an appropriate future indicator.
The Group tries to balance past experience and future conditions by making prudent assumptions about the future expected long term average persistency levels.
For non-participating contracts where explicit persistency assumptions are not made, prudence is also incorporated into the liabilities by ensuring that they are sufficient to cover the more onerous of the two scenarios where the policies either remain in-force until maturity or where they discontinue at the valuation date.
Expenses
The Group monitors its expense experience and carries out detailed investigations regularly to determine the expenses incurred in writing and administering the different products and classes of business. Adjustments may be made for known future changes in the administration processes, in line with the Group’s business plan. An allowance for expense inflation in the future is also made, taking account of both salary and price information.
Participating business
For its participating business, the Group seeks to establish its liabilities at their realistic value in line with the requirements set out in [FRS] 27.
Non-economic assumptions are set to represent the Group’s best estimates of future experience.
Economic assumptions
The FSA’s realistic reporting regime requires a market consistent economic model. The model is calibrated using market data from a variety of market sources. This enables assumptions to be determined for the term structure of risk free interest rates, property and equity volatility. Risk free interest rates are determined with reference to the gilt yield curve on the valuation date increased by ten basis points.
Property volatility is set with reference to historic variations in property prices. Equity volatility is set so that the model reproduces observed market prices of traded equity derivatives. Correlations between asset classes are based on historic data.
Each investment scenario contains a consistent set of assumptions for investment returns and inflation.
Future bonuses
Future reversionary and terminal bonuses are consistent with the bonus policies set out in [Society]’s Principles and Practices of Financial Management (PPFM).
Value of in-force non-participating contracts
The Group makes a deduction from the liabilities for the expected value of future profits arising on non-participating contracts written in the with-profits part of the Society [LTF].
The economic assumptions used to calculate the value of these profits are consistent with those used to calculate liabilities for with-profits business, with the addition of a liquidity premium in respect of assets backing non-participating annuity business. Non-economic assumptions represent best estimates of expected future experience on this business.
Guaranteed annuity options
The guarantees are valued on a market consistent basis. The valuation methodology allows for the correlation between interest rates and the proportion of the policyholders who take up the option.
Guaranteed cash options
The liability is determined assuming that policyholders choose the most valuable alternative between the annuity and cash available at retirement.
The table below sets out the current valuation assumptions used to establish the long term liabilities for Society, Legal & General Pensions Limited (LGPL) and Legal & General Assurance (Pensions Management) Limited.
(Download XLS:)  |
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2009 |
2008 | ||||||
|---|---|---|---|---|---|---|---|---|
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Rate of interest/discount rates |
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Non-participating business |
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Life assurances |
2.25% pa and 7.60% pa1 |
2.25% pa and 7.60% pa1 | ||||||
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Pension assurances |
2.75 – 3.75% pa and 7.60% pa1 |
2.50 – 3.75% pa and 7.60% pa1 | ||||||
|
Annuities in deferment |
5.49% pa |
6.50% pa | ||||||
|
Annuities in deferment (RPI-linked; |
1.31% pa |
2.20% pa | ||||||
|
Vested annuities |
5.05 – 5.49% pa |
5.54 – 6.50% pa | ||||||
|
Vested annuities (RPI-linked; |
0.50 – 1.31% pa |
0.80 – 2.20% pa | ||||||
|
Participating business |
|
| ||||||
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Risk free rate (10 years) |
4.39% pa |
3.57% pa | ||||||
|
Future bonuses |
Determined stochastically |
Determined stochastically | ||||||
|
UK equity volatility (10 year option term) |
26.5% |
36.4% | ||||||
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Property volatility |
15.0% |
15.0% | ||||||
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Mortality tables |
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Non-participating business |
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Non-linked individual term assurances: |
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Smokers |
105 – 114% TMS00/TFS00 Sel 52 |
109 – 123% TMS00/TFS00 Sel 52 | ||||||
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Non-smokers |
95 – 115% TMN00/TFN00 Sel 52 |
103 – 125% TMN00/TFN00 Sel 52 | ||||||
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Smoker status unknown |
129% TM00/TF00 Sel 52 |
138% TM00/TF00 Sel 52 | ||||||
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Non-linked individual term assurances |
66 – 101% CIBT93M/F Ult Comb2 |
66 – 99% CIBT93M/F Ult Comb2 | ||||||
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Other non-linked non profit life assurances |
A67/70 suitably age adjusted2 |
A67/70 suitably age adjusted2 | ||||||
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Annuities in deferment |
67 - 70% AM92/AF92 |
69 – 78% AM92/AF92 | ||||||
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Vested annuities3 |
|
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Bulk purchase annuities |
90 – 94% PCMA00/PCFA00 |
90 – 94% PCMA00/PCFA00 | ||||||
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Other annuities |
60 – 88% PCMA00/PCFA00 |
61 – 88% PCMA00/PCFA00 | ||||||
Premiums – non-participating business
For those contracts where the policyholder does not have the right to vary the amount of the premium paid, full credit is taken for the premiums contractually due at the valuation date. For contracts where the policyholder has the option to vary the rate of premium, the provision is taken as being the higher of the amount calculated as if the policyholder continues to make premium payments or, alternatively, ceases to pay premiums altogether.
Persistency – non-participating business
Lapse rates are used in the valuation of certain classes of long term business. Where this is the case, the valuation persistency basis is set by applying a prudential margin over the best estimate assumptions. The tables below show the major products where lapse rates have been used. In 2009, Whole of Life (conventional non profit) used lapse rates for the first time.
For term assurance business, the margin acts to increase the best estimate lapse rate in the early part of a policy’s lifetime (when it is treated as an asset) but to reduce the best estimate lapse rate later in the policy’s lifetime (when it is treated as a liability). The crossover point at which the margin changes direction is assessed for broad product groups but applied at a policy by policy level. Any liability to reinsurers on discontinuance within the first four years from inception is allowed for explicitly in the cash flows, using the valuation lapse basis, together with a prudent allowance for clawback of commission from agents upon lapse.
For unitised business, the margin acts to either increase or decrease the best estimate lapse rates, depending upon which approach results in the higher liability. The direction of the margin is assessed for unit life business and unit pensions business separately.
A summary of the lapse basis for major classes of business, as defined by the requirements of the annual returns to the FSA, is shown below:
| (Download XLS:) |
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|
2009 Average lapse rate for the policy years | |||
|---|---|---|---|---|
|
Product |
1 – 5 |
6 – 10 |
11 – 15 |
16 – 20 |
|
Level term |
13.9 |
9.5 |
6.0 |
3.1 |
|
Decreasing term |
14.2 |
9.7 |
6.5 |
6.0 |
|
Accelerated critical illness cover |
20.0 |
10.6 |
5.4 |
5.0 |
|
Pensions term |
12.5 |
8.6 |
5.7 |
5.1 |
|
Whole of Life (conventional non profit) |
4.2 |
2.0 |
0.7 |
0.0 |
|
Savings endowment (unitised with-profits) |
0.0 |
1.7 |
2.3 |
4.3 |
|
Target cash endowment (unitised with-profits) |
3.7 |
3.4 |
3.7 |
2.9 |
|
Savings endowment (unit linked) |
0.0 |
1.7 |
2.3 |
4.3 |
|
Target cash endowment (unit linked) |
3.7 |
3.4 |
3.7 |
2.9 |
|
Bond (unitised with-profits) |
1.2 |
3.0 |
2.9 |
3.0 |
|
Bond (unit linked) |
2.4 |
6.3 |
3.9 |
3.7 |
|
Individual pension regular premium (unitised with-profits) |
1.4 |
1.3 |
1.3 |
1.3 |
|
Individual pension regular premium (unit linked) |
2.1 |
1.5 |
1.6 |
1.6 |
|
Group pension regular premium (unitised with-profits) |
1.7 |
1.7 |
1.7 |
1.7 |
|
Group pension regular premium (unit linked) |
1.4 |
1.4 |
1.2 |
1.2 |
|
Trustee Investment Plan regular premium |
0.4 |
0.4 |
0.4 |
0.4 |
|
Trustee Investment Plan regular premium (unit linked) |
1.3 |
1.3 |
1.3 |
1.3 |
|
Individual pension single premium (unitised with-profits) |
3.1 |
2.9 |
2.9 |
2.9 |
|
Individual pension single premium (unit linked) |
3.6 |
3.2 |
2.5 |
2.5 |
|
Group pension single premium (unitised with-profits) |
9.5 |
9.5 |
9.5 |
9.5 |
|
Group pension single premium (unit linked) |
7.3 |
7.3 |
7.3 |
7.3 |
|
Trustee Investment Plan single premium |
9.3 |
9.0 |
8.6 |
8.6 |
|
Trustee Investment Plan single premium (unit linked) |
6.4 |
5.5 |
4.1 |
4.1 |
|
|
|
|
|
|
|
|
2008 Average lapse rate for the policy years | |||
|
Product |
1 – 5 |
6 – 10 |
11 – 15 |
16 – 20 |
|
Level term |
12.6 |
9.1 |
5.5 |
2.9 |
|
Decreasing term |
12.6 |
9.1 |
5.8 |
5.3 |
|
Accelerated critical illness cover |
18.4 |
10.5 |
5.3 |
4.9 |
|
Pensions term |
11.9 |
8.8 |
5.4 |
4.8 |
|
Savings endowment (unitised with-profits) |
0.0 |
2.3 |
3.0 |
3.6 |
|
Target cash endowment (unitised with-profits) |
3.6 |
4.4 |
4.3 |
3.8 |
|
Savings endowment (unit linked) |
0.0 |
2.3 |
3.0 |
3.6 |
|
Target cash endowment (unit linked) |
3.6 |
4.4 |
4.3 |
3.8 |
|
Bond (unitised with-profits) |
1.5 |
5.9 |
4.1 |
3.7 |
|
Bond (unit linked) |
2.3 |
5.6 |
3.8 |
3.6 |
|
Individual pension regular premium (unitised with-profits) |
1.1 |
1.1 |
1.1 |
1.1 |
|
Individual pension regular premium (unit linked) |
1.6 |
1.1 |
1.1 |
1.1 |
|
Group pension regular premium (unitised with-profits) |
2.3 |
2.3 |
2.3 |
2.3 |
|
Group pension regular premium (unit linked) |
2.0 |
2.0 |
2.0 |
2.0 |
|
Trustee Investment Plan regular premium |
0.3 |
0.3 |
0.3 |
0.3 |
|
Trustee Investment Plan regular premium (unit linked) |
1.2 |
1.2 |
1.2 |
1.2 |
|
Individual pension single premium (unitised with-profits) |
3.2 |
3.2 |
3.2 |
3.2 |
|
Individual pension single premium (unit linked) |
3.5 |
3.0 |
2.8 |
2.8 |
|
Group pension single premium (unitised with-profits) |
7.7 |
7.7 |
7.7 |
7.7 |
|
Group pension single premium (unit linked) |
6.5 |
6.5 |
6.5 |
6.5 |
|
Trustee Investment Plan single premium |
10.5 |
10.2 |
10.1 |
10.1 |
|
Trustee Investment Plan single premium (unit linked) |
6.5 |
5.3 |
5.0 |
5.0 |
Endowment reserve
The endowment reserve has been set taking reasonable account of an assessment of the expected future population of complaints, the expected uphold rate for these complaints, the potential impact of any Financial Ombudsman Service decisions on referred complaints and the average compensation per complaint.
Overseas business
In calculating the long term business provisions for international long term business operations, local actuarial tables and interest rates are used.
