17 Sensitivity analysis.

UK long term business IFRS sensitivity analysis

(XLS:) Sensitivity analysis – UK long term business IFRS sensitivity analysis

 

Impact on pre-tax Group profit net of reinsurance
2012
£m

Impact on Group equity net of reinsurance
2012
£m

Impact on pre-tax Group profit net of reinsurance
2011
£m

Impact on Group equity net of reinsurance
2011
£m

Sensitivity test

 

 

 

 

1% increase in interest rates

47

36

49

36

1% decrease in interest rates

(85)

(64)

(142)

(104)

Credit spread widens by 100 bps with no change in expected defaults

(79)

(59)

(52)

(38)

1% increase in inflation

(17)

(13)

37

28

Default of largest reinsurer

(676)

(511)

(694)

(510)

1% decrease in annuitant mortality

(96)

(73)

(76)

(55)

The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the UK long term business. This scenario does not reflect management action which could be taken to reduce the impact of a decrease in interest rates.

UK long term business sensitivity analysis is based on the Group’s long term insurance valuation assumptions disclosed in Note 16.

  • In calculating the alternative values, all other assumptions are left unchanged. In practice, items of the Group’s experience may be correlated.
  • The Group seeks to actively manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may have a more, or less, significant impact on the value of the liabilities. The analysis also ignores any second order effects of the assumption change, including the potential impact on the Group asset and liability position and any second order tax effects.
  • These stresses use the assets that back the liabilities. Any excess assets have not been stressed in these calculations.
  • The sensitivity of the profit to changes in assumptions may not be linear. They should not be extrapolated to changes of a much larger order.
  • The change in interest rate test assumes a 100 basis point change in the gross redemption yield on fixed interest securities together with a 100 basis point change in the real yields on variable securities. Valuation interest rates are assumed to move in line with market yields adjusted to allow for the impact of FSA regulations.
  • In the sensitivity for credit spreads corporate bond yields have increased by 100bps, gilt and approved security yields unchanged, and there has been no adjustment to the default assumptions.
  • The inflation stress adopted is a 1% pa increase in inflation resulting in a 1% pa reduction in real yield and no change to the nominal yield. In addition the expense inflation rate is increased by 1% pa.
  • The reinsurer stress shown is equal to the technical provisions ceded to that insurer.
  • The annuitant mortality stress is a 1% reduction in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates.
  • Default of largest reinsurer: The largest reinsurer was deduced at an entity level by mathematical reserves ceded. The largest reinsurer is Swiss Re. The increase in reserves is consistent with the reinsured reserves.

Details of IGD sensitivity analysis can be found in Table 2 of Note 26.

The Group also uses embedded value financial statements information to manage risk. The effect of alternative assumptions on the long term embedded value, prepared in accordance with the guidance issued by the European Insurance CFO Forum in October 2005 are contained within the Supplementary Financial Statements of the Annual Report and Accounts.

General insurance sensitivity analysis

(XLS:) Sensitivity analysis – general insurance sensitivity analysis

 

Impact on pre-tax profit net of reinsurance
2012
£m

Impact on equity net of reinsurance
2012
£m

Impact on pre-tax profit net of reinsurance
2011
£m

Impact on equity net of reinsurance
2011
£m

Sensitivity test

 

 

 

 

Single storm event with 1 in 200 year probability

(63)

(47)

(90)

(66)

Subsidence event – worst claims ratio in last 30 years

(50)

(37)

(41)

(30)

Economic downturn

(41)

(31)

(43)

(32)

5% decrease in overall claims ratio

8

6

9

7

5% surplus over claims liabilities

5

4

5

3

For any single event with claims in excess of £36m (2011: £30m) but less than £360m (2011: £265m), the ultimate cost to Legal & General Insurance Limited (LGI) would be £36m (2011: £30m). The ultimate cost to the Group is greater as a proportion of the catastrophe reinsurance cover is placed with Legal & General Assurance Society Limited, which is exposed to 70% of claims between £36m and £70m, 50% of claims between £70m and £160m and 20% of claims between £160m and £360m. The impact of a 1 in 500 year modelled windstorm and coastal flood event would exceed the upper limit of the catastrophe cover by approximately £180m (2011: £192m), with an estimated total cost to LGI of £246m (2011: £245m) and to the Group of £346m (2011: £317m).