RBS 2005 Annual Report Download - page 194

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Notes on the accounts
Frequency and severity of claims – for contracts where death
is the insured risk, the most significant factors that could
increase the overall frequency of claims are epidemics or wide
spread changes in lifestyle, resulting in earlier or more claims
than expected.
For contracts where survival is the insured risk, the most
significant factor is continued improvement in medical science
and social conditions that would increase longevity.
For contracts with fixed and guaranteed benefits and fixed
future premiums, there are no mitigating terms and conditions
that reduce the insurance risk accepted. Participating
contracts can result in a significant portion of the insurance
risk being shared with the insured party.
Sources of uncertainty in the estimation of future benefit
payments and premium receipts – the Group uses base tables
of standard mortality appropriate to the type of contract being
written and the territory in which the insured person resides.
These are adjusted to reflect the Group’s experience, mortality
improvements and voluntary termination behaviour.
Notes on the accounts continued
Limitations of sensitivity analysis: the above tables demonstrate
the effect of a change in a key assumption whilst other
assumptions remain unaffected. In reality, such an occurrence
is unlikely, due to correlation between the assumptions and
other factors. It should also be noted that these sensitivities are
non-linear, and larger or smaller impacts should not be
interpolated or extrapolated from these results. The sensitivity
analyses do not take into consideration that assets and
liabilities are actively managed and may vary at the time that
any actual market movement occurs.
Purchased insurance
The Insurance Sourcing Department is responsible to GEMC
for the Group-wide purchase of insurance as a means of
reducing other risk exposures.
Sensitivity factor Description of sensitivity factor applied
Interest rate and investment return Change in market interest rates of ± 1%.
The test allows consistently for similar changes to investment returns and
movements in the market value of backing fixed interest securities.
Expenses Increase in maintenance expenses of 10%
Assurance mortality/morbidity Increase in mortality/morbidity rates for assurance contracts of 5%
Annuitant mortality Reduction in mortality rates for annuity contracts of 5%
The above sensitivity factors are applied via actuarial and statistical models, with the following impact on the financial statements.
Impact
on profit
and equity
Risk factor Variability £m
Interest rates +1% (16)
Interest rates –1% 20
Expenses +10% (5)
Assurance mortality/morbidity +5% (7)
Annuitant mortality –5% —
34 Financial instruments (continued)