RBS 2007 Annual Report Download - page 200

Financial statements
RBS Group • Annual Report and Accounts 2007
198
Notes on the accounts continued
31 Risk management (continued)
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 UK sensitivity factors are applied via actuarial and statistical models, with the following impact on the financial statements.
Impact on profit and equity
2007 2006
Risk factor Variability £m £m
Interest rates +1% (18) (19)
Interest rates –1% 15 23
Expenses +10% (5) (5)
Assurance mortality/morbidity +5% (8) (6)
Annuitant mortality –5% — —
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
widespread 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.
Limitations of sensitivity analysis: the above tables demonstrate
the effect of a change in a key UK assumption whilst other
assumptions remain unaffected (assumptions related to ABN
AMRO are not material). 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.