39 – Insurance and Investment Contracts


Liabilities arising from Insurance and Investment Contracts

 

Dec 31, 2012

Dec 31, 2011

in € m.

Gross

Reinsurance

Net

Gross

Reinsurance

Net

Insurance contracts

4,654

(73)

4,581

4,706

(163)

4,543

Investment contracts

7,732

7,732

7,426

7,426

Total

12,386

(73)

12,313

12,132

(163)

11,969

Generally, amounts relating to reinsurance contracts are reported gross unless they have an immaterial impact on their respective balance sheet line items.

Carrying Amount

The following table presents an analysis of the change in insurance and investment contracts liabilities.

 

2012

2011

in € m.

Insurance contracts

Investment contracts

Insurance contracts

Investment contracts

Balance, beginning of year

4,706

7,426

4,899

7,898

New business

230

153

231

150

Claims/withdrawals paid

(502)

(646)

(490)

(562)

Other changes in existing business

94

617

(85)

(284)

Exchange rate changes

126

182

151

224

Balance, end of year

4,654

7,732

4,706

7,426

Other changes in existing business for the investment contracts of € 617 million and € (284) million are principally attributable to changes in the fair value of underlying assets for the years ended December 31, 2012 and 2011, respectively.

As of December 31, 2012 the Group had insurance contract liabilities of € 4.7 billion. Of this, € 2.4 billion represents traditional annuities in payment, € 1.8 billion universal life contracts and € 428 million unit linked pension contracts with guaranteed annuity rates. Guaranteed annuity rates give the policyholder the option, on retirement, to take up a traditional annuity at a rate that was fixed at the inception of the policy. The liability of € 428 million for unit linked pension contracts with guaranteed annuity rates is made up of the unit linked liability of € 300 million and a best estimate reserve of € 128 million for the guaranteed annuity rates. The latter is calculated using the differential between the fixed and best estimate rate, the size of the unit linked liability and an assumption on take up rate.

As of December 31, 2011 the Group had insurance contract liabilities of € 4.7 billion. Of this, € 2.3 billion represents traditional annuities in payment, € 2.0 billion universal life contracts and € 459 million unit linked pension contracts with guaranteed annuity rates (made up of a unit linked liability of € 323 million and a best estimate reserve of € 136 million for the guaranteed annuity rates).

Key Assumptions in relation to Insurance Business

The liabilities will vary with movements in interest rates, which are applicable, in particular, to the cost of guaranteed benefits payable in the future, investment returns and the cost of life assurance and annuity benefits where future mortality is uncertain.

Assumptions are made related to all material factors affecting future cash flows, including future interest rates, mortality and costs. The assumptions to which the long term business amount is most sensitive are the interest rates used to discount the cash flows and the mortality assumptions, particularly those for annuities.

The assumptions are set out below:

Interest Rates

Interest rates are used that reflect a best estimate of future investment returns taking into account the nature and term of the assets used to support the liabilities. Suitable margins for default risk are allowed for in the assumed interest rate.

Mortality

Mortality rates are based on published tables, adjusted appropriately to take into account changes in the underlying population mortality since the table was published, company experience and forecast changes in future mortality. If appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in pensioner longevity. Improvements in annuitant mortality are based on 100 % of the Continuous Mortality Investigation 2011 mortality improvement tables with an ultimate rate of improvement of 1 % per annum.

Costs

For non-linked contracts, allowance is made explicitly for future expected per policy costs.

Other Assumptions

The take-up rate of guaranteed annuity rate options on pension business is assumed to be 67 % for the year ended December 31, 2012 and 66 % for the year ended December 31, 2011.

Key Assumptions impacting Value of Business Acquired (VOBA)

The opening VOBA arising on the purchase of Abbey Life Assurance Company Limited was determined by capitalizing the present value of the future cash flows of the business over the reported liability at the date of acquisition. If assumptions were required about future mortality, morbidity, persistency and expenses, they were determined on a best estimate basis taking into account the business’s own experience. General economic assumptions were set considering the economic indicators at the date of acquisition.

The rate of VOBA amortization is determined by considering the profile of the business acquired and the expected depletion in future value. At the end of each accounting period, the remaining VOBA is tested against the future net profit expected related to the business that was in force at the date of acquisition.

If there is insufficient net profit, the VOBA will be written down to its supportable value.

Key Changes in Assumptions

Upon acquisition of Abbey Life Assurance Company Limited in October 2007, liabilities for insurance contracts were recalculated from a regulatory basis to a best estimate basis in line with the provisions of IFRS 4. The non-economic assumptions set at that time have not been changed but the economic assumptions have been reviewed in line with changes in key economic indicators. For annuity contracts, the liability was valued using the locked-in basis determined at the date of acquisition.

Sensitivity Analysis (in respect of Insurance Contracts only)

The following table presents the sensitivity of the Group’s profit before tax and equity to changes in some of the key assumptions used for insurance contract liability calculations. For each sensitivity test, the impact of a reasonably possible change in a single factor is shown with other assumptions left unchanged.

 

Impact on profit before tax

Impact on equity

in € m.

2012

2011

2012

20112

1

The impact of mortality assumes a ten percent decrease in annuitant mortality and a ten percent increase in mortality for other business.

Variable:

 

 

 

 

Mortality (worsening by ten percent)1

(10)

(12)

(8)

(9)

Renewal expense (ten percent increase)

(1)

(3)

(1)

(2)

Interest rate (one percent increase)

12

17

(151)

(116)

For certain insurance contracts, the underlying valuation basis contains a Provision for Adverse Deviations (“PADs”). For these contracts any worsening of expected future experience would not change the level of reserves held until all the PADs have been eroded while any improvement in experience would not result in an increase to these reserves. Therefore, in the sensitivity analysis, if the variable change represents a worsening of experience, the impact shown represents the excess of the best estimate liability over the PADs held at the balance sheet date. As a result, the figures disclosed in this table should not be used to imply the impact of a different level of change and it should not be assumed that the impact would be the same if the change occurred at a different point in time.

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