Download table as excel file26 Insurance assets and liabilities
Reinsurance assets are £157m (2006: £172m) and relate principally to the Group’s long-term business. Reinsurers’ share of provisions relating to the Group’s short-term business are £94m (2006: £82m). The reinsurance assets expected to be recovered after more than one year are £63m (2006: £92m).
Insurance liabilities comprise the following:
Download table as excel file| 2007 | 2006 | |||||||||||||
| £m | £m | |||||||||||||
| Insurance contract liabilities: | ||||||||||||||
| – linked liabilities | 1,398 | 1,591 | ||||||||||||
| – non-linked liabilities | 2,347 | 2,121 | ||||||||||||
| Provision for claims | 158 | 166 | ||||||||||||
| Insurance contract liabilities including unit-linked liabilities | 3,903 | 3,878 | ||||||||||||
Insurance contract liabilities relate principally to the Group’s long-term business. Insurance contract liabilities associated with the Group’s short-term non-life business are £174m (2006: £198m).
Movements in insurance assets and insurance contract liabilities were as follows:
Download table as excel file| 2007 | 2006 | |||||||||||||
| Gross | Reinsurance | Net | Gross | Reinsurance | Net | |||||||||
| £m | £m | £m | £m | £m | £m | |||||||||
| At beginning of year | 3,878 | (172) | 3,706 | 3,767 | (114) | 3,653 | ||||||||
| Change in year | 25 | 15 | 40 | 111 | (58) | 53 | ||||||||
| At end of year | 3,903 | (157) | 3,746 | 3,878 | (172) | 3,706 | ||||||||
The assumptions that have the greatest effect on the measurement of the amounts recognised above, and the processes used to determine them were as follows:
Mortality – mortality estimates are based on standard industry and national mortality tables, adjusted where appropriate to reflect the Group’s own experience. A margin is added to ensure prudence – for example, future mortality improvements for annuity business.
Renewal expenses level and inflation – expense reserves are a small part of overall insurance liabilities, however, increases in expenses caused by unanticipated inflation or other unforeseen factors could lead to expense reserve increases. Expenses are therefore set using prudent assumptions. Initial renewal expense levels are set by considering expense forecasts for the business and, where appropriate, building in a margin to allow for the increasing burden of fixed costs on the UK closed life book of business. The inflation assumption is set by adding a margin to the market rate of inflation implied by index-linked gilt yields.
Short-term business – for single premium policies the proportion of unearned premiums is calculated based on estimates of the frequency and severity of incidents.
There have been no changes in assumptions in 2007 that have had a material effect on the financial statements.
For long-term insurance contracts where death is the insured risk, the most significant factors that could detrimentally affect the frequency and severity of claims are the incidence of disease, such as AIDS, or general changes in lifestyle, such as in eating, exercise and smoking. Where survival is the insured risk, advances in medical care and social conditions are the key factors that increase longevity.
The Group manages its exposure to risk by operating in part as a unit-linked business, prudent product design, applying strict underwriting criteria, transferring risk to reinsurers, managing claims and establishing prudent reserves.
For payment protection contracts where inability to make payments under a loan contract is the insured risk, the most significant factors are the health of the policyholder and the possibility of unemployment which depends upon, among other things, long-term and short-term economic factors. The Group manages its exposure to such risks through prudent product design, efficient claims management, prudent reserving methodologies and bases, regular product, economic and market reviews and regular adequacy tests on the size of the reserves.
Absa insures property and motor vehicles, for which the most significant factors that could effect the frequency and severity of claims are climatic change and crime. Absa manages its exposure to risk by diversifying insurance risks accepted and transferring risk to reinsurers.
26 Insurance assets and liabilities (continued)
The following table presents the sensitivity of the level of insurance contract liabilities disclosed in this note to movements in the actuarial assumptions used to calculate them. The percentage change in variable is applied to a range of existing actuarial modelling assumptions to derive the possible impact on net profit after tax. The disclosure is not intended to explain the impact of a percentage change in the insurance assets and liabilities disclosed above.
Download table as excel file| 2007 | 2006 | |||||||||||||||||
| Net profit | Net profit | |||||||||||||||||
| Change in | after tax | Change in | after tax | |||||||||||||||
| variable | impact | variable | impact | |||||||||||||||
| % | £m | % | £m | |||||||||||||||
| Long-term insurance contracts: | ||||||||||||||||||
| Improving mortality (annuitants only) | 10 | 21 | 10 | 23 | ||||||||||||||
| Worsening of mortality (assured lives only) | 10 | 29 | 10 | 25 | ||||||||||||||
| Worsening of base renewal expense level | 20 | 43 | 20 | 23 | ||||||||||||||
| Worsening of expense inflation rate | 10 | 10 | 10 | 9 | ||||||||||||||
| Short-term insurance contracts: | ||||||||||||||||||
| Worsening of claim expense assumptions | 10 | 3 | 10 | 9 | ||||||||||||||
Any change in net profit after tax would result in a corresponding increase or decrease in shareholders’ equity.
The above analyses are based on a change in a single assumption while holding all other assumptions constant. In practice this is unlikely to occur.
The Group’s contracts do not contain options or guarantees that could confer material risk.
The Group considers that the concentration of insurance risk that is most relevant to the Group financial statements is according to the type of cover offered and the location of insured risk. The following table shows the maximum amounts payable under all of the Group’s insurance products. It ignores the probability of insured events occurring and the contribution from investments backing the insurance policies. The table shows the broad product types and the location of the insured risk, before and after the impact of reinsurance that represents the risk that is passed to other insurers.
Download table as excel file| 2007 | 2006 | |||||||||||||||||
| Before | After | Before | After | |||||||||||||||
| Reinsurance | Reinsurance | Reinsurance | Reinsurance | Reinsurance | Reinsurance | |||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||
| Total benefits insured by product type | ||||||||||||||||||
| Long term insurance contracts | 31,205 | (10,497) | 20,708 | 24,934 | (9,445) | 15,489 | ||||||||||||
| Short term insurance contracts | 31,464 | (1,139) | 30,325 | 39,870 | (901) | 38,969 | ||||||||||||
| Total benefits insured | 62,669 | (11,636) | 51,033 | 64,804 | (10,346) | 54,458 | ||||||||||||
Download table as excel file| 2007 | 2006 | |||||||||||||||||
| Before | After | Before | After | |||||||||||||||
| Reinsurance | Reinsurance | Reinsurance | Reinsurance | Reinsurance | Reinsurance | |||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||
| Total benefits insured by geographic location | ||||||||||||||||||
| United Kingdom | 22,538 | (7,473) | 15,065 | 25,403 | (8,010) | 17,393 | ||||||||||||
| Other European Union | 4,304 | (2,479) | 1,825 | 3,317 | (1,802) | 1,515 | ||||||||||||
| Africa | 35,827 | (1,684) | 34,143 | 36,084 | (534) | 35,550 | ||||||||||||
| Total benefits insured | 62,669 | (11,636) | 51,033 | 64,804 | (10,346) | 54,458 | ||||||||||||
For the long-term business, reinsurance programmes are in place to restrict the amount of cover to any single life. The reinsurance cover is spread across highly rated companies to diversify the risk of reinsurer solvency. Net insurance reserves include a margin to reflect reinsurer credit risk.