Notes to the consolidated financial statements

• « 32 Liabilities arising from insurance contracts
  and participating investment contracts
• 33 Life insurance
  sensitivity analysis
• 34 Liability arising from
  non-participating investment contracts »

33 Life insurance sensitivity analysis

The following table demonstrates the effect of changes in key assumptions on profit before tax and equity disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical.

	Change in variable	Increase (reduction) in profit before tax £m	Increase (reduction) in equity £m
Non-annuitant mortality1	5% reduction	31	22
Annuitant mortality2	5% reduction	(77)	(55)
Lapse rates3	10% reduction	38	28
Future maintenance and investment expenses4	10% reduction	70	50
Risk-free rate5	0.25% deduction	47	34
Guaranteed annuity option take up6	5% addition	(22)	(15)
Equity investment volatility7	1% addition	(7)	(5)
Widening of credit default spreads on corporate bonds8	0.25% addition	(82)	(59)
Decrease in illiquidity premia9	0.25% deduction	(134)	(97)

Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases.

¹This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate.

²This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate.

³This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.

⁴This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate.

⁵This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the risk-free rate by 25 basis points.

⁶This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.

⁷This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.

⁸This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Government bond yields, the risk-free rate and illiquidity premia are all assumed to be unchanged.

⁹This sensitivity shows the impact of a 25 basis point reduction in the allowance for illiquidity premia. It assumes the overall corporate bond spreads are unchanged and hence market values are unchanged. Government bond yields and the risk-free rate are both assumed to be unchanged.