64 LV= Annual Report 2012
Notes to the Financial Statements continued
31 December 2012
3. Risk management and control (continued)
Income protection and critical illness business is at risk from changes in morbidity rates. Where there is an increased incidence of ill health
or an increase in the duration of such ill health, the Group is exposed to higher claims than expected. The Group has underwriting procedures,
including medical and financial screening if appropriate, to price accurately for such risks and reinsurance is in place to limit the risk retained on
each policy.
Persistency risk influences the ability to recover acquisition costs from margins within the products. The risk is greater in early years but reduces
significantly as time passes. For long-term insurance contract liabilities there is an allowance built in to allow for future withdrawals.
Higher than expected expense costs will increase the reserves required. The Group is exposed to the risk that the charges it deducts from
policyholder benefits are not sufficient to cover future expenses.
The table below sets out the concentration of long-term insurance and investment contract liabilities on a realistic basis by type of contract.
All business is written in the UK.
2012 2011
Gross Reinsurance Net Gross Reinsurance Net
Group £m £m £m £m £m £m
Whole life 1,462.6 (44.7) 1,417.9 1,426.7 (18.6) 1,408.1
Endowment 678.7 – 678.7 758.9 – 758.9
Term Assurance 83.4 (116.3) (32.9) 45.0 (77.2) (32.2)
Guaranteed annuity pensions 1,281.9 (22.5) 1,259.4 1,269.7 (21.2) 1,248.5
Pure endowment pensions 2,797.7 (19.9) 2,777.8 2,108.4 (24.1) 2,084.3
Critical illness 48.6 (33.3) 15.3 59.1 (38.1) 21.0
Income protection 67.0 (55.9) 11.1 96.3 (40.8) 55.5
ISA 69.8 – 69.8 68.7 – 68.7
Other 86.9 (4.8) 82.1 91.9 (3.0) 88.9
6,576.6 (297.4) 6,279.2 5,924.7 (223.0) 5,701.7
Long-term claims liabilities 42.4 – 42.4 40.0 – 40.0
Unit linked 964.6 – 964.6 806.9 – 806.9
7,583.6 (297.4) 7,286.2 6,771.6 (223.0) 6,548.6
The table below sets out the impact on long-term insurance contract liabilities, the Unallocated divisible surplus and Profit before tax for
movements in key assumptions.
Impact on
gross
Impact on the long-term
Impact on Unallocated insurance
Profit before divisible contract
tax surplus liabilities
Sensitivity analysis for the change in assumptions used in long-term insurance contract liabilities £m £m £m
Increase in mortality rates by 5% 42.8 42.8 (14.7)
Increase in morbidity rates by 5% (8.0) (8.0) 24.4
Reduction in persistency by 5% 0.1 0.1 6.3
Increase in expenses by 10% (15.6) (15.6) 21.6