Sensitivities

The following tables show the sensitivities of the EV and of the NBV to changes in key assumptions using the parameters indicated by the CFO Forum.

  • Yield curve +1%: sensitivity to an upward shift of 100 basis points in the underlying reference rates, accompanied by an upward shift of 100 basis points in all other dependent economic assumptions. Liquidity premia added to swap rates until the extrapolation “entry-point” remain the same as in the central scenario.(1)
  • Yield curve -1%: sensitivity to a downward parallel shift of 100 basis points in the underlying reference rates, accompanied by a downward shift of 100 basis points in all other dependent economic assumptions. Liquidity premia added to swap rates until the extrapolation “entry-point” remain the same as in the central scenario.2
  • Equity Value +10%: sensitivity to a 10% market value increase at valuation date for equity investments.
  • Equity Value -10%: sensitivity to a 10% market value reduction at valuation date for equity investments.
  • Property Value -10%: sensitivity to a 10% market value reduction at valuation date for property investments.
  • Equity Implied Volatilities +25%: sensitivity to a 25% increase of the equity implied volatility across all maturities, resulting in a change of the time value of financial options and guarantees.
  • Swaption Implied Volatilities +25%: sensitivity to a 25% increase of the swaption implied volatility across all option maturities and swap tenors, resulting in a change of the time value of financial options and guarantees.
  • Reference rates without liquidity premium: sensitivity to the adoption of swap rates without any liquidity premium as reference rates.
  • Reference rates with liquidity premium +10bps: sensitivity to a 10bps additive increase in the full liquidity premium on top of swap rates, to be then applied to different products according to the bucketing approach described in Section 7.1.1.
  • Maintenance expenses -10%: sensitivity to a 10% decrease of maintenance expenses.
  • Lapse Rate -10%: sensitivity to a 10% decrease of lapse rates (multiplicative, i.e. 90% of best estimate lapse rates).
  • Lapse Rate +10%: sensitivity to a 10% increase of lapse rates (multiplicative, i.e. 110% of best estimate lapse rates).
  • Mortality/morbidity for risk business -5%: sensitivity to a 5% decrease of mortality/morbidity (multiplicative, i.e. 95% of best estimate mortality/morbidity rates), including the effect of possible related re-pricing, for all product lines subject to mortality risk, i.e. where the present value of future profits decreases when the mortality rates increase (e.g. term assurance, whole life, annuity during the accumulation period).
  • Mortality for annuity business -5%: sensitivity to a 5% decrease of mortality (multiplicative, i.e. 95% of best estimate mortality rates) for business subject to longevity risk, i.e. where the present value of future profits decreases when the mortality rates decrease (e.g. annuities in payment).
  • Required capital equal to minimum regulatory solvency requirement: sensitivity to a modification of the required capital, which is set equal to the level of the local regulatory minimum capital requirement.

Each sensitivity test is performed in isolation, i.e. all other assumptions remain unchanged except where they are directly impacted by the changed assumptions.

EV sensitivity analysis
 
Total Italy Germany France CEE RoE RoW
Base EV (€ mln) 19,372 3,729 3,743 3,828 1,002 4,177 2,893
Yield Curve +1% 12.2% 15.2% 12.9% 17.7% -0.8% 14.0% 2.0%
Yield Curve -1% -17.2% -18.1% -15.5% -28.6% 0.8% -22.5% -1.9%
Equity Value +10% 4.8% 10.7% 1.0% 6.2% 1.7% 3.6% 3.0%
Equity Value -10% -4.8% -10.9% -0.6% -6.7% -1.7% -3.5% -2.5%
Property Value -10% -2.8% -4.1% -1.2% -5.5% -0.2% -2.8% -0.7%
Equity Implied Volatilities +25% -1.2% -2.1% -1.4% -1.3% -0.6% -1.0% 0.0%
Swaption Implied Volatilities +25% -3.8% -5.9% -6.2% -5.4% -0.2% -1.9% 0.0%
Reference rates without liquidity premium -35.1% -76.1% -34.4% -43.7% 0.0% -25.2% 1.9%
Reference rates with liquidity premium +10bps 2.7% 6.2% 2.1% 3.2% 0.0% 2.3% -0.3%
Maint. Expenses -10% 3.3% 4.5% 1.1% 4.6% 2.6% 3.3% 3.2%
Lapse rate -10% 3.4% 4.9% 3.8% 3.7% 3.9% 1.0% 4.0%
Lapse rate +10% -2.9% -4.5% -3.8% -2.5% -3.5% -0.8% -3.2%
Mortality/Morbidity for Risk Business -5% 3.2% 1.0% 1.2% 2.3% 1.0% 2.0% 12.5%
Mortality for Annuity Business -5% -1.4% -0.1% -0.7% -3.0% 0.0% -1.4% -1.8%
Minimum Regulatory Capital 3.7% 2.5% 8.5% 1.5% 1.2% 2.2% 5.0%
NBV sensitivity analysis
 
Total Italy Germany France CEE RoE RoW
Base NBV (€ mln) 976 374 166 128 52 134 121
Yield Curve +1% 8.0% 5.4% 5.1% 21.3% -9.1% 32.6% -13.9%
Yield Curve -1% -23.9% -27.9% -4.6% -57.3% 9.9% -51.7% 13.5%
Equity Value +10% 2.4% 3.4% 1.4% 3.3% 1.1% 2.0% 0.3%
Equity Value -10% -2.5% -3.2% -1.1% -4.8% -1.1% -2.1% -0.4%
Property Value -10% -3.5% -6.5% -1.2% -1.9% 0.0% -3.5% -0.3%
Equity Implied Volatilities +25% -4.9% -8.6% -2.2% -3.1% -1.4% -5.4% 0.0%
Swaption Implied Volatilities +25% -8.8% -13.1% -7.5% -5.8% -1.0% -12.1% 0.0%
Reference rates without liquidity premium -38.8% -65.9% -16.4% -40.8% 0.0% -43.4% 4.2%
Reference rates with liquidity premium +10bps 2.6% 4.4% 1.7% 1.9% 0.0% 3.5% -0.6%
Maint. Expenses -10% 7.5% 7.4% 1.8% 10.0% 9.7% 9.4% 9.6%
Lapse rate -10% 11.2% 8.3% 13.8% 7.0% 19.7% 9.9% 18.7%
Lapse rate +10% -9.9% -6.6% -12.5% -7.1% -18.2% -9.2% -17.0%
Mortality/Morbidity for Risk Business -5% 8.3% 5.2% 2.2% 9.0% 5.3% 6.0% 29.1%
Mortality for Annuity Business -5% -1.3% -0.3% -0.5% -3.5% 0.0% -2.7% -2.3%
Minimum Regulatory Capital 5.6% 3.3% 11.5% 2.5% 2.4% 4.5% 10.8%

The impact of the sensitivity to a 1% increase in the yield curve is generally positive, with different magnitudes on account of different weights of businesses with prevalent financial profits proportionally shared with policyholders (which benefit from an increase of interest rates) and businesses with prevalent fixed components of profits (“fee-based” financial margins or technical margins) which are penalised by the corresponding increase in the discount factors.

The impact of the sensitivity to a 1% decrease in the yield curve is generally greater than the corresponding opposite variation due to the presence of financial guarantees and options, which are more likely to bite when interest rates are lower and create asymmetries in shareholders’ results.

Compared to 2010, 2011 sensitivities to +/-1% variation of the yield curve report larger percentage impacts on EV, as a consequence of the extremely negative year-end financial conditions which determine the projection of very low investment returns, and hence make the EV more volatile and sensitive to variations of economic assumptions.

To reduce the artificial volatility in asset valuation (and hence in EV) induced by the enlargement of the spread of government bonds, the industry has proposed the adoption of an anti-cyclical mechanism (government spread premium, GSP) to be included in the risk-free curve adopted for the evaluation of the liabilities.

In particular, the GSP is defined as the difference at ten-year duration between the yields on the “AAA & others" curve provided by European Central Bank and the swap curve, where the curve "AAA & others" represents a weighted average of government bond issues in the Euro area, with the exception of bonds that exceed specific maximum thresholds in terms of return and volatility.

At the end of 2011 this difference amounted to 177bps: the impact on VIF of the adoption of this spread (which replaces the liquidity premium in the Euro area, and is added without buckets to swap rates until the extrapolation entry-point) is represented in the following table.
VIF Sensitivity to Government Spread Premium (€ mln)
 
Base with GSP Change
Italy -789 1,398 2,187
Germany 2,641 3,610 969
France 1,212 2,503 1,291
Central Eastern Europe 823 823 0
Rest of Europe 2,367 2,894 526
Rest of World 1,978 1,978 0
Total 8,233 13,207 4,974

(1) As the ultimate forward rate used in this sensitivity remains the same as in the central scenario, the shift is parallel only up to the extrapolation entry-point.