2022 AVBOB Integrated Annual Report - FINANCIALS

1191 9 FINANCIAL STATEMENTS Continued AVBOB MUTUAL ASSURANCE SOCIETY AND ITS SUBSIDIARIES NOTES TO THE SUMMARISED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2022 (continued) 15. POLICYHOLDER LIABILITIES (continued) Long-term life insurance contracts 15.1 Assumptions • Mortality assumption • Withdrawal assumptions • Expense assumptions • Economic assumptions • Tax assumption The Society currently has an assessed tax loss in the Individual Policyholder Fund. The forecast cash flows from the valuation system indicates that in future, on the valuation basis, the tax payable on investment returns is expected to exceed the tax relief arising from policy administration cost. It is therefore assumed that investment returns will be subject to tax and administration costs will be subject to tax relief. This is consistent with the approach adopted in the previous year. The assumed future investment return is based on the assumed spread between asset classes and the assumed returns on each asset class. The assumed spread of assets has remained the same as the previous year. The assumed rate of expense inflation is 8.6% (2021: 7.2%) per annum. The returns above are gross of investment expenses. The value of the policyholder liabilities has been calculated using best estimate assumptions regarding the future experience of the business. These assumptions are generally determined based on recent past experience with appropriate adjustments for future trends. For prudence the actuaries add compulsory and discretionary margins to the best estimate liability. The best estimate assumptions and compulsory margins are set out in this section. The mortality assumptions have been based on the results of the most recent experience investigation for the Society. This investigation covers the period from 1 January 2021 to 31 December 2021. The level of the best estimate assumption was revised to be closer to the current actual experience in line with the investigation. Dividend withholding tax has remained at 20% in accordance with legislation. Administration costs are expressed separately for costs relating to premium collection and administration, and other administration costs. It is further assumed that the administration cost of an assistance policy is two- thirds the level of cost of a life policy. It is also assumed that the cost of administering a life policy increases by 20% for each additional life assured under the policy. The assumptions are consistent with the approach in the previous year. The risk-free rate assumption is 11.4% (2021: 9.9%) per annum. A full withdrawal investigation was performed over the period 1 January 2021 to 31 December 2021. Withdrawal rates were split into two categories: premium-paying and paid-up rates. The best estimate assumption was revised to over time be closer to the actual experience. The valuation assumption at the previous year end (including the assumed level of inflation for the year) was lower than the 2022 forecast cost per policy at the same date. The forecast cost per policy for this purpose was determined using an 88%:12% (2021: 88%:12%) allocation of specific costs between the Society and certain of its subsidiaries. The assumed maintenance cost in 2022 has been set to a level half way between the actual 2022 cost per policy and the 2023 budgeted cost per policy, allowing for inflation.