AVBOB Financial Statements 2018

109 AVBOB MUTUAL ASSURANCE SOCIETY AND ITS SUBSIDIARIES NOTES TO THE SUMMARISED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 (continued) 13. POLICYHOLDER LIABILITIES (continued) Long-term life insurance contracts 13.1 Assumptions • Mortality assumption • Lapse and surrender assumptions Premium Premium paying paying 2018 2017 Year 1: 41.5% 39.5% Year 2: 19.0% 19.5% Year 3: 12.5% 12.0% Year 4: 6.0% 7.5% • Expense assumptions • Economic assumptions The cost of administering a life policy of the principal policyholder is R149,65 (2017: R153,17) per annum and the premium collection cost is 3.0% (2017: 3.0%) of each premium. 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 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 Statutory Actuary adds 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 mortality investigation for the Society. This investigation covers the period from 1 January 2017 to 31 December 2017. The assumptions were revised so that the level of the best estimate assumption is closer to the current actual experience in line with the investigation resulting in lower reserves. A full withdrawal investigation was performed for the period 1 January 2017 to 31 December 2017. The withdrawal rates were split into two categories: premium paying and paid-up policies. These withdrawal assumptions are as follows: The valuation assumption at the previous year end (including the assumed level of inflation for the year) is higher than both the actual 2018 cost per policy and the 2019 forecast cost per policy. The assumed maintenance cost in 2018 has been set to a level half-way between the 2018 valuation assumption and the 2019 forecast cost per policy including inflation. 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. 109