AVBOB Financial Statements 2018

110 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) 13.1 Assumptions (continued) Equity: Risk-free rate plus 3.0% Cash: Risk-free rate less 1.5% Property: Risk-free rate plus 1.0% • Tax assumption • Bonus rates on with-profit policies The following future experience elements are not covered by the PPFM: • Non-profit policyholders will receive no future bonus declarations. Past declared "ad-hoc" or special bonus increases will remain, but no further special bonus increases will be declared. 13.2 Compulsory margins The best estimate assumptions have been adjusted for the following compulsory margins: Assumption Margin Mortality Increase mortality rates by 7.5% Disability Increase disability rates by 10% Lapses Increase / decrease lapse rates by 25% Surrenders Increase / decrease surrender rates by 10% Investment returns Decrease investment returns by 0.25% Expenses Increase expenses by 10% Transport and funeral subsidy cost Expense inflation Increase escalation by 10% Average number of children Increase number of children by 20% Premium escalation take-up rate Increase take-up rate by 10% 13.3 Change in valuation methodology At the current year end no changes were made to the valuation methodology. Increase expenses by 10% Dividend withholding tax has remained at 20% in accordance with legislation. The Society's interpretation of policyholder reasonable benefit expectations regarding bonuses has been documented in the Principles and Practices of Financial Management (PPFM). Policyholder reasonable benefit expectations regarding future bonus distributions are considered in determining the policyholder liabilities. The bonus rate assumptions are unchanged from the previous year. The risk-free rate assumption is 9.7% (2017: 9.7%) per annum. The assumptions for other asset classes are as follows: 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 rate of expense inflation is 7.0% (2017: 7.0%) per annum. The return above is gross of investment expenses. 110