AVBOB Financial Statements 2018

111 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) 13.4 Change to valuation assumptions • • • • • • • • 13.5 Sensitivity analysis of the policyholder liabilities Change in the liability 2018 2017 R 000 R 000 10% increase in mortality 819 357 676 535 1% decrease in investment return 706 881 481 897 10% increase in expenses 606 538 433 693 1% increase in expense inflation 682 290 448 864 20% increase in lapses ( 211 073) ( 79 616) 10% increase in surrenders ( 19 499) 7 153 10% decrease in surrenders 22 846 ( 5 226) Maintenance expenses reduced resulting in a reduction in liabilities. In addition, the expense reserve setup in the previous financial year for centenary expenses was decreased by R8,4 million. Overall, they led to a profit of R230,2 million. In anticipation of the fith special bonus announcement, the free funeral take-up rate is expected to increase by 20% and the long-term withdrawal assumption to decrease from 7.5% to 6.0%. Changes in these assumptions have increased the liability by R504,4 million and R277,7 million respectively. The best estimate lapse assumption was updated to track the current actual experience more closely. This resulted in a loss of R10,0 million. There was no change in the direction of lapses planned margin. The economic assumptions were amended to reflect the expected future investment returns based on the long- term assumed assets held by the Society as well as the expected future inflation rates. The increase in the assumed investment return resulted in a profit of R25,3 million. The inflation gap remained unchanged at 2.75%. The policyholder liabilities are calculated according to best estimate assumptions plus compulsory margins - the valuation assumptions. To illustrate sensitivity to the assumptions, changes in the valuation assumptions were calculated, as set out in the following table: The analyses are based on a change in an assumption while holding all other assumptions constant. In practice this is unlikely to occur, as changes in some of the assumptions may be correlated. A correlation exists between the inflation rate and investment returns, as well as between the inflation rate and renewal expenses. At 30 June 2018, the cash benefit of R2 000 was increased to R2 500. This increased the liability by R45,3 million. The partial elimination of negative balances were reduced by R37,5 million to prevent the premature recognition of profits in alignment with the Society's practice. The transport and funeral subsidy cost was changed from R89,76 to R106,20 per policy per annum in line with the expected future experience, but before adjusting for the 20% assumed increase in the free funeral take up. The liability increased by R161,5 million. At the current year end a number of changes were made to the assumptions which had an impact on earnings. The impact of these changes on the pre-tax earnings for the year is as follows: The best estimate mortality assumptions were updated to track the current actual experience more closely. This resulted in a profit of R202,2 million. 111