PPS Integrated Report 2021 Notes to the Consolidated Financial Statements | 166 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2021 ~ Investment returns Risk-free fixed interest securities: the risk-free rates are based on the gross redemption yield of the Prudential Authority's nominal yield curve. ~ Renewal expense level and inflation Estimates are made as to the future level of administration costs to be incurred in administering the policies in force at the current year end, using a functional cost approach. This approach allocates expenses between policy and overhead expenses and within policy expenses, between new business, maintenance and claims. These future costs are assumed to increase each year in line with an assumed inflation rate. The assumed inflation rate is set at a level consistent with the assumed future investment returns. Variations in administration costs will arise from any cost reduction exercises implemented by management or from cost overruns relative to budget. The current level of expenses is taken as an appropriate expense base. Expense inflation is assumed to be 3.00% (2020: 3.00%) less than the Prudential Authority's nominal yield curve for South Africa and 2.75% (2020: 2.75%) less than the Prudential Authority's nominal yield curve for Namibia. ~ Tax It has been assumed that current tax legislation and rates continue unaltered. Allowance is made for future tax and tax relief. ~ Future profit allocations The assumed future profit allowance on the non-DPF portion of the liabilities are in line with the Group’s past practice and members’ reasonable expectations. b. Incurred but not reported (IBNR) The IBNR liability calculation is based on run-off tables using historical data from 2013 to 2020. Due to the short term over which these liabilities will be settled, no allowance is made for claims handling expenses, claims inflation, adjustments for trends, unusual claims or loss ratios. Furthermore, the IBNR liability is undiscounted. c. Change in assumptions The assumptions used to calculate the non-DPF portion of the policy liabilities are updated annually to reflect current best estimates of future experience. Changes to the assumptions will result in changes to the amount of the non-DPF policy liabilities. The impact of the changes will be included in the profits allocated to the DPF component of the policy liabilities. Consequently the aggregate value of the policy liabilities will be unchanged as a result of changes to the assumptions. The economic basis changes led to no change in liabilities (2020: R557.2 million decrease). d. Sensitivity analysis The following tables present the sensitivity in the key valuation assumptions of the value of the non-DPF component of the insurance policy liabilities disclosed in this note to movements in the assumptions used in the estimation of these insurance policy liabilities. The impact of a deviation from the best estimate assumption for all future years on a per policy basis on the liability is shown. 13 LONG-TERM INSURANCE POLICY LIABILITIES, AND PPS PROFIT-SHARE ACCOUNTS (continued) 13.1 Long-term life insurance contracts – assumptions, change in assumptions and sensitivity (continued) a. Process used to decide on assumptions (continued)
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