180 Aviva plc 2011 Preliminary Announcement
MCEV financial statements continued
E16 – Implied discount rates (IDR) In the valuation of a block of business, the IDR is the rate of discount such that a traditional embedded value calculation for the covered business equates to the MCEV. The cash flows projected are the expected future cash flows including expected investment cash flows from equities, bonds and properties earning a risk premium in excess of risk free, statutory reserves and required capital. The risk premiums used are consistent with those used in the expected existing business contribution within operating earnings. As the risk premiums are positive, a discount rate higher than risk-free is required to give a value equal to the market-consistent embedded value. Average derived risk discount rates are shown below for the embedded value.
United Kingdom France Ireland Italy1 Poland Spain Other Europe Aviva Europe North America1 Asia Pacific Total
2011 %
Restated 2010 %
9.3% 7.9% 4.1% n/a 6.5% 15.0% 6.7% n/a n/a 5.2%
8.4% 6.7% 4.4% 7.3% 7.3% 9.6% 8.0% 6.9% 34.2% 5.9%
n/a
9.8%
1. Where there is significant difference in projected real world and risk neutral profits and the value of the in force business plus required capital is negative or close to zero, the IDR is not well defined and consequently IDR is not meaningful.