Aviva 2005 Annual Report Download - page 155

35 – Insurance liabilities continued
(d) In all countries, local generally-accepted interest rates and published standard mortality tables are used for different categories of
business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
Movements
The following movements have occurred in the long-term business provisions during the year:
2005 2004
£m £m
Carrying amount at 1 January 106,491 96,228
Provisions in respect of new business 6,589 5,839
Expected change in existing business provisions (2,703) (3,164)
Variance between actual and expected experience 3,784 1,680
Impact of operating assumption changes (1,034) 377
Impact of economic assumption changes 2,411 1,004
Other movements 340 227
Change in liability recognised as an expense 9,387 5,963
Portfolio transfers, acquisitions and disposals (360) 924
Foreign exchange rate movements (684) 289
Effect of adjusting to FRS 27 realistic basis –3,087
Other movements (404) –
Carrying amount at 31 December 114,430 106,491
The effect of changes in the main assumptions is given in note 39.
(c) General insurance and health liabilities
Provisions for outstanding claims
Significant delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved
in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the balance sheet date. The reserves for
general insurance and health are based on information currently available; however, it is inherent in the nature of the business written
that the ultimate liabilities may vary as a result of subsequent developments.
Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment
expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE,
as well as claims incurred but not yet reported and associated LAE.
Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business
for which discounted provisions are held:
Rate Mean term of liabilities
Country Class 2005 2004 2005 2004
Netherlands Permanent health and injury 3.21% 3.27% 7 years 10 years
No equalisation or catastrophe reserves have been recognised. This treatment differs from UK GAAP and is explained in note 1 on the
first time adoption of IFRS.
The net outstanding claims provisions before discounting were £13,014 million (2004: £12,816 million). The period of time which will
elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
Assumptions
Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are generally set by
skilled claims technicians, applying their experience and knowledge to the circumstances of individual claims. The ultimate cost of
outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder
and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’s past claims development
experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the
development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier
years and expected loss ratios.
Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where
this is considered appropriate. Claim development is separately analysed for each geographic area, as well as by each line of business.
Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately
addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their
future development.
Financial statements
Aviva plc 2005
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