Aviva 2005 Annual Report Download - page 161

37 – Liability for investment contracts continued
(ii) Non-participating investment contracts
2005 2004
£m £m
Carrying amount at 1 January 25,581 20,493
Reserves in respect of new business 5,247 3,872
Expected change in existing business provisions 936 769
Variance between actual and expected experience (1,732) 160
Impact of operating assumption changes 2–
Impact of economic assumption changes –5
Other movements 93 78
Change in liability 4,546 4,884
Portfolio transfers and acquisitions –194
Foreign exchange rate movements (76) 10
Carrying amount at 31 December 30,051 25,581
The effect of changes in main assumptions is given in note 39.
38 – Financial guarantees and options
As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return
guarantees, in respect of certain long-term insurance and fund management products.
(a) UK Life with-profits business
In the UK, life insurers are required to comply with the FSA’s realistic reporting regime for their with-profit funds for the calculation of
FSA liabilities. Under the FSA’s rules, provision for guarantees and options within realistic liabilities must be measured at fair value, using
market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which
represents the additional cost arising from uncertainty surrounding future economic conditions.
The material guarantees and options to which this provision relates are:
(i) Maturity value guarantees – Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit
business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has
offered maturity value guarantees on certain unit-linked products.
(ii) No market valuation reduction (MVR) guarantees – For unitised business, there are a number of circumstances where a “no MVR”
guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect
the difference between the guaranteed value of the policy and the market value of the underlying assets.
(iii) Guaranteed annuity options – The Group’s UK with-profit funds have written individual and group pensions which contain
guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an
annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities.
(iv) Guaranteed minimum pension – The Group’s UK with-profit funds also have certain policies which contain a guaranteed minimum
level of pensions as part of the condition of the original transfer from state benefits to the policy.
In addition, while these do not constitute guarantees, the Group has made promises to certain policyholders, in relation to their mortgage
endowments, that payments on these policies will meet the mortgage value, provided investment returns exceed 6% per annum net of
tax between 1 January 2000 and maturity and the investment returns on the free reserves are sufficient to meet the top-up costs.
(b) UK Life non-profit business
The Group’s UK non-profit funds are not subject to the requirements of the FSA’s realistic reporting regime and, therefore, liabilities are
evaluated by reference to local statutory reserving rules.
(i) Guaranteed annuity options – Similar options to those written in the with-profit fund have been written in relation to non-profit
products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model,
and amounts to £44 million at 31 December 2005 (2004: £47 million).
(ii) Guaranteed unit price on certain products – Certain unit-linked pension products linked to long-term life insurance funds provide
policyholders with guaranteed benefits at retirement or death. No additional provision is made for this guarantee as the investment
management strategy for these funds is designed to ensure that the guarantee can be met from the fund, mitigating the impact of
large falls in investment values and interest rates.
Financial statements
Aviva plc 2005
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