Aviva 2005 Annual Report Download - page 174

Financial statements continued
Notes to the consolidated financial statements continued
46 – Contingent liabilities and other risk factors
(a) Uncertainty over claims provisions
Note 35 gives details of the estimation techniques used in determining the general business outstanding claims provisions and of the
methodology and assumptions used in determining the long-term business provisions, which are designed to allow for prudence and the
appropriate cost of future policy-related liabilities. Both are estimated to give a result within the normal range of outcomes. To the extent
that the ultimate cost falls outside this range, for example where experience is worse than that assumed for long-term business, or future
general business claims inflation differs from that expected, there is uncertainty in respect of this liability.
(b) Asbestos, pollution and social environmental hazards
In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become
involved in actual or threatened litigation arising therefrom, including claims in respect of pollution and other environmental hazards.
Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including the United Kingdom, Australia
and Canada. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which
they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be
determined with certainty. However, the Group’s net exposure to such liabilities is not significant and, on the basis of current information
and having regard to the level of provisions made for general insurance claims, the directors consider that any costs arising are not likely
to have a material impact on the financial position of the Group.
(c) Guarantees on long-term savings products
Note 38 gives details of guarantees and options given by various Group companies as a normal part of their operating activities, in respect
of certain long-term insurance and fund management products. In the United Kingdom, in common with other pension and life policy
providers, the Group wrote individual and group pension policies in the 1970s and 1980s with a guaranteed annuity rate option (GAO).
Since 1993, such policies have become more valuable to policyholders, and more costly for insurers, as current annuity rates have fallen
in line with interest rates and improving longevity. Reserving policies for the cost of GAOs varied until a ruling by the House of Lords in
the Equitable Life case in 2000 which effectively required full reserving by all companies. Prior to the ruling, consistent with the Group’s
ordinary reserving practice in respect of such obligations, full reserves for GAOs had already been established. No adjustment was made,
or was necessary, to the Group’s reserving practice as a result of the ruling. The directors continue to believe that the existing provisions
are sufficient.
(d) Pensions mis-selling
The pensions review of past sales of personal pension policies which involved transfers, opt outs and non-joiners from occupational
schemes, as required by the Financial Services Authority (FSA), has largely been completed. A provision of some £42 million (2004:
£52 million) remains to meet the outstanding costs of the very few remaining cases, the anticipated cost of any guarantees provided,
and potential levies payable to the Financial Services Compensation Scheme. It continues to be the directors’ view that there will be
no material effect either on the Group’s ability to meet the expectations of policyholders or on shareholders.
(e) Endowment reviews
In December 1999, the FSA announced the findings of its review of mortgage endowments and expressed concern as to whether, given
decreases in expected future investment returns, such policies could be expected to cover full repayment of mortgages. A key conclusion
was that, on average, holders of mortgage endowments had enjoyed returns such that they had fared at least as well as they would have
done without an endowment. Nevertheless, following the FSA review, all of the Group’s UK mortgage endowment policyholders received
policy-specific letters advising them whether their investment was on track to cover their mortgage.
In May 2002, in accordance with FSA requirements, the Group commenced sending out the second phase of endowment policy
update letters, which provide policyholders with information about the performance of their policies and advice as to whether these
show a projected shortfall at maturity. The Group will continue to send these updates annually to all mortgage endowment holders,
in accordance with FSA requirements. The Group has made provisions totalling £195 million (2004: £130 million) to meet potential
mis-selling costs and the associated expenses of investigating complaints. It continues to be the directors’ view that there will be no
material effect either on the Group’s liability to meet the expectations of policyholders or on shareholders.
In August 2004, the Group confirmed its intention to introduce time barring on mortgage endowment complaints, under FSA rules, by
the end of 2006. The Group is writing to its 1.1 million endowment policyholders as part of its ongoing review, stating that it intends to
introduce a time bar on mortgage endowment complaints in the future. Customers will be given at least 12 months’ individual notice
before a time bar becomes applicable – double the six months’ notice required by the FSA.
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