Aviva 2005 Annual Report Download - page 83

Financial statements
Aviva plc 2005
capital regime, and hence FRS 27, an amount may be recognised
for the present value of future profits on non-participating business
written in a with-profit fund where the determination of the
realistic value of liabilities in that with-profit fund takes account,
directly or indirectly, of this value. This amount is recognised as a
reduction in the liability rather than as an asset on the balance
sheet, and is then apportioned between the amounts that have
been taken into account in the measurement of liabilities and other
amounts which are shown as an adjustment to the unallocated
divisible surplus.
Unallocated divisible surplus
In certain participating long-term insurance and investment
business, the nature of the policy benefits is such that the division
between shareholder reserves and policyholder liabilities is
uncertain. Amounts whose allocation either to policyholders or
shareholders has not been determined by the end of the financial
year are held within liabilities as an unallocated divisible surplus.
Liability adequacy
At each reporting date, an assessment is made of whether the
recognised long-term business provisions are adequate, using
current estimates of future cash flows. If that assessment shows
that the carrying amount of the liabilities (less related assets) is
insufficient in the light of the estimated future cash flows, the
deficiency is recognised in the income statement by setting up an
additional provision in the balance sheet.
General insurance and health provisions
(i) Outstanding claims provisions General insurance and health
outstanding claims provisions are based on the estimated ultimate
cost of all claims incurred but not settled at the balance sheet date,
whether reported or not, together with related claims handling
costs. Significant delays are experienced in the notification and
settlement of certain types of general insurance claims, particularly
in respect of liability business, including environmental and pollution
exposures, the ultimate cost of which cannot be known with
certainty at the balance sheet date. Provisions for certain claims are
discounted, using rates having regard to the returns generated by
the assets supporting the liabilities. Any estimate represents a
determination within a range of possible outcomes. Further details
of estimation techniques are given in note 35(c).
Outstanding claims provisions are valued net of an allowance for
expected future recoveries. Recoveries include non-insurance assets
that have been acquired by exercising rights to salvage and
subrogation under the terms of insurance contracts.
(ii) Provision for unearned premiums The proportion of written
premiums, gross of commission payable to intermediaries,
attributable to subsequent periods is deferred as a provision for
unearned premiums. The change in this provision is taken to the
income statement in order that revenue is recognised over the
period of risk.
(iii) Liability adequacy At each reporting date, the Group reviews
its unexpired risks and carries out a liability adequacy test for any
overall excess of expected claims and deferred acquisition costs over
unearned premiums, using the current estimates of future cash
flows under its contracts after taking account of the investment
return expected to arise on assets relating to the relevant general
business provisions. If these estimates show that the carrying
amount of its insurance liabilities (less related deferred acquisition
costs and additional value in force) is insufficient in light of the
estimated future cash flows, the deficiency is recognised in the
income statement by setting up a provision in the balance sheet.
Other assessments and levies
The Group is subject to various periodic insurance-related
assessments or guarantee fund levies. Related provisions are
established where there is a present obligation (legal or constructive)
as a result of a past event. Such amounts are not included within
insurance liabilities but are included under “Provisions” in the
balance sheet.
(K) Non-participating investment contract liabilities
Claims
For non-participating investment contracts with an account
balance, claims reflect the excess of amounts paid over the
account balance released.
Provisions
Deposits collected under non-participating investment contracts are
not accounted for through the income statement, except for the
investment income attributable to those contracts, but are
accounted for directly through the balance sheet as an adjustment
to the investment contract liability.
The majority of the Group’s contracts classified as non-participating
investment contracts are unit-linked contracts and are measured at
fair value. Liabilities for non-linked non-participating contracts are
generally measured at amortised cost.
The fair value liability is in principle established through the use
of prospective discounted cash-flow techniques. For unit-linked
contracts, the fair value liability is equal to the current unit
fund value, plus additional non-unit reserves if required on a
fair value basis.
Amortised cost is calculated as the fair value of consideration
received at the date of initial recognition, less the net effect of
principal payments such as transaction costs and front-end fees,
plus or minus the cumulative amortisation (using the effective
interest rate method) of any difference between that initial amount
and the maturity value, and less any write-down for surrender
payments. The effective interest rate is the one that equates the
discounted cash payments to the initial amount. At each reporting
date, the amortised cost liability is determined as the value of future
best estimate cash flows discounted at the effective interest rate.
(L) Reinsurance
The Group assumes and cedes reinsurance in the normal course of
business, with retention limits varying by line of business. Premiums
on reinsurance assumed are recognised as revenue in the same
manner as they would be if the reinsurance were considered direct
business, taking into account the product classification of the
reinsured business. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured
policies, using assumptions consistent with those used to account
for these policies.
Gains or losses on buying retroactive reinsurance are recognised in
the income statement immediately at the date of purchase and are
not amortised. Premiums ceded and claims reimbursed are
presented on a gross basis in the consolidated income statement
and balance sheet as appropriate.
Reinsurance assets primarily include balances due from both
insurance and reinsurance companies for ceded insurance liabilities.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the outstanding claims provisions or settled claims
associated with the reinsured policies and in accordance with the
relevant reinsurance contract.
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