Aviva 2006 Annual Report Download - page 110

Aviva plc
Annual Report and Accounts 2006 106
Accounting policies continued
(F) Premiums earned
Premiums on long-term insurance contracts and participating
investment contracts are recognised as income when receivable,
except for investment-linked premiums which are accounted for
when the corresponding liabilities are recognised. For single
premium business, this is the date from which the policy is effective.
For regular premium contracts, receivables are taken at the date
when payments are due. Premiums are shown before deduction
of commission and before any sales-based taxes or duties. Where
policies lapse due to non-receipt of premiums, then all the related
premium income accrued but not received from the date they are
deemed to have lapsed is offset against premiums.
General insurance and health premiums written reflect business
incepted during the year, and exclude any sales-based taxes or
duties. Unearned premiums are those proportions of the premiums
written in a year that relate to periods of risk after the balance
sheet date. Unearned premiums are calculated on either a daily
or monthly pro rata basis. Premiums collected by intermediaries,
but not yet received, are assessed based on estimates
from underwriting or past experience, and are included in
premiums written.
Deposits collected under investment contracts without a
discretionary participating feature (non-participating contracts)
arenot accounted for through the income statement, except for
the fee income (covered in policy G) and the investment income
attributable to those contracts, but are accounted for directly
through the balance sheet as an adjustment to the investment
contract liability.
(G) Other investment contract fee revenue
Investment contract policyholders arecharged fees for policy
administration, investment management, surrenders or other
contract services. These fees are recognised as revenue in the period
in which they arecollected unless they relate to services to be
provided in futureperiods. Amounts areconsidered to be assessed
when the policyholder’s balance has been adjusted for those fees.
If the fees arefor services to be provided in futureperiods, then
they aredeferred and recognised as the service is provided.
Initiation and other “front-end” fees (fees that are assessed against
the policyholder balance as consideration for origination of the
contract) arecharged on some non-participating investment and
investment fund management contracts. Where the investment
contract is recorded at amortised cost, these fees are deferred and
recognised over the expected term of the policy by an adjustment
to the effective yield. Where the investment contract is measured
at fair value, the front-end fees that relate to the provision of
investment management services aredeferred and recognised as
the services are provided.
(H) Other fee and commission income
Other fee and commission income consists primarily of investment
fund management fees, distribution fees from mutual funds,
commission revenue from the sale of mutual fund shares, and
transfer agent fees for shareholder record keeping. Revenue from
investment management fees, distribution fees and transfer
agent fees is recognised when earned. Reinsurance commissions
receivable and other commission income are recognised on the
trade date.
(I) Net investment income
Investment income consists of dividends, interest and rents
receivable for the year, movements in amortised cost on debt
securities, realised gains and losses, and unrealised gains and losses
on FV investments (as defined in policy R). Dividends on equity
securities are recorded as revenue on the ex-dividend date. Interest
income is recognised as it accrues, taking into account the effective
yield on the investment. It includes the interest rate differential on
forward foreign exchange contracts. Rental income is recognised on
an accruals basis.
The realised gain or loss on disposal of an investment is the
difference between the proceeds received, net of transaction costs,
and its original cost or amortised cost as appropriate. Unrealised
gains and losses represent the difference between the carrying
value at the year end and the carrying value at the previous year
end or purchase value during the year, less the reversal of previously
recognised unrealised gains and losses in respect of disposals made
during the year.
The long-term natureof much of the Group’soperations means
that, for management’s decision-making and internal performance
management, short-term realised and unrealised investment gains
and losses aretreated as non-operating items. The Group focuses
instead on an operating profit measure that incorporates a longer
term returnon investments supporting its general insurance and
health business. Total investment income, including realised and
unrealised gains, is therefore analysed between that calculated
using a longer term return and short-term fluctuations from this.
Further details of this analysis and the assumptions used aregiven
in note 8.
(J) Insurance and participating investment contract liabilities
Claims
Long-term business claims reflect the cost of all claims arising during
the year,including claims handling costs, as well as policyholder
bonuses accrued in anticipation of bonus declarations.
General insurance and health claims incurred include all losses
occurring during the year, whether reported or not, related
handling costs, a reduction for the value of salvage and other
recoveries, and any adjustments to claims outstanding from
previous years.
Claims handling costs include internal and external costs incurred in
connection with the negotiation and settlement of claims. Internal
costs include all direct expenses of the claims department and any
part of the general administrative costs directly attributable to the
claims function.
Long-term business provisions
Under current IFRS requirements, insurance and participating
investment contract liabilities are measured using accounting
policies consistent with those adopted previously under existing
accounting practices, with the exception of liabilities remeasured
to reflect current market interest rates and those relating to UK
with-profit and non-profit contracts. In the United States, shadow
adjustments to the liabilities or related deferred acquisition costs are
recognised directly in equity so that unrealised gains or losses on
assets that are recognised directly in equity affect the measurement
of the liability or related deferred acquisition costs in the same way
as realised gains or losses. The Group has adopted FRS 27, Life
Assurance,for liabilities relating to such contracts, which adds to
the requirements of IFRS but does not vary them in any way.
Further details are given in policy A above.
Financial statements continued