Aviva 2006 Annual Report Download - page 169

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 165
35 – Insurance liabilities continued
The principal assumptions underlying the cost of future policy related liabilities are as follows:
Future investment return A“risk-free” rate equal to the spot yield on gilts, plus a margin of 0.1% is used. The rates vary, according to the
outstanding term of the policy, with a typical rate as at year end 2006 being 4.84% for a policy with ten years outstanding.
Volatility of investment return The volatility of returns is assumed to be distributed as follows:
Financial investment Volatility
Equities 17% (for UK stocks)
Property 15%
Gilts 3.25% (NUL&P WP)/4.5% (other WP funds)
Corporate bonds 5.25% (NUL&P WP)/6.5% (other WP funds)
Future regular bonuses Annual bonus assumptions for 2007 have been set consistently with the year end 2006 declaration. Future annual
bonus rates reflect the principles and practices of the fund. In particular, the level is set with regard to the projected margin for final bonus
and the change from one year to the next is limited to a level consistent with past practice.
Mortality Mortality assumptions are set with regard to recent company experience and general industry trends.
Mortality table used
2006 2005
Assurances, pure endowments and Nil or AM92/AF92 Nil or AM92/AF92
deferred annuities before vesting or AM80/AF80 adjusted
Pensions business after vesting and PCMA00/PCFA00 PCMA00/PCFA00 or PMA92/
pensions annuities in payment adjusted plus allowance PFA92 adjusted plus allowance
for futuremortality for futuremortality improvement
improvement
Non-profit business Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium
methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable,
together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses.
These assumptions vary by contract type and reflect current and expected future experience.
For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid
value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that future
premiums cease, unless it is moreonerous to assume that they continue. Whereappropriate, allowance for persistency is based on
actual experience.
Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates
as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to
amargin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits,
based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes.
The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option
on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of
policyholders who will choose to exercise the option.
Changes have been made to the assumptions for certain non-profit business during 2006, resulting from a decision taken by
management to adopt changes permitted by the FSA Policy Statement 06/14, Prudential Changes for Insurers,issued in December 2006.
These are as follows:
–For certain blocks of protection business, the reserve for some policies may now be negative, where previously it would have been set
to zero.
–Prudent lapse assumptions have been introduced for these blocks of protection business. Prudent assumptions will be lower than
expected for policies with positive reserves and higher than expected for policies with negative reserves.
–For certain blocks of unit-linked business, lower levels of expenses are allowed for in the calculation of individual policy reserves, with
the remaining expenses being covered by future valuation margins on the overall block of similar policies.