Aviva 2006 Annual Report Download - page 171

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 167
35 – Insurance liabilities continued
(c) Netherlands
On transition to IFRS, the valuation of most long-term insurance and participating investment contracts was changed from existing
methods that generally used historic assumptions to an active basis using current market interest rates. A liability adequacy test is
performed in line with IFRS requirements. Where liabilities are based on current market interest rates and assets are valued at market
value, the margin in the liability adequacy test is determined by comparison of the liabilities with the present value of best estimate
cash flows.
Valuation discount rates Mortality tables used
2006 and 2005 2006 and 2005
Life assurances Actual swap rate GBM 61-65, GMB71-75,
GBM/V 76-80, GBM 80-85,
GBM/V 85-90 and GBM/V 90-95
Annuities in deferment and in payment Actual swap rate GBMV 76-80, GBMV 85-90,
GBMV 95-00, Coll 1993/2003
and DIL 98, plus further allowance
for future mortality improvement
(d) United States
For the major part of our US business, insurance liabilities are measured in accordance with US GAAP as at the date of acquisition.
The liability for future policy benefits for traditional life insurance is computed using the net level method, based on guaranteed interest
and mortality rates as used in calculating cash surrender values. Reserve interest assumptions range from 2.00% to 7.50%. The weighted
average interest rate for all traditional life policy reserves in 2006 was 4.48%.
Future policy benefit reserves for universal life insurance, indexed life, deferred annuity products and funding agreements are computed
under a retrospective deposit method and represent policy account balances before applicable surrender charges. The weighted average
interest crediting rates for universal life products were4.37% in 2006. The range of interest crediting rates for deferred annuity products,
excluding sales inducement payouts, was 2.75% to 7.00% in 2006. An additional liability is established for universal life contracts with
death or other insurance benefit features, which is determined using an equally-weighted range of scenarios with respect to investment
returns, policyholder lapses, benefit election rates, premium payout patterns and mortality.The additional liability represents the present
value of future expected benefits based on current product assumptions.
The indexed life and annuity products guarantee the return of principal to the customer, and credit interest based on certain indices.
Aportion of the premium from each customer is invested in fixed income securities and is intended to cover the minimum guaranteed
value. A further portion of the premium is used to purchase call options to hedge the growth in interest credited to the customer as a
direct result of increases in the related indices. Both the call options and the options embedded in the policy are valued at their fair value.
Deferred income reserves are established for fees charged for insurance benefit features which are assessed in a manner that is expected
to result in higher profits in earlier years, followed by lower profits or losses in subsequent years. The excess charges are deferred and
amortised using the same assumptions and factors used to amortise deferred acquisition costs. Shadow adjustments may be made to
deferred acquisition costs, acquired value of in-force business, deferred income reserves and contract liabilities. The shadow adjustments
are recognised directly in equity so that unrealised gains or losses on investments that are recognised directly in equity affect the
measurement of the liability, or related assets, in the same way as realised gains or losses.
(e) In all other countries, local generally-accepted interest rates and published standard mortality tables are used for different categories of
business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
Movements
The following movements have occurred in the long-term business provisions during the year:
2006 2005
£m £m
Carrying amount at 1 January 114,430 106,491
Provisions in respect of new business 8,750 6,589
Expected change in existing business provisions (5,678) (2,703)
Variance between actual and expected experience 1,209 3,784
Effect of adjusting to PS06/14 realistic basis (800) –
Impact of other operating assumption changes (333) (1,034)
Impact of economic assumption changes (1,727) 2,411
Other movements 314 340
Change in liability recognised as an expense 1,735 9,387
Effect of portfolio transfers, acquisitions and disposals 12,454 (360)
Foreign exchange rate movements (2,005) (684)
Other movements –(404)
Carrying amount at 31 December 126,614 114,430