Aviva 2006 Annual Report Download - page 172

Aviva plc
Annual Report and Accounts 2006 168
Notes to the consolidated financial statements continued
35 – Insurance liabilities continued
The effect of changes in the main assumptions is given in note 39.
Included within portfolio transfers is £287 million reclassified to investment contracts (see note 37) as a result of Prudential Rule No 49
issued by the Australian Prudential Regulation Authority (APRA), which requires further unbundling of certain savings products between
insurance liabilities and investment contracts.
(c) General insurance and health liabilities
Provisions for outstanding claims
Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved
in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the balance sheet date. The reserves for
general insurance and health are based on information currently available; however, it is inherent in the nature of the business written
that the ultimate liabilities may vary as a result of subsequent developments.
Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment
expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE,
as well as claims incurred but not yet reported and associated LAE.
Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business
for which discounted provisions are held:
Rate Mean term of liabilities
Country Class 2006 2005 2006 2005
Netherlands Permanent health and injury 3.61% 3.21% 9years 7years
The net outstanding claims provisions before discounting were £12,768 million (2005: £13,014 million).The period of time which will
elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
Assumptions
Outstanding claims provisions areestimated based on known facts at the date of estimation. Case estimates aregenerally set by
skilled claims technicians, applying their experience and knowledge to the circumstances of individual claims. The ultimate cost of
outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder
and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’spast claims development
experience can be used to project futureclaims development and hence ultimate claims costs. As such, these methods extrapolate the
development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier
years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification
period is also used where this is considered appropriate. Claim development is separately analysed for each geographic area, as well as
by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are
usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect
their future development.
In most cases, no explicit assumptions aremade regarding future rates of claims inflation or loss ratios. Instead, the assumptions used
are those implicit in the historic claims development data on which the projections are based. Additional qualitative judgement is used
to assess the extent to which past trends may not apply in the future, for example, to reflect one-offoccurrences, changes in external
or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as
well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at the estimated ultimate
cost of claims that represents the likely outcome, from the range of possible outcomes, taking account of all the uncertainties involved.
Financial statements continued