Aviva 2006 Annual Report Download - page 177

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 173
36 – Reinsurance assets continued
(iii) Reinsurers’ share of the provision for unearned premiums (UPR)
2006 2005
£m £m
Carrying amount at 1 January 482 398
Premiums ceded to reinsurers in the year 726 706
Less: Reinsurers’ share of premiums earned during the year (722) (612)
Other movements –(1)
Changes in reinsurance asset recognised as income 493
Reinsurers’ share of portfolio transfers and acquisitions 1(6)
Foreign exchange rate movements (3) 2
Other movements –(5)
Carrying amount at 31 December 484 482
37 – Liability for investment contracts
(a) Carrying amount
The liability for investment contracts at 31 December comprised:
2006 2005
£m £m
Long-term business
Participating contracts 49,400 47,258
Non-participating contracts at fair value 38,081 29,304
Non-participating contracts at amortised cost 877 747
38,958 30,051
Total 88,358 77,309
(b) Long-term business investment liabilities
Investment contracts arethose that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore
treated as financial instruments under IFRS.
Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive
additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according
to the methodology and group practice for long-term business liabilities as described in note 35. They are not measured at fair value
as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a
definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration
of participating contracts to Phase II of its insurance contracts project.
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified
as a liability, referred to as unallocated distributable surplus. Guarantees on long-term investment products are discussed in note 38.
Investment contracts that do not contain a discretionary participation featureare referred to as non-participating contracts and the liability
is measured at either fair value or amortised cost.
Most non-participating investment contracts measured at fair value are unit-linked in structure and the fair value liability is equal to
the unit reserve plus additional non-unit reserves if required on a fair value basis. For this business, a deferred acquisition cost asset
and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the
provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount
of the related deferred acquisition cost asset is shown in note 25 and the deferred income liability is shown in note 45.
In the United States, funding agreements consist of one to ten year fixed rate contracts. These contracts may not be cancelled by the
holders unless there is a default under the agreement, but may be terminated by Aviva at any time. The weighted average interest rates
for fixed-rate and floating-rate funding agreements in 2006 were5.07% and 5.55%, respectively. The funding agreements are measured
at fair value equal to the present value of contractual cash flows.
There is a small volume of annuity certain business for which the liability is measured at amortised cost using the effective interest method.
The fair value of contract liabilities measured at amortised cost is not materially different from the amortised cost liability.