Aviva 2006 Annual Report Download - page 179

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Aviva plc
Annual Report and Accounts 2006 175
38 – Financial guarantees and options
As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return
guarantees, in respect of certain long-term insurance and fund management products. Further information on assumptions is given in
notes 35 and 37.
(a) UK Life with-profit business
In the UK, life insurers are required to comply with the FSA’s realistic reporting regime for their with-profit funds for the calculation of
FSA liabilities. Under the FSA’s rules, provision for guarantees and options within realistic liabilities must be measured at fair value, using
market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which
represents the additional cost arising from uncertainty surrounding future economic conditions.
The material guarantees and options to which this provision relates are:
(i) Maturity value guarantees – Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit
business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has
offered maturity value guarantees on certain unit-linked products.
(ii) No market valuation reduction (MVR) guarantees – For unitised business, there are a number of circumstances where a “no MVR”
guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect
the difference between the accumulated value of units and the market value of the underlying assets.
(iii) Guaranteed annuity options – The Group’s UK with-profit funds have written individual and group pension contracts which contain
guaranteed annuity rate options (GAOs), wherethe policyholder has the option to take the benefits from a policy in the form of an
annuity based on guaranteed conversion rates. The Group also has exposureto GAOs and similar options on deferred annuities.
(iv) Guaranteed minimum pension – The Group’s UK with-profit funds also have certain policies that contain a guaranteed minimum level
of pensions as part of the condition of the original transfer from state benefits to the policy.
In addition, while these do not constitute guarantees, the with-profit fund companies have made promises to certain policyholders in
relation to their with-profit mortgage endowments. Subject to certain conditions, top-up payments will be made on these policies at
maturity to meet the mortgage value up to a maximum of the 31 December 1999 illustrated shortfall.
(b) UK Life non-profit business
The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, including changes introduced in 2006 under FSA
Policy Statement 06/14 Prudential Changes for Insurers,as outlined in note 35(b)(iii)(a).
(i) Guaranteed annuity options – Similar options to those written in the with-profit fund have been written in relation to non-profit
products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and
amounts to £39 million at 31 December 2006 (2005: £44 million).
(ii) Guaranteed unit price on certain products – Certain unit-linked pension products linked to long-term life insurance funds provide
policyholders with guaranteed benefits at retirement or death. No additional provision is made for this guarantee as the investment
management strategy for these funds is designed to ensurethat the guarantee can be met from the fund, mitigating the impact of
large falls in investment values and interest rates.