Aviva 2013 Annual Report Download - page 118

Aviva plc
Annual report and accounts 2013
116
Accounting policies continued
Unallocated divisible surplus
In certain participating long-term insurance and investment
business, the nature of the policy benefits is such that the
division between shareholder reserves and policyholder liabilities
is uncertain. Amounts whose allocation to either policyholders
or shareholders has not been determined by the end of the
financial year are held within liabilities as an unallocated divisible
surplus.
If the aggregate carrying value of liabilities for a particular
participating business fund is in excess of the aggregate carrying
value of its assets, then the difference is held as a negative
unallocated divisible surplus balance, subject to recoverability
from margins in that fund’s participating business. Any excess
of this difference over the recoverable amount is charged to net
income in the reporting period.
Embedded derivatives
Embedded derivatives that meet the definition of an insurance
contract or correspond to options to surrender insurance
contracts for a set amount (or based on a fixed amount and an
interest rate) are not separately measured. All other embedded
derivatives are separated and measured at fair value if they are
not considered as closely related to the host insurance contract
or do not meet the definition of an insurance contract. Fair
value reflects own credit risk to the extent the embedded
derivative is not fully collateralised.
Liability adequacy
At each reporting date, an assessment is made of whether the
recognised long-term business provisions are adequate, using
current estimates of future cash flows. If that assessment shows
that the carrying amount of the liabilities (less related assets) is
insufficient in light of the estimated future cash flows, the
deficiency is recognised in the income statement by setting up
an additional provision in the statement of financial position.
General insurance and health provisions
Outstanding claims provisions
General insurance and health outstanding claims provisions are
based on the estimated ultimate cost of all claims incurred but
not settled at the statement of financial position date, whether
reported or not, together with related claims handling costs.
Significant delays are experienced in the notification and
settlement of certain types of general insurance claims,
particularly in respect of liability business, including
environmental and pollution exposures, the ultimate cost of
which cannot be known with certainty at the statement of
financial position date. As such, booked claim provisions for
general insurance and health insurance are based on the best
estimate of the cost of future claim payments plus an explicit
allowance for risk and uncertainty. Any estimate represents a
determination within a range of possible outcomes. Further
details of estimation techniques are given in note 41(c).
Provisions for latent claims are discounted, using rates based
on the relevant swap curve, in the relevant currency at the
reporting date, having regard to the expected settlement dates
of the claims. The discount rate is set at the start of the
accounting period with any change in rates between the start
and end of the accounting period being reflected below
operating profit as an economic assumption change. The range
of discount rates used is described in note 41(c)(ii). Outstanding
claims provisions are valued net of an allowance for expected
future recoveries. Recoveries include non-insurance assets that
have been acquired by exercising rights to salvage and
subrogation under the terms of insurance contracts.
Provision for unearned premiums
The proportion of written premiums, gross of commission
payable to intermediaries, attributable to subsequent periods is
deferred as a provision for unearned premiums. The change in
this provision is taken to the income statement as recognition of
revenue over the period of risk.
Liability adequacy
At each reporting date, the Group reviews its unexpired risks
and carries out a liability adequacy test for any overall excess of
expected claims and deferred acquisition costs over unearned
premiums, using the current estimates of future cash flows
under its contracts after taking account of the investment return
expected to arise on assets relating to the relevant general
business provisions. If these estimates show that the carrying
amount of its insurance liabilities (less related deferred
acquisition costs) is insufficient in light of the estimated future
cash flows, the deficiency is recognised in the income statement
by setting up a provision in the statement of financial position.
Other assessments and levies
The Group is subject to various periodic insurance-related
assessments or guarantee fund levies. Related provisions are
established where there is a present obligation (legal or
constructive) as a result of a past event. Such amounts are not
included in insurance liabilities but are included under
‘Provisions’ in the statement of financial position.
(M) Non-participating investment
contract liabilities
Claims
For non-participating investment contracts with an account
balance, claims reflect the excess of amounts paid over the
account balance released.
Contract liabilities
Deposits collected under non-participating investment contracts
are not accounted for through the income statement, except for
the investment income attributable to those contracts, but are
accounted for directly through the statement of financial
position as an adjustment to the investment contract liability.
The majority of the Group’s contracts classified as non-
participating investment contracts are unit-linked contracts and
are measured at fair value. Certain liabilities for non-linked non-
participating contracts are measured at amortised cost.
The fair value liability is determined in accordance with IAS
39, using a valuation technique to provide a reliable estimate
of the amount for which the liability could be transferred in
an orderly transaction between market participants at the
measurement date, subject to a minimum equal to the
surrender value. For unit-linked contracts, the fair value liability
is equal to the current unit fund value, plus additional non-unit
reserves if required based on a discounted cash flow analysis.
For non-linked contracts, the fair value liability is based on a
discounted cash flow analysis, with allowance for risk calibrated
to match the market price for risk.
Amortised cost is calculated as the fair value of
consideration received at the date of initial recognition, less the
net effect of payments such as transaction costs and front-end
fees, plus or minus the cumulative amortisation (using the
effective interest rate method) of any difference between that
initial amount and the maturity value, and less any write-down
for surrender payments. The effective interest rate is the one
that equates the discounted cash payments to the initial
amount. At each reporting date, the amortised cost liability is
determined as the value of future best estimate cash flows
discounted at the effective interest rate.
(N) Reinsurance
The Group assumes and cedes reinsurance in the normal course
of business, with retention limits varying by line of business.
Premiums on reinsurance assumed are recognised as revenue
in the same manner as they would be if the reinsurance were
considered direct business, taking into account the product