Aviva 2013 Annual Report Download - page 201

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
199
Notes to the consolidated financial statements continued
43 – Financial guarantees and options continued
‘No MVR’ guarantees
Certain unitised with-profit policies containing ‘no MVR’ guarantees, similar to those in the UK, have been sold in Ireland.
These guarantees are currently ‘in-the-money’ by £0.2 million (2012: £0.4 million). This has been calculated on a deterministic
basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees.
The value of these guarantees is usually sensitive to the performance of investments held in the with-profit fund. Amounts payable
under these guarantees are determined by the bonuses declared on these policies. There is no sensitivity to either interest rates
or equity markets since there is no longer any exposure to equity in these funds and a matching strategy has been implemented
for bonds.
(iii) Spain and Italy
Guaranteed investment returns and guaranteed surrender values
The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain
and Italy. Traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis,
subject to a guaranteed minimum annual return of up to 6% in Spain and up to 4% in Italy on existing business, while on new
business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required,
an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2013, total liabilities for the
Spanish business were £1 billion (2012: £3 billion) with a further reserve of £0.1 million (2012: £0.1 million) for guarantees. Total
liabilities for the Italian business were £11 billion (2012: £10 billion), with a further provision of £43 million (2012: £45 million) for
guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees
would need to increase by £7 million (2012: £5 million) in Spain and £0 million (2012: £1 million) in Italy if interest rates fell by 1%
from end 2013 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-
term market interest rate of 2.34% and no lapses or premium discontinuances.
(d) Sensitivity
In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including
foreign currency exchange rates, interest rates, real estate prices and equity prices. Interest rate guaranteed returns, such as those
available on GAOs, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value
guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the
level assumed when the guarantee was made.
44 – Reinsurance assets
This note details the reinsurance recoverables on our insurance and investment contract liabilities.
(a) Carrying amounts
The reinsurance assets at 31 December comprised:
2013
£m
2012
£m
Long-term business
Insurance contracts 3,734 4,291
Participating investment contracts 2 3
Non-participating investment contracts1 2,048 1,678
5,784 5,972
Outstanding claims provisions 53 93
5,837 6,065
General insurance and health
Outstanding claims provisions 849 900
Provisions for claims incurred but not reported 315 354
1,164 1,254
Provisions for unearned premiums 256 248
1,420 1,502
7,257 7,567
Less: Amounts classified as held for sale (37) (883)
Total 7,220 6,684
1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial
instruments measured at fair value through profit or loss.
Of the above total, £5,553 million (2012: £5,251 million) is expected to be recovered more than one year after the statement of
financial position date.
(b) Assumptions
The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts. Reinsurance
assets are valued net of an allowance for their recoverability.