Aviva 2013 Annual Report Download - page 203

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
201
Notes to the consolidated financial statements continued
45 – Effect of changes in assumptions and estimates during the year
Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were
changed from 2012 to 2013, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses
the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible
surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing
financial assets.
Effect on
profit 2013
£m
Effect on
profit 2012
£m
Assumptions
Long-term insurance business
Interest rates 1,389 (515)
Expenses 3 11
Persistency rates (1) —
Mortality for assurance contracts 8 —
Mortality for annuity contracts 85 241
Tax and other assumptions 20 (207)
Investment contracts
Interest rates — (2)
Expenses — (1)
Persistency rates — —
Tax and other assumptions — —
General insurance and health business
Change in loss ratio assumptions 3 —
Change in discount rate assumptions 33 (21)
Change in expense ratio and other assumptions — (21)
Total 1,540 (515)
The impact of interest rates for long-term business relates primarily to the UK and Ireland driven by the increase in valuation
interest rates. This had the effect of decreasing liabilities and hence a positive impact on profit. The overall impact on profit also
depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. The impact of
annuitant mortality assumptions relates to a slight weakening of annuitant mortality assumptions in the UK and Ireland. Mortality
assumptions in the UK and Ireland are reviewed each year, and updated to reflect recent experience.
46 – Unallocated divisible surplus
An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between
shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore the expected duration for settlement
of the UDS is not defined.
The following movements have occurred in the year:
2013
£m
2012
£m
Carrying amount at 1 January 6,986 650
Change in participating contract assets (262) 6,140
Change in participating contract liabilities (22) 253
Other movements 4 (77)
Change in liability recognised as an expense (280) 6,316
Effect of portfolio transfers, acquisitions and disposals (115) 1
Foreign exchange rate movements 118 24
Other movements — (5)
Carrying amount at 31 December 6,709 6,986
Less: Amounts classified as held for sale 4 (55)
6,713 6,931
Following the reversal of previous losses in Italy and Spain, all Italian participating funds at 31 December 2013 have a positive UDS
balance with the exception of Eurovita (which is held for sale) and a number of smaller funds in Italy. In Spain, all participating
funds had positive UDS balances at 31 December 2013.
Negative UDS balances result from an accounting mismatch between participating assets carried at market value and
participating liabilities measured using local practice. The negative balances are tested for recoverability using embedded value
methodology and in line with local accounting practice. Testing is conducted at a participating fund-level within each life entity.
The negative balances are considered to be recoverable from margins in the existing participating business liabilities.
In Italy the estimation of the recoverable negative UDS balance uses a real-world embedded value method, with a risk-discount
rate of 6.6% (2012: 6.25%). The embedded value method includes implicit allowance for the time value of options and
guarantees. In Spain, the estimation of the recoverable negative UDS balance uses a market-consistent embedded value method.
At 31 December 2013 there was no negative UDS in Spain and consequently testing was not required. The carrying value of
UDS was £132 million positive (2012: £95 million positive in aggregate, though certain funds had a negative UDS balance totalling
£39 million).
At 31 December 2013, the negative UDS balances in Italy were tested for recoverability and £42 million (£39 million Eurovita)
of negative UDS was considered irrecoverable (2012: £130 million, £108 million Eurovita). The remaining carrying value of negative
UDS in Italy is £5 million, of which £4 million is in Eurovita. The aggregate UDS balance was £205 million positive at 31 December
2013 (2012: £2 million negative).