Aviva 2002 Annual Report Download - page 104

48 – Contingent liabilities and other risk factors
(a) Uncertainty over claims provisions
Note 38 gives details of the assumptions used in determining the long-term business provision which are designed to allow for
prudence and the appropriate emergence of surpluses to pay future bonuses. Note 39 gives details of the estimation techniques used
in determining the general business outstanding claims provision. Both are estimated to give a result within the normal range of
outcomes. To the extent that the ultimate cost falls outside this range, for example where experience is worse than that assumed for
long-term business, or assumptions over general business claims inflation may alter in the future, there is uncertainty in respect of
this liability.
(b) Asbestos, pollution and social environmental hazards
In the course of conducting insurance business, various companies within the Aviva Group receive general insurance liability claims, and
become involved in actual or threatened litigation arising therefrom, including claims in respect of pollution and other environmental
hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including the United Kingdom,
Australia, Canada and South Africa. Given the significant delays that are experienced in the notification of these claims, the potential
number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the
ultimate cost cannot be determined with certainty. However, the Group’s exposure to such liabilities is not significant and, on the basis of
current information and having regard to the level of provisions made for general insurance claims, the directors consider that any costs
arising are not likely to have a material impact on the financial position of the Group.
(c) Guarantees on long-term savings products
As a normal part of their operating activities, various Group companies have given guarantees, including interest rate guarantees, in
respect of certain long-term insurance and fund management products. In the United Kingdom, in common with other pension and life
policy providers, the Group wrote individual and group pension policies in the 1970s and 1980s with a guaranteed annuity rate option
(“GAO”). Since 1993, such policies have become more valuable to policyholders, and more costly for insurers, as current annuity rates
have fallen in line with interest rates. Reserving policies for the cost of GAOs varied until a ruling by the House of Lords in the Equitable
case in 2000 which effectively required full reserving by all companies. Prior to the ruling, consistent with the Group’s ordinary reserving
practice in respect of such obligations, full reserves for GAOs had already been established. No adjustment was made, or was necessary,
to the Group‘s reserving practice as a result of the ruling. The directors continue to believe that the existing provisions are sufficient.
(d) Pensions mis-selling
The Pensions Review of past sales of personal pension policies which involved transfers, opt outs and non-joiners from occupational
schemes, as required by the Financial Services Authority (“FSA”), has largely been completed. A provision of some £68 million
(2001: £96 million) remains to meet the outstanding costs of the few remaining cases, the anticipated cost of any guarantees provided,
and potential levies payable to the Financial Services Compensation Scheme. It continues to be the directors’ view that there will be no
material effect either on the Group’s ability to meet the expectations of policyholders or on shareholders.
(e) Endowment reviews
In December 1999, the FSA announced the findings of its review of mortgage endowments and expressed concern as to whether, given
decreases in expected future investment returns, such policies could be expected to cover full repayment of mortgages. A key conclusion
was that, on average, holders of mortgage endowments had enjoyed returns such that they had fared at least as well as they would
have done without an endowment. Nevertheless, following the FSA review, all of the Group’s UK mortgage endowment policyholders
received policy-specific letters advising them whether their investment was on track to cover their mortgage.
In May 2002, in accordance with FSA requirements, the Group commenced sending out the second phase of endowment policy update
letters, which provide policyholders with information about the performance of their policies and advice as to whether these show a
projected shortfall at maturity. The Group will continue to send these updates annually to all mortgage endowment holders, in
accordance with FSA requirements. An expense provision of £50 million (2001: £10 million) has been made to meet potential mis-selling
costs and the associated expenses of investigating complaints. It continues to be the directors’ view that there will be no material effect
either on the Group’s liability to meet the expectations of policyholders or on shareholders.
(f) Other
In addition, the Company has guaranteed the overdrafts and borrowings of certain subsidiary and associated undertakings. In the
opinion of the directors, no material loss will arise in respect of these guarantees and indemnities.
49 – Capital commitments
In carrying on the business of investment, the Group has entered into future commitments, including property development, after
31 December 2002. These amounts are not reflected in the consolidated Group balance sheet on pages 52 and 53. The Group has in
hand a number of property developments which, under contracts already signed, will require expenditure of £344 million (2001:
£207 million) for long-term business and £nil (2001: £1 million) for general business operations.
Notes to the accounts continued
90 Aviva plc
Annual report + accounts 2002