Aviva 2002 Annual Report Download - page 95

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38 – Long-term business provision continued
For unitised with-profit business, the provisions are valued initially by determining the lower of the current non-guaranteed surrender
value and the bid value of units. This result is then compared with a prospective valuation and the higher result is taken.
The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the
option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the
proportion of policyholders who will choose to exercise the option.
Interest % Mortality tables used
France
Life assurances:
Up to eight years 3.5 to 4.5 TD 88/90
Eight years and over 2.5 to 3.5 TD 88/90
Annuities 2.5 to 4.5 TPRV (prospective table)
Netherlands
Life assurances 3 to 4 GBM 61-65, 76-80, 80-85
GBM/V 85-90, 90-95
Annuities in deferment and in payment 3 to 4 GBM/V 76-80, 80-85, 85-90,
90-95, Coll 1993 and DIL 98
plus further allowance for future mortality improvement
In all countries, local generally accepted interest rates and published standard mortality tables are used for different categories of
business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
39 – Provisions for outstanding claims
(a) The ultimate cost of general business outstanding claims is estimated by using a range of standard actuarial claims projection
techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. Such methods extrapolate the development of paid and
incurred claims, average costs per claim and ultimate claim numbers for each accident year, based upon the observed development of
earlier years and expected loss ratios. The main assumption underlying these techniques is that past claims development experience
can be used to project ultimate claims costs. Judgement is used to assess the extent to which past trends may not apply in future, for
example to reflect public attitudes to claiming, economic conditions or varying levels of claims inflation. The approach adopted takes into
account, inter alia, the nature and materiality of the business and the type of data available. Large claims are usually separately assessed,
either by being measured at case estimate face value or separately projected in order to reflect their future development. Case estimates
are generally set by skilled claims technicians applying their experience and knowledge to the circumstances of individual claims.
Additional qualitative input, such as allowance for one-off occurrences or changes in legislation, policy conditions or portfolio mix, is also
used in arriving at the estimated ultimate cost of claims, in order that it represents the most likely outcome, from a range of possible
outcomes, taking account of all the uncertainties involved.
Provisions are calculated allowing for reinsurance recoveries and a separate asset is recorded for the reinsurers’ share, having regard
to collectability.
(b) Claims on certain classes of business are discounted as follows:
Rate Mean term of liabilities
Class 2002 2001 2002 2001
Netherlands Permanent health and injury 3.5% 3.5% 12 years 12 years
Net of reinsurers’ share, the outstanding claims provisions before discounting were £9,508 million (2001: £9,700 million). The period of
time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims
and related reinsurance recoveries.
40 – Equalisation provision
An equalisation provision has been established in the Group accounts as explained in accounting policy T on page 46. This had the effect
of reducing Group and Company shareholders’ funds by £314 million at the year end (2001: £272 million). The change in the
equalisation provision during the year comprised a reduction of £57 million (2001: £56 million) in the balance on the general business
technical account and the profit on ordinary activities before tax, offset by £15 million representing the equalisation provision of a
subsidiary company sold during the year.
81 Aviva plc
Annual report + accounts 2002