Aviva 2007 Annual Report Download - page 122
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Please find page 122 of the 2007 Aviva annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Long-term business provisions
Under current IFRS requirements, insurance and
participating investment contract liabilities are measured
using accounting policies consistent with those adopted
previously under existing accounting practices, with the
exception of liabilities remeasured to reflect current market
interest rates and those relating to UK with-profit and
non-profit contracts, to be consistent with the value of the
backing assets. In the United States, shadow adjustments
are made to the liabilities or related deferred acquisition
costs and are recognised directly in equity. This means that
the measurement of these items is adjusted for unrealised
gains or losses on the backing assets such as AFS financial
investments (see policy S), that are recognised directly in
equity, in the same way as if those gains or losses had
been realised. The Group has adopted FRS 27, Life
Assurance, for liabilities relating to such contracts, which
adds to the requirements of IFRS but does not vary them
in any way. Further details are given in policy A above.
The long-term business provisions are calculated separately
for each life operation, based either on local regulatory
requirements or existing local GAAP at the later of the date
of transition to IFRS or the date of the acquisition of the
entity, and actuarial principles consistent with those applied
in the UK. Each calculation represents a determination
within a range of possible outcomes, where the
assumptions used in the calculations depend on the
circumstances prevailing in each life operation. The principal
assumptions are disclosed in note 38(b). For liabilities of
the UK with-profit fund, FRS 27 requires liabilities to be
calculated as the realistic basis liabilities as set out by the
UK’s Financial Services Authority, adjusted to remove the
shareholders’ share of future bonuses. For UK non-profit
insurance contracts, the Group applies the realistic
regulatory basis as set out in the FSA Policy Statement
06/14 Prudential Changes for Insurers where applicable.
Present value of future profits (PVFP) on non-
participating business written in a with-profit fund
For with-profit life funds falling within the scope of the
FSA realistic capital regime, and hence FRS 27, an amount
may be recognised for the present value of future profits
on non-participating business written in a with-profit fund
where the determination of the realistic value of liabilities
in that with-profit fund takes account, directly or indirectly,
of this value. This amount is recognised as a reduction in
the liability rather than as an asset on the balance sheet,
and is then apportioned between the amounts that have
been taken into account in the measurement of liabilities
and other amounts which are shown as an adjustment to
the unallocated divisible surplus.
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.
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 the light of the
estimated future cash flows, the deficiency is recognised
in the income statement by setting up an additional
provision in the balance sheet.
General insurance and health provisions
(i) 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 balance sheet 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 balance sheet date. Provisions for certain claims
are discounted, using rates having regard to the returns
generated by the assets supporting the liabilities. Any
estimate represents a determination within a range of
possible outcomes. Further details of estimation techniques
are given in note 38(c).
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.
(ii) 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 in order that revenue is recognised over the
period of risk.
(iii) 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 balance sheet.
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 balance sheet.
Aviva plc
Annual Report and
Accounts 2007
118
Financial
statements
Accounting policies continued