Aviva 2007 Annual Report Download - page 185
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Please find page 185 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.38 – Insurance liabilities continued
(b) Long-term business liabilities
(i) Business description
The Group underwrites long-term business in a number of countries as follows:
– In the UK mainly in
– “with-profit” funds of CGNU Life Assurance (CGNU Life), Commercial Union Life Assurance (CULAC) and the
with-profit and Provident Mutual funds of Norwich Union Life & Pensions (NUL&P), where the with-profit policyholders
are entitled to at least 90% of the distributed profits, the shareholders receiving the balance;
– “non-profit” funds of Norwich Union Annuity and NUL&P, where shareholders are entitled to 100% of the distributed
profits. Shareholder profits on unitised with-profit business written by Norwich Union Life & Pensions and on
stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the
non-profit funds.
– In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain
guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of
policies participate in investment returns, with the balance being attributable to shareholders.
– In the Netherlands, the balance of profits, after providing appropriate returns for policyholders and after tax, accrues for
the benefit of the shareholders. The bases for determining returns for policyholders are complex, but are consistent with
methods and criteria followed generally in the Netherlands. In addition, a substantial number of policies provide benefits
that are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived
largely from management fees.
– In the United States, there are two main business segments – protection products and accumulation products.
Protection products include interest-sensitive whole life, term life, universal life and indexed life insurance policies.
The accumulation product segment includes traditional fixed and indexed deferred annuities for individuals and
funding agreements for business customers. In addition, there are two closed blocks of participating contracts arising
from demutualisations of subsidiary companies. All products are classified as insurance contracts except for the funding
agreements and term certain immediate annuities, which are classified as nonparticipating investment contracts.
– In other overseas operations.
(ii) Group practice
The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas
subsidiaries have generally been included on the basis of local regulatory requirements, mainly using the net premium
method, modified where necessary to reflect the requirements of the Companies Act.
Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions
where there is discretion over these. In turn, the assumptions used depend on the circumstances prevailing in each of the
life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates.
Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are
included in the movements in the long-term business provision.
(iii) Methodology and assumptions
There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts – the net
premium method and the gross premium method – both of which involve the discounting of projected premiums
and claims.
Under the net premium method, the premium taken into account in calculating the provision is determined actuarially,
based on the valuation assumptions regarding discount rates, mortality and disability. The difference between this
premium and the actual premium payable provides a margin for expenses. This method does not allow for voluntary early
termination of the contract by the policyholder, and so no assumption is required for persistency. Explicit provision is made
for vested bonuses (including those vesting following the most recent fund valuation), but no such provision is made for
future regular or terminal bonuses. However, this method makes implicit allowance for future regular or terminal bonuses
already earned, by margins in the valuation discount rate used.
The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for
interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by
contract type and reflect current and expected future experience. Explicit provision is made for vested bonuses and
explicit allowance is also made for future regular bonuses, but not terminal bonuses.
Aviva plc
Annual Report and
Accounts 2007
181
Financial
statements