Aviva 2007 Annual Report Download - page 186
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Please find page 186 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
(a) UK
With-profit business the valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet,
adjusted to remove the shareholders’ share of future bonuses. The key elements of the Realistic Balance Sheet
methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in
excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal
to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally
calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for
investment return, taxation, expenses and any other charges levied on the contract.
For a small proportion of business, the retrospective approach is not available or is inappropriate, so a prospective valuation
approach is used instead, including allowance for anticipated future regular and final bonuses.
The items included in the cost of future policy-related liabilities include:
– Maturity Guarantees;
– Smoothing (which can be negative);
– Guaranteed Annuity Options;
– GMP underpin on Section 32 transfers; and
– Expected payments under Mortgage Endowment Promise.
In the Provident Mutual and With-Profit sub-funds in NUL&P, this is offset by the expected cost of charges to WPBR to be
made in respect of guarantees.
The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based
on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions
(for example, persistency, mortality and expenses) are based on experience, adjusted to take into account future trends.
Where policyholders have valuable guarantees, options or promises, then future persistency is assumed to improve, and
future take-up rates of guaranteed annuity options are assumed to increase.
The principal assumptions underlying the cost of future policy related liabilities are as follows:
Future investment return A “risk-free” rate equal to the spot yield on gilts, plus a margin of 0.1% is used. The rates
vary, according to the outstanding term of the policy, with a typical rate as at 31 December 2007 being 4.72% for a policy
with ten years outstanding.
Volatility of investment return Volatility assumptions are set with reference to implied volatility data on traded market
instrument, where available. Specimen values based on the average term of the liabilities are as follows:
Volatility
2007 2006
Equities 25% (NUL&P)/23.5% (other WP funds) 17% (for UK stocks)
Property 15% 15%
Gilts 3.75% 3.25% (NUL&P)/ 4.5% (other WP funds)
Corporate bonds 5.75% 5.25% (NUL&P)/6.5% (other WP funds)
Future regular bonuses Annual bonus assumptions for 2008 have been set consistently with the year end 2007
declaration. Future annual bonus rates reflect the principles and practices of the fund. In particular, the level is set with
regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent
with past practice.
Mortality Mortality assumptions are set with regard to recent company experience and general industry trends. Most
assumptions are unchanged from 2006 but for some endowment and whole life business the basis has been
strengthened although the base mortality tables are unchanged.
Mortality table used
2007 2006
Assurances, pure endowments and deferred Nil or AM92/AF92 Nil or AM92/AF92
annuities before vesting
Pensions business after vesting and pensions PCMA00/PCFA00 PCMA00/PCFA00
annuities in payment adjusted plus allowance adjusted plus allowance
for future mortality for future mortality
improvement improvement
Non-profit business Conventional non-profit contracts, including those written in the with-profit funds, are valued using
gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of
contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates,
mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and
expected future experience.
Aviva plc
Annual Report and
Accounts 2007
182
Financial
statements
Notes to the consolidated financial statements continued