Aviva 2007 Annual Report Download - page 257
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Please find page 257 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.EEV methodology continued
The RDR is only one component of the overall allowance for risk in EEV calculations. Risk is also allowed for in the cost of
holding statutory reserving margins, additional required capital and in the time value of options and guarantees. Hence to
derive the RDR the Group WACC is adjusted to reflect the average level of required capital assumed to be held, and to
reflect the explicit valuation of the time value of options and guarantees.
In order to derive risk discount rates for each of our life businesses, the adjusted Group WACC is expressed as a risk
margin in excess of the gross risk free interest rate used in the WACC calculation as described above. This risk margin is
used for all our main businesses including the US. Business-specific discount rates are then calculated as the sum of this
risk margin and the appropriate local gross risk free rate at the valuation date, based on returns on government bonds.
A common risk free rate, and hence a common RDR, is used for all of our businesses within the Eurozone. Additional
country-specific risk margins are applied to smaller businesses to reflect additional economic, political and business-specific
risk. For example, risk margins ranging from 3.7% to 8.7% are applied to the Group’s eastern European and Asian
operations. Within each business, a constant RDR has been applied in all future time periods and in each of the economic
scenarios underlying the calculation of the time value of options and guarantees.
At each valuation date, the risk margin is reassessed based on current economic factors and is updated only if a significant
change has occurred. In particular, changes in risk profile arising from movements in asset mix are allowed for via the
updated risk margin calculation.
Following the review of the risk margin at 31 December 2006, the Directors decided to leave the life embedded value risk
margin unchanged at 2.7%. The market assessed risk factor (beta) had reduced since the initial risk margin was originally
set, implying a reduction of the risk in the life business. Following the review at 31 December 2007, the Directors have
decided to maintain the life embedded value risk margin at 2.7%. Management will keep the risk margin under review
and will make adjustments as necessary to reflect past trends and future expected trends in the riskiness of the life
business, based on the beta.
The sensitivity disclosures on page 265 indicate the impact to the embedded value that would arise for a change in the
risk discount rate.
Participating business
Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and
expected future returns on assets deemed to back the policies.
For with-profit funds in the UK and Ireland, for the purpose of recognising the value of the estate, it is assumed that
terminal bonuses are increased to exhaust all of the assets in the fund over the future lifetime of the in-force with-profit
policies. However, under stochastic modelling there may be some extreme economic scenarios when the total assets in the
Group’s with-profit funds are not sufficient to pay all policyholder claims. The average additional shareholder cost arising
from this shortfall has been included in the time value of options and guarantees.
For profit sharing business in continental Europe, where policy benefits and shareholder value depend on the timing of
realising gains, apportionment of unrealised gains between policyholders’ benefits and shareholders reflect contractual
requirements as well as existing practice. Where under certain economic scenarios additional shareholder injections are
required to meet policyholder payments, the average additional cost has been included in the time value of options and
guarantees.
Consolidation adjustments
The effect of transactions between our life companies such as loans and reinsurance arrangements has been included
in results split by territory in a consistent manner. No elimination is required on consolidation.
As the EEV methodology incorporates the impact of profits and losses arising from subsidiary companies providing
administration, investment management and other services to the Group’s life companies, the equivalent profits and losses
have been removed from the relevant segment (non insurance or fund management) and are instead included within the
results of life and related businesses. In addition, the underlying basis of calculation for these profits has changed from the
IFRS basis to the EEV basis.
The capitalised value of the future profits and losses from such service companies are included in the embedded value and
new business contribution calculations for the relevant territory, but the net assets (representing historical profits and other
amounts) remain under non insurance or fund management. In order to reconcile the profits arising in the financial period
within each segment with the assets on the opening and closing balance sheets, a transfer of IFRS profits from life and
related business to the appropriate segment is deemed to occur. An equivalent approach has been adopted for expenses
within our holding companies.
Aviva plc
Annual Report and
Accounts 2007
253
Financial
statements