Aviva 2009 Annual Report Download - page 136

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Aviva plc Accounting policies continued
Annual Report and Accounts 2009
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. For liabilities relating to UK with-profit contracts, the Group has adopted FRS 27,
Life Assurance , as described in
policy F above, in addition to the requirements of IFRS.
In the United States, shadow adjustments are made to the liabilities or related deferred acquisition costs and are recognised
directly in other comprehensive income. 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 other comprehensive income,
in the same way as if those gains or losses had been realised.
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 funds, 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 UK 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 in the statement of financial position, 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.
If the aggregate carrying value of liabilities for a particular participating business fund is in excess of the aggregate carrying
value of its assets, then the difference is held as a negative unallocated divisible surplus balance, subject to recoverability from
margins in that fund’s participating business. Any excess of this difference over the recoverable amount is charged to net income
in the reporting period.
Embedded derivatives
Embedded derivatives that meet the definition of an insurance contract or correspond to options to surrender insurance contracts
for a set amount (or based on a fixed amount and an interest rate) are not separately measured. All other embedded derivatives
are separated and measured at fair value, if they are not considered as closely related to the host insurance contract or do not
meet the definition of an insurance contract. Fair value reflects own credit risk to the extent the embedded derivative is not fully
collateralised.
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 light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up an
additional provision in the statement of financial position.
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 statement of financial position 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 statement of financial position date. Any estimate represents a determination within a range of possible outcomes. Further
details of estimation techniques are given in note 38(c).
Provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency
at the reporting date, having regard to the expected settlement dates of the claims. The discount rate is set at the start of the
accounting period with any change in rates between the start and end of the accounting period being reflected below operating
profit as an economic assumption change. The range of discount rates used is described 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.