Aviva 2009 Annual Report Download - page 137

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Performance review
Aviva plc Accounting policies continued
Corporate responsibility
Annual Report and Accounts 2009
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
(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 as recognition of revenue
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 statement of financial position.
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 statement of financial position.
(L) Non-participating investment contract liabilities
Claims
For non-participating investment contracts with an account balance, claims reflect the excess of amounts paid over the account
balance released.
Contract liabilities
Deposits collected under non-participating investment contracts are not accounted for through the income statement, except for
the investment income attributable to those contracts, but are accounted for directly through the statement of financial position
as an adjustment to the investment contract liability.
The majority of the Group’s contracts classified as non-participating investment contracts are unit-linked contracts and are
measured at fair value. Certain liabilities for non-linked non-participating contracts are measured at amortised cost.
The fair value liability is determined in accordance with IAS 39, using a valuation technique to provide a reliable estimate of
the amount for which the liability could be settled between knowledgeable willing parties in an arm’s length transaction. For unit-
linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required based on
a discounted cash flow analysis. For non-linked contracts, the fair value liability is based on a discounted cash flow analysis, with
allowance for risk calibrated to match the market price for risk.
Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of
payments such as transaction costs and front-end fees, plus or minus the cumulative amortisation (using the effective interest rate
method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments.
The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the
amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate.
(M) Reinsurance
The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business.
Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were
considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related
to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with
those used to account for these policies.
Where general insurance liabilities are discounted, any corresponding reinsurance assets are also discounted using consistent
assumptions.
Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase
and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income
statement and statement of financial position as appropriate.
Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance
liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or
settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
Reinsurance contracts that principally transfer financial risk are accounted for directly through the statement of financial
position and are not included in reinsurance assets or liabilities. A deposit asset or liability is recognised, based on the consideration
paid or received less any explicitly identified premiums or fees to be retained by the reinsured.
If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in
the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after
initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract,
and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
Financial statements IFRS