Aviva 2009 Annual Report Download - page 214

212
Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
38 – Insurance liabilities continued
Future policy benefit reserves for universal life insurance, deferred annuity products and funding agreements are computed under a
retrospective deposit method and represent policy account balances before applicable surrender charges. For the indexed products,
the liability held is calculated based on the option budget method and is equal to the host contract and the calculated value of the
derivative. The value of the derivative is based on the present value of the difference between the projected fund value and the
underlying fund guarantee. The weighted average interest crediting rates for universal life products were 4.27% in 2009
(2008:
4.77%)
. The range of interest crediting rates for deferred annuity products, excluding sales inducement payouts, was 2.00% to
6.00% in 2009
(2008: 2.50% to 6.00%) . An additional liability is established for universal life contracts with death or other
insurance benefit features, which is determined using an equally-weighted range of scenarios with respect to investment returns,
policyholder lapses, benefit election rates, premium payout patterns and mortality. The additional liability represents the present
value of future expected benefits based on current product assumptions.
The indexed life and annuity products guarantee the return of principal to the customer, and credit interest based on certain
indices. A portion of the premium from each customer is invested in fixed income securities and is intended to cover the minimum
guaranteed value. A further portion of the premium is used to purchase derivatives to hedge the growth in interest credited to the
customer as a direct result of increases in the related indices. Both the derivatives and the options embedded in the policy are
valued at their fair value.
Deferred income reserves are established for fees charged for insurance benefit features which are assessed in a manner that is
expected to result in higher profits in earlier years, followed by lower profits or losses in subsequent years. The excess charges are
deferred and amortised using the same assumptions and factors used to amortise deferred acquisition costs. Shadow adjustments
may be made to deferred acquisition costs, acquired value of in-force business, deferred income reserves and contract liabilities.
The shadow adjustments are recognised directly in other comprehensive income so that unrealised gains or losses on investments
that are recognised directly in other comprehensive income affect the measurement of the liability, or related assets, in the same
way as realised gains or losses.
(e) Other countries
In all other countries, local generally-accepted interest rates and published standard mortality tables are used for different
categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific
groupings of people.
(iv) Movements
The following movements have occurred in the long-term business provisions during the year:
2009 2008
£m £m
Carrying amount at 1 January 156,188 135,312
Provisions in respect of new business 11,105 13,414
Expected change in existing business provisions (7,625) (6,423)
Variance between actual and expected experience 2,154 (9,401)
Effect of adjusting to PS06/14 realistic basis — (40)
Impact of other operating assumption changes (121) (812)
Impact of economic assumption changes (404) (604)
Other movements 1,112 (527)
Change in liability recognised as an expense 6,221 (4,393)
Effect of portfolio transfers, acquisitions and disposals (67) 1,872
Foreign exchange rate movements (8,284) 23,397
154,058 156,188
Carrying amount at 31 December
The variance between actual and expected experience of £2.2 billion was primarily driven by favourable movements in investment
markets in 2009, which had a direct or indirect impact on liability values. Equity markets recovered and the values of corporate
bonds and commercial mortgages were increased by the narrowing of credit spreads. For many types of long-term business,
including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting
the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality
and other demographic factors.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of insurance
liabilities. The £2.2 billion variance between actual and expected experience is not a change in assumptions. For participating
business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does
not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions
and estimates during the year shown in note 42, together with the impact of movements in related non-financial assets.
(c) General insurance and health liabilities
(i) Provisions for outstanding claims
Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in
assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position
date. The reserves for general insurance and health business are based on information currently available. However, it is inherent
in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.