Aviva 2009 Annual Report Download - page 216

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Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
38 – Insurance liabilities continued
No adjustments are made to the claims technicians’ case estimates included in booked claim provisions, except for rare occasions
when the estimated ultimate cost of a large or unusual claim may be adjusted, subject to internal reserve committee approval,
to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then
estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson
methods. The main assumption underlying these techniques is that a company’s past claims development experience can be used
to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid
and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected
loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also
used where this is considered appropriate.
Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of
business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed,
either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future
development.
The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio
assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative
judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off
occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims
inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling
procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range
of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result
in the quantification of a reserve range.
However, the following explicit assumptions are made which could materially impact the level of booked net reserves:
UK mesothelioma claims
The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail
nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group’s latent claims. The key assumptions
underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average
cost of claims, legal fees and the life expectancy of potential sufferers.
The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be
derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower
scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £195 million greater
than the best estimate, or £155 million lower than the best estimate. These scenarios do not, however, constitute an upper or
lower bound on these liabilities.
Interest rates used to discount latent claim liabilities
The discount rates used in determining our latent claim liabilities are based on the relevant swap curve in the relevant currency at
the reporting date, having regard to the duration of the expected settlement of latent claims. The range of discount rates used is
shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2009, it is estimated
that a 1% fall in the discount rates used would increase net claim reserves by approximately £60 million, excluding the offsetting
effect on asset values as assets are not hypothecated across classes of business. The impact of a 1% fall in interest rates across all
assets and liabilities of our general insurance and health businesses is shown in note 56(i).
Allowance for risk and uncertainty
The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit
reserve uncertainty distributions. The reserve estimation basis for non-life claims adopted by the Group at 31 December 2009
requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments,
plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in
accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to
each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure
that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.
Changes to claims development patterns can materially impact the results of actuarial projection techniques. However,
allowance for the inherent uncertainty in the assumptions underlying reserving projections is automatically allowed for in the
explicit allowance for risk and uncertainty included when setting booked reserves.