Aviva 2009 Annual Report Download - page 222

220
Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
40 – Financial guarantees and options
This note details the financial guarantees and options we have given for some of our insurance and investment products.
As a normal part of their operating activities, various Group companies have given guarantees and options, including
investment return guarantees, in respect of certain long-term insurance and fund management products. Further information
on assumptions is given in notes 38 and 39.
(a) UK Life with-profit business
In the UK, life insurers are required to comply with the FSA’s realistic reporting regime for their with-profit funds for the calculation
of FSA liabilities. Under the FSA’s rules, provision for guarantees and options within realistic liabilities must be measured at fair
value, using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and
options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
The material guarantees and options to which this provision relates are:
(i) Maturity value guarantees
Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum
maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has offered maturity value
guarantees on certain unit-linked products. For some unitised with-profit life contracts the amount paid after the fifth policy
anniversary is guaranteed to be at least as high as the premium paid increased in line with the rise in RPI/CPI.
(ii) No market valuation reduction (MVR) guarantees
For unitised business, there are a number of circumstances where a “no MVR” guarantee is applied, for example on certain policy
anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the accumulated value
of units and the market value of the underlying assets.
(iii) Guaranteed annuity options
The Group’s UK with-profit funds have written individual and group pension contracts which contain guaranteed annuity rate
options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on
guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities.
Realistic liabilities for GAOs in the UK with-profit funds were £760 million at 31 December 2009
(2008: £1,093 million,
2007: £1,161 million)
. With the exception of the New With-Profits Sub Fund (NWPSF), movements in the realistic liabilities in the
with-profit funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit.
Realistic liabilities for GAOs in the NWPSF were £109 million at 31 December 2009
(2008 and 2007: not applicable) .
(iv) Guaranteed minimum pension
The Group’s UK with-profit funds also have certain policies that contain a guaranteed minimum level of pensions as part of the
condition of the original transfer from state benefits to the policy.
In addition, the with-profit fund companies have made promises to certain policyholders in relation to their with-profit
mortgage endowments. Top-up payments will be made on these policies at maturity to meet the mortgage value up to
a maximum of the 31 December 1999 illustrated shortfall. For UKLAP WP policyholders, these payments are subject to
certain conditions.
(b) UK Life non-profit business
The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, including changes introduced in 2006
under FSA Policy Statement 06/14
Prudential Changes for Insurers .
(i) Guaranteed annuity options
Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these
guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £28 million
at 31 December 2009
(2008: £27 million, 2007: £36 million) .
(ii) Guaranteed unit price on certain products
Certain unit-linked pension products linked to long-term life insurance funds provide policyholders with guaranteed benefits at
retirement or death. No additional provision is made for this guarantee as the investment management strategy for these funds
is designed to ensure that the guarantee can be met from the fund, mitigating the impact of large falls in investment values and
interest rates.
(c) Overseas life businesses
In addition to guarantees written in the Group’s UK life businesses, our overseas businesses have also written contracts containing
guarantees and options. Details of the significant guarantees and options provided by overseas life businesses are set out below.
(i) France
Guaranteed surrender value and guaranteed minimum bonuses
Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value
of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the
duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains
on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the
establishment of a reserve, “Provision pour Aléas Financiers” (PAF), when accounting income is less than 125% of guaranteed
minimum credited returns. No PAF was established at the end of 2008.