Aviva 2009 Annual Report Download - page 247

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Performance review
Aviva plc Notes to the consolidated financial statements continued
Corporate responsibility
Annual Report and Accounts 2009
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
51 – Contingent liabilities and other risk factors
This note sets out the main areas of uncertainty over the calculation of our liabilities.
(a) Uncertainty over claims provisions
Note 38 gives details of the estimation techniques used by the Group to determine the general business outstanding claims
provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches
are designed to allow for the appropriate cost of future policy-related liabilities, with a degree of prudence, to give a result within
the normal range of outcomes. To the extent that the ultimate cost falls outside this range, for example where experience is
worse than that assumed, or future general business claims inflation differs from that expected, there is uncertainty in respect
of these liabilities.
(b) Asbestos, pollution and social environmental hazards
In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and
become involved in actual or threatened related litigation arising there from, including claims in respect of pollution and other
environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including
Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential
number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance,
the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of
provisions made for general insurance claims, and the strengthening of latent claims that took place during 2008, the directors
consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.
(c) Guarantees on long-term savings products
As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate
guarantees, in respect of certain long-term insurance and fund management products. Note 40 gives details of these guarantees
and options. In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables
including foreign currency exchange rates, interest rates, property values and equity prices. Interest rate guaranteed returns, such
as those available on guaranteed annuity options (GAOs), are sensitive to interest rates falling below the guaranteed level. Other
guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations
in the investment return below the level assumed when the guarantee was made. The directors continue to believe that the
existing provisions for such guarantees and options are sufficient.
(d) Pensions mis-selling
The pensions review of past sales of personal pension policies which involved transfers, opt outs and non-joiners from occupational
schemes, as required by the Financial Services Authority (FSA), has largely been completed.
A provision of some £16 million at 31 December 2009
(2008: £18 million, 2007: £23 million) remains to meet the outstanding
costs of the very few remaining cases, the anticipated cost of any guarantees provided, and potential levies payable to the Financial
Services Compensation Scheme. It continues to be the directors’ view that there will be no material effect either on the Group’s
ability to meet the expectations of policyholders or on shareholders.
(e) Endowment reviews
In December 1999, the FSA announced the findings of its review of mortgage endowments and expressed concern as to whether,
given decreases in expected future investment returns, such policies could be expected to cover full repayment of mortgages.
A key conclusion was that, on average, holders of mortgage endowments had enjoyed returns such that they had fared at least
as well as they would have done without an endowment. Nevertheless, following the FSA review, all of the Group’s UK
mortgage endowment policyholders received policy-specific letters advising them whether their investment was on track
to cover their mortgage.
In May 2002, in accordance with FSA requirements, the Group commenced sending out the second phase of endowment
policy update letters, which provide policyholders with information about the performance of their policies and advice as to
whether these show a projected shortfall at maturity. The Group will send these updates annually to all mortgage endowment
holders, in accordance with FSA requirements. The Group has made provisions totalling £25 million at 31 December 2009
(2008: £38 million, 2007: £96 million) to meet potential mis-selling costs and the associated expenses of investigating complaints.
It continues to be the directors’ view that there will be no material effect either on the Group’s liability to meet the expectations
of policyholders or on shareholders.
In August 2004, the Group confirmed its intention to introduce time barring on mortgage endowment complaints, under FSA
rules. The Group now includes details of its endowment policyholders’ time bar position within the annual re-projection mailings.
Customers will be given at least 12 months’ individual notice before a time bar becomes applicable – double the six months’ notice
required by the FSA.
Financial statements IFRS