Aviva 2013 Annual Report Download - page 189

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
187
Notes to the consolidated financial statements continued
41 – Insurance liabilities continued
(b) Long-term business liabilities
(i) Business description
The Group underwrites long-term business in a number of countries as follows:
 In the UK mainly in:
– New With-Profits sub-fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at
least 90% of the distributed profits, the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not
distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account
(RIEESA) (see below).
– Old With-Profits sub-fund (OWPSF), With-Profits sub-fund (WPSF) and Provident Mutual sub-fund (PMSF) of UKLAP, where the
with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance.
– ‘Non-profit’ funds of Aviva Annuity UK and UKLAP, where shareholders are entitled to 100% of the distributed profits.
Shareholder profits on unitised with-profit business written by WPSF and on stakeholder unitised with-profit business are derived
from management fees and policy charges, and emerge in the non-profit funds.
– The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these
cannot be distributed until the ‘lock-in’ criteria set by the Reattribution Scheme have been met. RIEESA will be used to write
non-profit business and also to provide capital support to NWPSF.
 In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain
guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies
participate in investment returns, with the balance being attributable to shareholders.
 In other operations in Europe and Asia, a range of long-term insurance and savings products are written.
(ii) Group practice
The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas
subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the
requirements of the Companies Act 2006.
Material judgment is required in calculating the provisions and is exercised particularly through the choice of assumptions
where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations.
Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates. Where discount rate
assumptions are based on current market yields on fixed interest securities, allowance is made for default risk implicit in the yields
on the underlying assets.
Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included
in the movements in the long-term business provision.
For UK with-profit life funds falling within the scope of the PRA realistic capital regime, and hence FRS 27, an amount may be
recognised for the present value of future profits (PVFP) on non-participating business written in a with-profit fund where the
determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. For our
UK with-profit funds, no adjustment for this value is made to the participating insurance and investment contract liabilities or the
unallocated divisible surplus.
(iii) Methodology and assumptions
There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts – the net premium
method and the gross premium method – both of which involve the discounting of projected premiums and claims.
Under the net premium method, the premium taken into account in calculating the provision is determined actuarially, based
on the valuation assumptions regarding discount rates, mortality and disability. The difference between this premium and the
actual premium payable provides a margin for expenses. This method does not allow for voluntary early termination of the contract
by the policyholder, and so no assumption is required for persistency.
The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest
and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and
reflect current and expected future experience.
(a) UK
With-profit business
The valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet, adjusted to remove the
shareholders’ share of future bonuses. The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve
(WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-
related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities.
The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums
paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.
For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and
final bonuses.
The items included in the cost of future policy-related liabilities include:
 Maturity Guarantees;
 Guarantees on surrender, including no-MVR Guarantees and Guarantees linked to inflation;
 Guaranteed Annuity Options;
 GMP underpin on Section 32 transfers; and
 Expected payments under Mortgage Endowment Promise.