Aviva 2013 Annual Report Download - page 190

Aviva plc
Annual report and accounts 2013
188
Notes to the consolidated financial statements continued
41 – Insurance liabilities continued
The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a
stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example,
persistency, mortality and expenses) are based on experience, adjusted to take into account future trends.
The principal assumptions underlying the cost of future policy-related liabilities are as follows:
Future investment return
A ‘risk-free’ rate equal to the spot yield on UK swaps is used for the valuation of With-Profits business. The rates vary according to
the outstanding term of the policy, with a typical rate as at 31 December 2013 of 3.11% (2012: 1.92 %) for a policy with ten
years outstanding.
Volatility of investment return
Volatility assumptions are set with reference to implied volatility data on traded market instruments, where available, or on a best
estimate basis where not.
Volatilit
y
2013 2012
Equity returns 22.2% 26.3%
Property returns 15.0% 15.0%
Fixed interest yields 16.3% 17.1%
The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a
ten-year term. Fixed interest yield volatility is also dependent on term and money-ness. The figure shown is for a ten-year swap option
with ten-year term, currently at the money.
Future regular bonuses
Annual bonus assumptions for 2014 have been set consistently with the year-end 2013 declaration. Future annual bonus rates reflect
the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the
change from one year to the next is limited to a level consistent with past practice.
Mortality
Mortality assumptions for with-profit business are set with regard to recent Company experience and general industry trends.
The mortality tables used in the valuation are summarised below:
Mortalit
y
table used 2013 2012
Assurances, pure endowments and deferred annuities before vesting Nil or Axx00 adjusted Nil or Axx00 adjusted
Pensions business after vesting and pensions annuities in payment PCMA00/PCFA00 adjusted plus
allowance for future mortality
improvement
PCMA00/PCFA00 adjusted plus
allowance for future mortality
improvement
Allowance for future mortality improvement is in line with the rates shown for non-profit business below.
Non-profit business
The valuation of non-profit business is based on regulatory requirements, adjusted to remove certain regulatory reserves and margins
in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profit funds, are
valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of
contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity,
persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience.
For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the
bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that
future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based
on actual experience.
Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term
interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties
with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds,
mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all
asset classes.
The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the
option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the
proportion of policyholders who will choose to exercise the option.