Aviva 2013 Annual Report Download - page 194

Aviva plc
Annual report and accounts 2013
192
Notes to the consolidated financial statements continued
41 – Insurance liabilities continued
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.
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 and legal fees.
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 £235 million greater
than the best estimate, or £70 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 2013, it is estimated
that a 1% fall in the discount rates used would increase net claim reserves by approximately £90 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 58.
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 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.
Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the
Ogden Tables. The Ogden Tables contain a discount rate that is set by the Lord Chancellor and that is applied when calculating
the present value of loss of earnings for claims settlement purposes. The process for setting this discount rate is under review.
The timing of the conclusion of this review is unclear and it is still uncertain whether or by how much the rate will change.
However an allowance has been included in provisions for a reduction in the Ogden discount rates. A reduction in the Ogden
discount rates will increase lump sum payments to UK bodily injury claimants.