Aviva 2013 Annual Report Download - page 199

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
197
Notes to the consolidated financial statements continued
42 – Liability for investment contracts continued
For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by
corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and
expected experience for persistency, mortality and other demographic factors.
The £0.3 billion impact of operating assumption changes relates to the impact on with profit liabilities in the With-profits
sub-fund (WPSF), of a decision to discontinue the charge on assets shares for guarantee costs, and to refund previously deducted
charges to asset shares.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of participating
investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment
to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are
included in the effect of changes in assumptions and estimates during the year shown in note 45, together with the impact of
movements in related non-financial assets.
(ii) Non-participating investment contracts
2013
£m
Restated1
2012
£m
Carrying amount at 1 January 47,699 45,659
Provisions in respect of new business 3,386 3,851
Expected change in existing business provisions (2,698) (2,531)
Variance between actual and expected experience 3,122 982
Impact of operating assumption changes 4 14
Impact of economic assumption changes 1 4
Other movements 46 (18)
Change in liability 3,861 2,302
Effect of portfolio transfers, acquisitions and disposals2 (3,785) 25
Foreign exchange rate movements 365 (404)
Other movements — 117
Carrying amount at 31 December 48,140 47,699
1 “Other movements” (outside Change in liability) of £117 million in 2012 include £111 million in respect of the reclassification of liabilities from insurance to non-participating investment. In the 2012 statements this £111 million was
included within “Other movements” (within change in liability).
2 Disposals include £1,826 million related to the disposal of the US business, and £1,955 million related to the disposal of Ark Life.
The variance between actual and expected experience of £3.1 billion was primarily driven by favourable movements in investment
markets in 2013. The rise in investment markets increased the value of unit linked contracts, which comprise the vast majority of
the non-participating investment contract liabilities. For unit-linked investment contracts, movements in asset values are offset by
corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and
expected experience for persistency, mortality and other demographic factors.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non-
participating investment contract liabilities. The impact of assumption changes on profit are included in the effect of changes in
assumptions and estimates during the year shown in note 45, which combines participating and non-participating investment
contracts together with the impact of movements in related non-financial assets.
43 – Financial guarantees and options
This note details the financial guarantees and options that the Group has 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 41 and 42.
(a) UK Life with-profit business
In the UK, life insurers are required to comply with the PRA’s realistic reporting regime for their with-profit funds for the calculation
of PRA liabilities. Under the PRA’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.