Aviva 2014 Annual Report Download - page 117

Aviva plc Annual report and accounts 2014
113
Area of focus How our audit addressed the area of focus
• We performed reasonableness checks on the modelled results of
managements’ analysis of change and tested the accuracy of the
manual calculations. This included assessing the appropriateness of
changes to the model used to value the liabilities associated with the
UK Equity Release Mortgages.
• Further testing was also conducted on specific assumptions such as UK
Life Annuitant Mortality and UK Life Credit Default assumptions as set
out below.
Based on the work performed, we noted no significant matters arising
from our testing and consider that the assumptions used to be in line
with recognised market practices and, where appropriate, industry peers.
As part of our consideration of the entire set of assumptions we focused particularly on the following two within the UK Life market given their
significance to the Group’s result and the level of judgement involved.
UK Life Annuitant Mortality Assumptions
Annuitant mortality assumptions require a high degree of judgement
due to the number of factors which may influence mortality
experience. The differing factors which affect the assumptions are
underlying mortality experience (in the portfolio), industry and
management views on the future rate of mortality improvements; and
external factors arising from the development of the enhanced annuity
market and the UK annuity reforms announced in the March 2014
budget.
In addition to the procedures above, in respect of the UK Life annuitant
mortality assumptions:
• We understood and tested the governance process in place to
determine the annuitant mortality methodology and assumptions.
• We tested the methodology and the model for rate of improvements
used by management to derive the assumptions with reference to
relevant rules and actuarial guidance and by applying our industry
knowledge and experience.
• We assessed the results of the experience investigations carried out by
UK Life management for the annuity business to determine whether
they provided support for the assumptions used by management.
• We evaluated management’s assessment of the implications of the UK
annuity reforms announced in the March 2014 budget on the
assumptions adopted by UK Life.
• We compared the mortality assumptions selected by UK Life against
those used by its peers.
In light of the work performed and the evidence obtained, we consider
the assumptions used for annuitant mortality to be reasonable.
UK Life Credit Default Assumptions
UK Life holds significant commercial mortgage, corporate bond and
other loan asset portfolios to support the annuity liabilities. In line with
relevant rules, the current yield on these assets less a prudent
deduction for credit default and reinvestment risk is used to discount
the annuity liabilities. Additional supplementary liabilities are held
particularly in respect of the use of higher risk assets. These liabilities
are to cover inter alia the risk of increased short term default rates and
in the event of default, the availability of assets yielding similar returns.
The assumptions used require significant judgement.
In respect of the credit default assumptions at UK Life:
• We understood and tested the governance process in place to
determine the credit default risk methodology and assumptions.
• We tested the methodology and credit risk pricing models used for
commercial mortgages by management to derive the assumptions with
reference to relevant rules and actuarial guidance, and by applying our
industry knowledge and experience.
• We validated assumptions used by management against market
observable data and our experience of market practices.
Based on the work undertaken, we consider the allowance for credit
default risk to be appropriate.
Valuation of non- life insurance contract liabilities
Refer to
p
a
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e 78 (Audit Committee Re
p
ort),
p
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g
e 122 (Accountin
g
p
olicies) and
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g
e 188 (notes)
The estimation of non-life insurance contract liabilities involves a
significant degree of judgement. The liabilities are based on the best-
estimate ultimate cost of all claims incurred but not settled at a given
date, whether reported or not, together with the related claims
handling costs. A range of methods, including stochastic projections,
may be used to determine these provisions. Underlying these methods
are a number of explicit or implicit assumptions relating to the
expected settlement amount and settlement patterns of claims.
Regulators across the globe continue to focus on reserving adequacy
for non-life insurers, particularly in the current market.
Given their size in relation to the consolidated Group and the
complexity of the judgements involved our work focused on the
liabilities in the UK General Insurance and Canada markets.
In the UK General Insurance and Canada markets, we assessed the
Directors’ calculation of the non-life insurance liabilities by testing the
underlying company data, the methodology and assumptions used
against recognised actuarial practices and by applying our industry
knowledge and experience.
The testing included performing the following procedures:
• Understanding and testing the governance process in place to
determine the loss reserves, including testing the financial reporting
control framework for setting these reserves.
• Performing independent re-projections on selected classes of business,
particularly focussing on the largest and most uncertain reserves. For
these classes we compared our re-projected claims reserves to those
booked by management, and sought to understand any significant
differences.
• For the remaining classes we evaluated the methodology and
assumptions, or performed a diagnostic check to identify and follow up
any anomalies.
Our work and the evidence provi
d
ed identified no significant issues.
Aviva plc Annual report and accounts 2014 |113
IFRS Financial statements