Aviva 2014 Annual Report Download - page 195

Aviva plc Annual report and accounts 2014
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41 – Insurance liabilities continued
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.
Valuation discount rates for business in the non-profit funds are as follows:
Valuation discount rates 2014 2013
Assurances
Life conventional non-profit 1.7% 2.5%
Pensions conventional non-profit 2.1% 3.2%
Annuities
Conventional immediate and deferred annuities 1.3% to 3.3% 3.2% to 4.7%
Non-unit reserves on Unit Linked business
Life 1.7% 2.8%
Pensions 2.1% 3.5%
Income Protection
Active lives 1.8% 2.9%
Claims in payment
–
level 1.8% 3.1%
Claims in payment
–
index linked (0.9)% (0.6)%
The above valuation discount rates are after reduction for investment expenses and credit risk. For conventional immediate annuity
business the allowance for credit risk comprises long-term assumptions for defaults and downgrades, which vary by asset category
and rating, and short-term supplementary allowances for higher expected defaults during the current economic conditions. The
credit risk allowance made for corporate bonds and mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited
equated to 55 bps and 87 bps respectively at 31 December 2014 (2013: 48 bps and 124 bps respectively). For corporate bonds,
the allowance represented c.40% of the average credit spread for the portfolio (2013: 44%). The total valuation allowance held by
Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.9 billion (2013:
£2.0 billion) over the remaining term of the UK Life corporate bond and mortgage portfolio. Total liabilities for the annuity business
were £34 billion at 31 December 2014 (2013: £30 billion).
During 2014 there has been a change to the model and assumptions used to value certain equity release assets and the
consequential impact on the liabilities that they back. The revised model derives a best estimate view on property growth and
explicitly calculates the additional return that would be demanded by investors due to uncertainties in the asset cash flows. This
results in a lower value of assets and a corresponding lower value of liabilities due to changes in the valuation interest rate.
Changes in the Aviva Annuity UK Limited net asset value are driven by changes in the “No Negative Equity Guarantee” (NNEG) as
any changes to asset values that are not driven by NNEG result in a corresponding offset to the liability values through a revised
valuation interest rate. As a result the annuity liabilities have reduced by £452 million and the backing equity release mortgages
have reduced by £278 million during the year.
Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends.
The mortality tables used in the valuation are summarised below:
Mortality tables used 2014 2013
Assurances
Non-profit AM00/AF00 or TM00/TF00
adjusted for smoker status and
age/sex specific factors
AM00/AF00 or TM00/TF00 adjusted
for smoker status and age/sex
specific factors
Pure endowments and deferred annuities before vesting AM00/AF00 adjusted AM00
/
AF00 adjusted
Annuities in payment
Pensions business and general annuity business PCMA00/PCFA00 adjusted plus
allowance for future mortality
improvement
PCMA00/PCFA00 adjusted plus
allowance for future mortality
improvement
Aviva plc Annual report and accounts 2014 |191
IFRS Financial statements