Barclays 2005 Annual Report Download - page 177

Barclays PLC
Annual Report 2005 175
3.5
25 Insurance assets and liabilities (continued)
Movements in insurance liabilities and reinsurance assets
Movements in insurance assets and insurance contract liabilities were as follows:
2005
Gross Reinsurance Net
£m £m £m
At beginning of year 8,377 (109) 8,268
Effects of the adoption of IAS 39 and IFRS 4 (Note 62) (4,781) – (4,781)
Acquisitions 252 (29) 223
Change in year (81) 24 (57)
At end of year 3,767 (114) 3,653
Assumptions used to measure insurance liabilities
The assumptions that have the greatest effect on the measurement of the amounts recognised above, and the processes used to determine them
were as follows:
Long-term business – linked and non-linked
Mortality – mortality estimates are based on standard industry and national mortality tables, adjusted where appropriate to reflect the Group’s own
experience. A margin is added to ensure prudence – for example, future mortality improvements for annuity business.
Renewal expenses level and inflation – expense reserves are a small part of overall insurance liabilities, however, increases in expenses caused by
unanticipated inflation or other unforeseen factors could lead to expense reserve increases. Expenses are therefore set using prudent assumptions.
Initial renewal expense levels are set by considering expense forecasts for the business and where appropriate building in a margin to allow for the
increasing burden of fixed costs on the UK closed life book of business. The inflation assumption is set by adding a margin to the market rate of
inflation implied by index-linked gilt yields.
Short-term business
Short-term business – for single premium policies the proportion of unearned premiums is calculated based on estimates of the frequency and
severity of incidents.
Changes in assumptions
Sensitivity analysis regarding changes in these assumptions are described at ‘Sensitivities’ on page 176. There have been no changes in assumptions
in 2005 that have had a material effect on the financial statements.
Uncertainties associated with cash flows related to insurance contracts and risk management activities
Long-term insurance contracts (linked and non-linked)
For long-term insurance contracts where death is the insured risk, the most significant factors that could detrimentally affect the frequency and
severity of claims are the incidence of disease, such as AIDS, or general changes in lifestyle, such as in eating, exercise and smoking. Where survival
is the insured risk, advances in medical care and social conditions are the key factors that increase longevity.
The Group manages its exposure to risk by operating in part as a unit-linked business, prudent product design, applying strict underwriting criteria,
transferring risk to reinsurers, managing claims and establishing prudent reserves.
Short-term insurance contracts
For payment protection contracts where inability to make payments under a loan contract is the insured risk, the most significant factors are the
health of the policyholder and the possibility of unemployment which depends upon, among other things, long-term and short-term economic
factors. The Group manages its exposure to such risks through prudent product design, efficient claims management, prudent reserving
methodologies and bases, regular product, economic and market reviews and regular adequacy tests on the size of the reserves.
Absa insures property and motor vehicles, for which the most significant factors that could effect the frequency and severity of claims are climatic
change and crime. Absa manages its exposure to risk by diversifying insurance risks accepted and transferring risk to reinsurers.