A8 Insurance liabilities

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A8 – Insurance liabilities

This note analyses our insurance contract liabilities by type of product and describes how we calculate these liabilities and what assumptions we have used.

(a) Carrying amount

Insurance liabilities at 31 December comprise:

			2009				2008				2007
	Long-term business £m	General insurance and health £m	Total £m		Long-term business £m	General insurance and health £m	Total £m		Long-term business £m	General insurance and health £m	Total £m
Long-term business provisions
Participating	64,702	—	64,702		66,863	—	66,863		66,093	—	66,093
Unit-linked non-participating	23,158	—	23,158		22,060	—	22,060		20,601	—	20,601
Other non-participating	66,198	—	66,198		67,265	—	67,265		48,618	—	48,618
	154,058	—	154,058		156,188	—	156,188		135,312	—	135,312
Outstanding claims provisions	921	9,977	10,898		907	11,842	12,749		727	10,842	11,569
Provision for claims incurred but not reported	—	2,719	2,719		—	2,518	2,518		—	2,099	2,099
	921	12,696	13,617		907	14,360	15,267		727	12,941	13,668
Provision for unearned premiums	—	4,781	4,781		—	5,493	5,493		—	5,484	5,484
Provision arising from liability adequacy tests	—	7	7		—	13	13		—	24	24
Other technical provisions	—	—	—		—	—	—		—	3	3
Total	154,979	17,484	172,463		157,095	19,866	176,961		136,039	18,452	154,491
Less: Obligations to staff pension schemes transferred to provisions	(1,351)	—	(1,351)		(1,402)	—	(1,402)		(1,025)	—	(1,025)
Amounts classified as held for sale	—	(20)	(20)		—	(709)	(709)		—	(627)	(627)
	153,628	17,464	171,092		155,693	19,157	174,850		135,014	17,825	152,839

(b) Long-term business liabilities

(i) Business description

The Group underwrites long-term business in a number of countries as follows:

– In the UK mainly in

– New With-Profits sub-fund (“NWPSF”) of Aviva Life & Pensions UK (“UKLAP”), where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (“RIEESA”) (see below);

– Old With-Profits sub-fund (“OWPSF”), With-Profits sub-fund (“WPSF”) and Provident Mutual sub-fund (“PMSF”) of UKLAP, where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance;

– “Non-profit” funds of Aviva Annuity UK and UKLAP, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by WPSF and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds;

–The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the “lock-in” criteria set by the Reattribution Scheme have been met. RIEESA will be used to write non-profit business and also to provide capital support to NWPSF.

– In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.

– In the Netherlands, the balance of profits, after providing appropriate returns for policyholders and after tax, accrues for the benefit of the shareholders. The bases for determining returns for policyholders are complex, but are consistent with methods and criteria followed generally in the Netherlands. In addition, a substantial number of policies provide benefits that are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees.

– In the United States, there are two main types of business – protection products and accumulation products. Protection products include interest-sensitive whole life, term life, universal life and indexed life insurance policies. The accumulation product segment includes traditional fixed and indexed deferred annuities for individuals and funding agreements for business customers. In addition, there are two closed blocks of participating contracts arising from demutualisations of subsidiary companies. All products are classified as insurance contracts except for the funding agreements and term certain immediate annuities, which are classified as non-participating investment contracts.

– In other overseas operations.

(ii) Group practice

The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, mainly using the net premium method, modified where necessary to reflect the requirements of the Companies Act.

Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates.

Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included in the movements in the long-term business provision.

(iii) Methodology and assumptions

There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts – the net premium method and the gross premium method – both of which involve the discounting of projected premiums and claims.

Under the net premium method, the premium taken into account in calculating the provision is determined actuarially, based on the valuation assumptions regarding discount rates, mortality and disability. The difference between this premium and the actual premium payable provides a margin for expenses. This method does not allow for voluntary early termination of the contract by the policyholder, and so no assumption is required for persistency. Explicit provision is made for vested bonuses (including those vesting following the most recent fund valuation), but no such provision is made for future regular or terminal bonuses. However, this method makes implicit allowance for future regular or terminal bonuses already earned, by margins in the valuation discount rate used.

The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience. Explicit provision is made for vested bonuses and explicit allowance is also made for future regular bonuses, but not terminal bonuses.

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