Aviva plc (2008)
Notes to the consolidated financial statements [extract]
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Note 2 |
Presentation changes [extract] |
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(b) (i) |
Restatement for the change in accounting policy for latent reserves [extract] |
As part of the Company’s aim to continuously improve the relevance and reliability of its financial reporting, Aviva undertook a review of the Group’s general insurance reserving in 2008.
As part of this review, the Group concluded that estimating our latent claim provisions on an undiscounted basis, and discounting back to current values, represented an improvement to the existing estimation technique. This approach is in line with best practice for long-term liabilities and moves the measurement of latent claims onto a more economic basis, consistent with our internal model for economic capital and the measurement model being proposed for both IFRS Phase II and Solvency II. This approach also improves consistency with the reporting of other long-tail classes of business which are already discounted, namely certain London Market latent claims and our Dutch Permanent health and Injury Business.
The discount rate that has been applied is based on the relevant swap curve in the relevant currency at the reporting date, having due regard to the duration of the expected settlement of the claims. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is shown in note 38c and depends on the duration of the claim and the reporting date. We estimate that latent claims will be payable for around the next 35 to 40 years with an average duration of 15 years.
The application of discounting to our latent claims represents a change in accounting policy and has been applied retrospectively. The cumulative impact of discounting in our opening reserves as at 1 January 2007 is to reduce insurance liabilities by 214 million and reinsurance assets by 61 million, and to increase retained earnings by 153 million. These have been treated as prior year adjustments in these financial statements.