18 Insurance contract liabilities.

Insurance contracts are contracts which transfer significant insurance risk to the insurer at the inception of the contract.

A number of insurance and investment contracts contain discretionary participating features (DPF) which entitle the policyholders to receive guaranteed benefits as well as additional benefits:

  • the amount or timing of which is contractually at the discretion of the Group; and
  • which are contractually based on:
    • the performance of a specified pool of contracts or a specified type of contract;
    • realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or
    • the profit or loss of the Company, fund or other entity which issues the contract.

Contracts with DPF are referred to as participating contracts. With-profits contracts in the UK and most Garantie Long Terme contracts in France are classified as participating.

Long term insurance

Under current IFRS requirements, insurance contract liabilities are measured using local Generally Accepted Accounting Principles (GAAP), as permitted by IFRS 4, ‘Insurance contracts’.

UK

In the UK, insurance contract liabilities are determined following an annual investigation of the long term funds (LTFs) in accordance with regulatory requirements.

For non-participating insurance contracts, the liabilities are calculated on the basis of current information using the gross premium valuation method. This brings into account the full premiums receivable under contracts written, having prudent regard to expected lapses and surrenders, estimated renewal and maintenance costs and contractually guaranteed benefits. For unit linked insurance contract liabilities the provision is based on the fund value together with an allowance for any excess of future expenses over charges where appropriate.

For participating contracts, the liabilities to policyholders are determined on a realistic basis in accordance with Financial Reporting Standard (FRS) 27, ‘Life assurance’. This includes an assessment of the cost of any future options and guarantees granted to policyholders valued on a market consistent basis. The calculation also takes account of bonus decisions which are consistent with Legal & General Assurance Society Limited’s (Society’s) Principles and Practices of Financial Management (PPFM). The shareholders’ share of the future cost of bonuses is excluded from the assessment of the realistic liability.

In determining the realistic value of liabilities for participating contracts, the value of future profits on non-participating business written in the with-profits part of the fund is accounted for as part of the calculation. The present value of future profits (VIF) for this business is separately determined and its value is deducted from the sum of the liabilities for participating contracts and the unallocated divisible surplus.

Unitised liabilities are recognised when premiums are received and non-unitised liabilities are recognised when premiums are due.

Overseas

The long term insurance contract liabilities for business transacted by overseas subsidiaries are determined on the basis of recognised actuarial methods which reflect local supervisory principles or, in the case of the US, on the basis of US GAAP.

General insurance

Liabilities, together with related reinsurance recoveries, are established on the basis of current information. Such liabilities can never be definitive as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis. Claims and related reinsurance recoveries are accounted for in respect of all incidents up to the year end. Provision is made on the basis of available information for the estimated ultimate cost, including claims settlement expenses, claims reported but not yet settled and claims incurred but not yet reported. An unexpired risk provision is made for any overall excess of expected claims and deferred acquisition costs over unearned premiums and after taking account of investment return.

Liability adequacy tests

The Group performs liability adequacy testing on its insurance liabilities to ensure that the carrying amount of liabilities (less related deferred acquisition costs) is sufficient to cover current estimates of future cash flows. When performing the liability adequacy test, the Group discounts all contractual cash flows and compares this amount with the carrying value of the liability. Any deficiency is immediately charged to the income statement, initially reducing deferred acquisition costs and then by establishing a provision for losses.

Reinsurance

The Group’s insurance subsidiaries cede insurance premiums and risk in the normal course of business in order to limit the potential for losses and to provide financing. Outwards reinsurance premiums are accounted for in the same accounting period as the related premiums for the direct or inwards reinsurance business being reinsured. Reinsurance assets include balances due from reinsurers for paid and unpaid losses and loss adjustment expenses, ceded unearned premiums and ceded future life policy benefits. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded as an asset in the consolidated balance sheet unless a right of offset exists, in which case the associated liabilities are reduced commensurately.

(i) Analysis of insurance contract liabilities

(XLS:) Insurance contract liabilities – analysis

 

Notes

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

1.

Excluding General insurance contracts.

Participating insurance contracts

(iii)

8,116

(1)

8,750

(1)

Non-participating insurance contracts1

(iv)

37,445

(2,277)

33,761

(2,110)

General insurance contracts

(v)

283

(8)

245

(6)

Insurance contract liabilities

 

45,844

(2,286)

42,756

(2,117)

During the year, the Group continued utilising prospective reinsurance arrangements which resulted in a reduction of IFRS reserves of £231m (2011: £173m). This profit has been reflected in the consolidated income statement for the year.

(ii) Expected insurance contract liability cash flows

(XLS:) Insurance contract liabilities – expected insurance contract liability cash flows 2012

 

Date of undiscounted cash flow

Total
£m

Carrying value
£m

As at 31 December 2012

0-5 years
£m

5-15
years
£m

15-25
years
£m

Over
25 years
£m

1.

Excludes unearned premium reserve of £179m (2011: £152m) for which there are no cash flows.

Participating insurance contracts

4,631

2,967

886

403

8,887

8,116

Non-participating insurance contracts

8,476

16,307

14,126

15,777

54,686

26,779

General insurance contracts1

104

104

104

Insurance contract liabilities

13,211

19,274

15,012

16,180

63,677

34,999

(XLS:) Insurance contract liabilities – expected insurance contract liability cash flows 2011

 

Date of undiscounted cash flow

Total
£m

Carrying value
£m

As at 31 December 2011

0-5 years
£m

5-15
years
£m

15-25
years
£m

Over
25 years
£m

1.

Excludes unearned premium reserve of £179m (2011: £152m) for which there are no cash flows.

Participating insurance contracts

5,387

2,954

841

377

9,559

8,750

Non-participating insurance contracts

7,413

14,992

13,046

16,260

51,711

21,939

General insurance contracts1

93

93

93

Insurance contract liabilities

12,893

17,946

13,887

16,637

61,363

30,782

Insurance contract undiscounted cash flows are based on the expected date of settlement.

Amounts under unit linked contracts are generally repayable on demand and the Group is responsible for ensuring there is sufficient liquidity within the asset portfolio to enable liabilities to unit linked policyholders to be met as they fall due. However, the terms of funds investing in less liquid assets permit the deferral of redemptions for predefined periods in circumstances where there are not sufficient liquid assets within the fund to meet the level of requested redemptions. Accordingly, unit linked liabilities have been excluded from the table.

(iii) Movement in participating insurance contract liabilities

(XLS:) Insurance contract liabilities – movement in participating insurance contract liabilities

 

Notes

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

As at 1 January

 

8,750

(1)

9,383

(1)

New liabilities in the year

 

262

374

Liabilities discharged in the year

 

(1,413)

(1,435)

Unwinding of discount rates

 

78

85

Effect of change in non-economic assumptions

16

4

(26)

Effect of change in economic assumptions

16

329

357

Other

 

106

12

As at 31 December

 

8,116

(1)

8,750

(1)

Expected to be settled within 12 months (net of reinsurance)

 

1,539

 

1,551

 

Expected to be settled after 12 months (net of reinsurance)

 

6,576

 

7,198

 

(iv) Movement in non-participating insurance contract liabilities

(XLS:) Insurance contract liabilities – movement in non-participating insurance contract liabilities

 

Notes

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

1.

The economic assumptions changes in 2012 principally reflect the narrowing of credit spreads. Movements in credit spreads also increased the value of the corresponding backing assets.

As at 1 January

 

33,761

(2,110)

31,064

(2,096)

New liabilities in the year

 

2,667

(392)

2,687

(309)

Liabilities discharged in the year

 

(2,271)

213

(2,018)

144

Unwinding of discount rates

 

1,311

(118)

1,321

(123)

Effect of change in non-economic assumptions

16

(124)

132

(403)

389

Effect of change in economic assumptions1

16

2,229

(17)

1,133

(111)

Foreign exchange adjustments

 

(128)

15

(23)

(4)

As at 31 December

 

37,445

(2,277)

33,761

(2,110)

Expected to be settled within 12 months (net of reinsurance)

 

3,573

 

2,105

 

Expected to be settled after 12 months (net of reinsurance)

 

31,595

 

29,546

 

(v) Analysis of General insurance contract liabilities

(XLS:) Insurance contract liabilities – analysis of General insurance contract liabilities

 

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

Outstanding claims

74

76

(1)

Claims incurred but not reported

30

17

Unearned premiums

179

(8)

152

(5)

General insurance contract liabilities

283

(8)

245

(6)

(vi) Movement in General insurance claim liabilities

(XLS:) Insurance contract liabilities – movement in General insurance claim liabilities

 

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

As at 1 January

93

(1)

127

(1)

Claims arising

181

172

Claims paid

(172)

1

(207)

Adjustments to prior year liabilities

2

1

As at 31 December

104

93

(1)

Expected to be settled within 12 months (net of reinsurance)

72

 

63

 

Expected to be settled after 12 months (net of reinsurance)

32

 

29

 

(vii) Unearned premiums

(XLS:) Insurance contract liabilities – unearned premiums

 

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

As at 1 January

152

(5)

134

(5)

Earned in the period

(152)

5

(134)

6

Gross written premiums in respect of future periods

179

(8)

152

(6)

As at 31 December

179

(8)

152

(5)

Expected to be earned within 12 months (net of reinsurance)

171

 

147

 

Expected to be earned after 12 months (net of reinsurance)

 

 

(viii) Claims development – General insurance

Changes may occur in the amount of the Group’s obligations at the end of a contract period. The top section of each table below illustrates how the estimate of total claims outstanding for each accident year developed over time. The bottom section of the table reconciles the cumulative claims to the amount appearing in the balance sheet.

Gross of reinsurance

(XLS:) Insurance contract liabilities – claims development – gross of reinsurance

Accident year

2008
£m

2009
£m

2010
£m

2011
£m

2012
£m

Total
£m

Estimate of ultimate claims costs:

 

 

 

 

 

 

– At end of accident year

191

164

174

124

167

820

– One year later

189

157

188

117

651

– Two years later

189

156

185

530

– Three years later

189

156

345

– Four years later

189

189

Estimate of cumulative claims

189

156

185

117

167

814

Cumulative payments

(185)

(152)

(174)

(111)

(95)

(717)

Outstanding claims provision

4

4

11

6

72

97

Prior period outstanding claims

 

 

 

 

 

3

Claims handling provision

 

 

 

 

 

4

Total claims liabilities recognised in the balance sheet

 

 

 

 

 

104

Net of reinsurance

(XLS:) Insurance contract liabilities – claims development – net of reinsurance

Accident year

2008
£m

2009
£m

2010
£m

2011
£m

2012
£m

Total
£m

Estimate of ultimate claims costs:

 

 

 

 

 

 

– At end of accident year

189

162

173

123

166

813

– One year later

188

155

187

115

645

– Two years later

188

154

184

526

– Three years later

188

154

342

– Four years later

188

188

Estimate of cumulative claims

188

154

184

115

166

807

Cumulative payments

(185)

(150)

(172)

(111)

(95)

(713)

Outstanding claims provision

3

4

12

4

71

94

Prior period outstanding claims

 

 

 

 

 

6

Claims handling provision

 

 

 

 

 

4

Total claims liabilities recognised in the balance sheet

 

 

 

 

 

104