22 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

Death claims are accounted for on notification of death. Surrenders for non-linked policies are accounted for when payment is made. Critical illness claims are accounted for when admitted. All other long term claims and surrenders are accounted for when payment is due. Claims payable include the direct costs of settlement.

The change in the insurance liability reflects the reduction in liabilities due to the payment of claims in the year, offset by liabilities arising from new business. The movement also reflects assumption changes relating to variables such as claims expectations, expenses and the unwind of the previous period’s expectations.

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 (PVFP) 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

 

Notes

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

Participating insurance contracts

22(iii)

6,579

(1)

6,972

(1)

Non-participating insurance contracts

22(iv)

49,589

(2,587)

39,975

(2,596)

General insurance contracts

22(v)

287

(8)

298

(5)

Insurance contract liabilities

 

56,455

(2,596)

47,245

(2,602)

During the year, the group continued utilising prospective reinsurance arrangements which resulted in a profit of £298m (2013: £270m). This profit has been reflected in the Consolidated Income Statement for the year and arises from new reinsurance arrangements or the reinsurance of new business under existing arrangements.

(ii) Expected insurance contract liability cash flows

 

Date of undiscounted cash flow

 

 

As at 31 December 2014

0-5 years
£m

5-15 years
£m

15-25 years
£m

Over 25 years
£m

Total
£m

Carrying value
£m

1.

Excludes unearned premium reserve of £196m (2013: £195m) for which there are no cash flows.

Participating insurance contracts

3,383

2,482

784

308

6,957

6,579

Non-participating insurance contracts

11,282

21,704

18,346

19,147

70,479

33,356

General insurance contracts1

88

3

91

91

Insurance contract liabilities

14,753

24,189

19,130

19,455

77,527

40,026

 

Date of undiscounted cash flow

 

 

As at 31 December 2013

0-5 years
£m

5-15 years
£m

15-25 years
£m

Over 25 years
£m

Total
£m

Carrying value
£m

1.

Excludes unearned premium reserve of £196m (2013: £195m) for which there are no cash flows.

Participating insurance contracts

3,917

2,882

748

269

7,816

6,972

Non-participating insurance contracts

9,846

18,856

16,257

18,509

63,468

28,684

General insurance contracts1

99

4

103

103

Insurance contract liabilities

13,862

21,742

17,005

18,778

71,387

35,759

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

 

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

As at 1 January

6,972

(1)

8,116

(1)

New liabilities in the year

61

75

Liabilities discharged in the year

(1,159)

(1,606)

Unwinding of discount rates

54

79

Effect of change in non-economic assumptions

(5)

4

Effect of change in economic assumptions

561

291

Other

95

13

As at 31 December

6,579

(1)

6,972

(1)

 

 

 

 

 

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

1,194

 

1,387

 

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

5,384

 

5,584

 

(iv) Movement in non-participating insurance contract liabilities

 

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

As at 1 January

39,975

(2,596)

37,445

(2,277)

New liabilities in the year

7,325

(446)

3,872

(334)

Liabilities discharged in the year

(2,469)

259

(2,307)

167

Unwinding of discount rates

1,493

(145)

1,308

(134)

Effect of change in non-economic assumptions

(569)

362

77

(25)

Effect of change in economic assumptions

3,844

(3)

(430)

Foreign exchange adjustments

(10)

(18)

10

7

As at 31 December

49,589

(2,587)

39,975

(2,596)

 

 

 

 

 

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

3,584

 

3,721

 

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

43,418

 

33,658

 

(v) Analysis of General insurance contract liabilities

 

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

Outstanding claims

61

(1)

66

Claims incurred but not reported

30

37

Unearned premiums

196

(7)

195

(5)

General insurance contract liabilities

287

(8)

298

(5)

(vi) Movement in General insurance claim liabilities

 

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

As at 1 January

103

104

Claims arising

182

(2)

175

Claims paid

(183)

1

(156)

Adjustments to prior year liabilities

(11)

(20)

As at 31 December

91

(1)

103

 

 

 

 

 

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

62

 

57

 

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

28

 

46

 

(vii) Unearned premiums

 

Gross
2014
£m

Reinsurance
2014
£m

Gross
2013
£m

Reinsurance
2013
£m

As at 1 January

195

(5)

179

(8)

Earned in the year

(377)

15

(375)

10

Gross written premiums in respect of future periods

378

(17)

391

(7)

As at 31 December

196

(7)

195

(5)

 

 

 

 

 

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

189

 

190

 

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

Accident year

2010
£m

2011
£m

2012
£m

2013
£m

2014
£m

Total
£m

Estimate of ultimate claims costs:

 

 

 

 

 

 

– At end of accident year

174

124

164

162

168

 

– One year later

187

119

150

156

 

– Two years later

185

116

148

 

– Three years later

183

116

 

– Four years later

183

 

Estimate of cumulative claims

183

116

148

156

168

771

Cumulative payments

(176)

(119)

(145)

(145)

(103)

(688)

Outstanding claims provision

7

(3)

3

11

65

83

Prior year outstanding claims

 

 

 

 

 

6

Claims handling provision

 

 

 

 

 

2

Total claims liabilities recognised in the balance sheet

 

 

 

 

 

91

Net of reinsurance

Accident year

2010
£m

2011
£m

2012
£m

2013
£m

2014
£m

Total
£m

Estimate of ultimate claims costs:

 

 

 

 

 

 

– At end of accident year

173

123

164

162

168

 

– One year later

187

119

149

155

 

– Two years later

184

115

147

 

– Three years later

183

115

 

– Four years later

183

 

Estimate of cumulative claims

183

115

147

155

168

768

Cumulative payments

(176)

(119)

(144)

(145)

(102)

(686)

Outstanding claims provision

7

(4)

3

10

66

82

Prior year outstanding claims

 

 

 

 

 

6

Claims handling provision

 

 

 

 

 

2

Total claims liabilities recognised in the balance sheet

 

 

 

 

 

90