94 LV= Annual Report 2012
Notes to the Financial Statements continued
31 December 2012
24. Reinsurance assets
Accounting for reinsurance assets
The Group cedes insurance risk in the normal course of business for its long-term and general insurance businesses. Reinsurance
assets represent balances recoverable from reinsurance companies. Recoverable amounts are estimated in a manner consistent with
the outstanding claims provision. Reinsurance premiums are recognised in the same period as the underlying contract that they relate to.
Group Society
2012 2011 2012 2011
Notes £m £m £m £m
Reinsurers’ share of provision for unearned premiums 21 a 14.8 13.0 – –
Reinsurers’ share of long-term insurance contract liabilities 21 a 261.9 200.0 261.9 200.0
Reinsurers’ share of long-term linked insurance contract liabilities 21 a 35.5 23.0 35.5 23.0
Reinsurers’ share of claims liabilities 21 a 135.0 100.9 – –
447.2 336.9 297.4 223.0
Within one year (107.7) (33.1) (141.5) (63.7)
Over one year 554.9 370.0 438.9 286.7
447.2 336.9 297.4 223.0
The carrying amounts disclosed above reasonably approximate fair value at the Statement of Financial Position date.
25. Long-term insurance and investment contract liabilities valuation assumptions
The basis of the calculation of the long-term insurance contract liabilities is described in the accounting policies. The liability is
calculated separately for each life operation. Material judgement is required in calculating the liability. In particular there is discretion
over the assumptions used. For participating business, the liability is calculated in accordance with the FSA’s realistic capital regime
adjusted to exclude the associated tax liability. Non participating liabilities are valued using a gross premium method.
In calculating the realistic liabilities, account has also been taken of future management actions consistent with those set out in the
Principles and Practices of Financial Management. The most significant of these are changes to bonus assumptions and level of payouts.
The assumptions used to calculate the liability depend on the circumstances prevailing in each of the life operations. The assumptions
used in determining the liability are estimated to give a result within the normal range of outcomes. To the extent that the ultimate cost
differs to the amounts provided, for example where experience is worse than that assumed, the surplus or deficit will be credited or
charged to the Statement of Comprehensive Income in future years.
When valuing options and guarantees the asset model used was the Barrie and Hibbert Market-Consistent Asset Model. This is a
deflator model based on published financial economic theory that is capable of market-consistent valuations for multiple asset classes in
multiple currencies. For this valuation it was calibrated to market data as at 31 December 2012 representative of the nature and term of
the guarantees inherent in participating insurance contracts within the participating insurance contract funds.
The accounting policies for long-term insurance and investment contract liabilities are included within Notes 21 and 17 respectively,
sensitivities to changes in assumptions are included within Note 3.
a) Society
i) Participating insurance contracts
For participating insurance contracts, a market consistent valuation is used to calculate the liability. This involves placing a value on
liabilities similar to the market value of assets with similar cash flow patterns. The key assumptions used in this valuation are set out in
the tables below.
Interest Rates
The risk-free interest rates assumed are:
Year 2012 2011
5 0.91% 1.14%
15 2.60% 2.81%
25 3.39% 3.37%
35 3.62% 3.48%
Other assumptions
Best estimate assumptions are set for inflation, mortality, expenses and persistency. The future expense inflation assumption is
modelled as RPI plus 0.5% (2011: RPI plus 0.7%), where RPI in both 2012 and 2011 is modelled stochastically.
Asset mix for assets backing asset shares at the valuation date: 2012 2011
Cash 2.38% 2.73%
Fixed interest 40.68% 39.75%
Equities 48.79% 49.45%
Property 8.15% 8.07%