Aviva 2005 Annual Report Download - page 181

50 – Risk management policies continued
This governance structure and policy set is regularly reviewed and updated to reflect internal and external changes. For example, since the
regulatory changes brought about by the FSA’s Prudential Sourcebook, which came into effect on 1 January 2004, the Group has placed
a greater emphasis on assessment and documentation of risks, controls and an articulation of risk appetite.
(b) The Group’s approach to financial risk and capital management
Integration of risk and capital management
The Group has developed a capital management framework using Individual Capital Assessment (ICA) principles for identifying the risks
that business units, and the Group as a whole are exposed to, quantifying their impact on economic capital. The ICA estimates how
much capital is needed to mitigate the risk of insolvency to a selected remote level of risk applied to a number of tests (both financial and
non-financial) on the capital position of the business. The ICA works to a 99.5% confidence level of solvency over one year, in line with
UK FSA regulatory requirements. An ICA has been developed for all material parts of the Group, and the results of financial and
operating experience tests are linked to the Group’s risk reporting model.
In addition the Group is developing a risk-based capital model for its businesses that will provide a more detailed assessment of the capital
needs of the business.
The Group also uses Financial Condition Reports (FCRs) to inform decisions on capital management issues. The FCR is a medium-term
forecast of the overall financial position of the business under a variety of economic and operating scenarios, allowing for new business.
The FCR considers a number of financial performance measures in addition to solvency and capital requirements. FCRs are produced by
business units and enable the Group to assess:
– The range of risks to which the business is exposed;
– Their evolution over time; and
– The impact of mitigating actions which might be taken.
Impact of regulatory context on nature of the risks
A large proportion of the Group’s long-term savings business involves insurance products where the majority of investment risks are borne
by its policyholders. Risks attributable to policyholders are actively and prudently managed in order to satisfy policyholders’ risk and reward
objectives. In addition, the Group’s worldwide insurance operations are subject to numerous local regulatory requirements, that prescribe
the type, quality, and concentration of investments, and the level of assets to be maintained in local currency in order to meet local
insurance liabilities. These requirements help to maintain the Group’s market risk levels at an acceptable level in each of the jurisdictions in
which it operates.
(c) Management of financial and non-financial risks
The Group has established policies on the management of financial and non-financial risks. The adoption of these policies throughout the
Group enables a broadly consistent approach to the management of risk at business unit level. In addition, the Group operates a number
of oversight committees that monitor aggregate risk data and take overall risk management decisions. Further details as to the operation
of these policies and committees are provided by risk area below.
The Group also monitors a set of specific risks on a regular basis through the Group risk monitoring framework. Businesses units are
required to disclose to the Group risk function all material risks, along with information on likelihood and severity of risks, and the
mitigating actions taken or planned. This enables the Group to assess its overall risk exposure and to develop a group-wide risk map,
identifying any concentrations of risk that may exist, and to define which risks and what level of risk the Group is prepared to accept.
The risk map is refreshed quarterly, and business units are required to escalate material changes intra-quarter.
(i) Insurance Risk
Life Insurance Business
The risk management framework for life insurance business is set out as follows.
1. Types of life insurance risk Life insurance risk in the Group arises through its exposure to mortality and morbidity insurance and
exposure to worse than anticipated operating experience on factors such as persistency levels and management and administration
expenses. The management of life insurance risk is undertaken primarily in business units but is also monitored at Group level.
The impact of life insurance risks is monitored by the business units as part of the control cycle of business management. Exposure is
monitored through the assessment of liabilities, the asset liability management framework, profit reporting, financial condition reporting,
and the ICA process. Significant insurance risks will be reported through the Group Risk Monitoring framework and overseen by the Life
Insurance Risk Committee. At Group level the overall exposure to life insurance risk is measured through the ICA, FCRs, and other
management reporting.
2. Risk management The Group has developed a life insurance risk policy and guidelines on the practical application of this policy.
Individual life insurance risks are managed at a business unit level.
The Life Insurance Risk committee monitors the risk framework developed and implemented in each business, and receives management
information on life insurance risks.
Financial statements
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