Aviva 2005 Annual Report Download - page 182

Financial statements continued
Notes to the consolidated financial statements continued
50 – Risk management policies continued
The committee considers all areas of life insurance risk, but in particular has a remit to monitor mortality, longevity, persistency, pricing,
and expenses. The committee also considers the reinsurance coverage across the life businesses. It confirms that guidance and procedures
are in place for each of the major components of life insurance risk, and that businesses adopt a risk management framework to mitigate
against any life insurance risk outside local appetite, within the parameters for the overall Group risk appetite. The framework adopted in
business units is reviewed in detail and approved twice yearly. The key points of this framework are as follows:
– Mortality and morbidity – businesses must implement an underwriting procedure, and regularly monitor experience against external
benchmarks;
– All risks must be managed at product or portfolio level to avoid cross subsidies between product lines and between different funds; and
– A product management cycle must be established to review all aspects of emerging experience, particularly mortality and persistency,
at regular intervals.
Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows business units to select reinsurers based on
local factors, but assesses the overall programme to manage group-wide risk exposures and monitor the aggregation of risk ceded to
individual reinsurers is within appetite for credit risk.
Longevity risk is carefully monitored against the latest external industry data and emerging trends. Whilst individual businesses are
responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and the capital implications to
manage the impact on the group-wide exposure and the capital funding that businesses may require as a consequence. The Group has
used reinsurance solutions to reduce the risks from longevity where possible and continually monitors emerging market solutions to
mitigate this risk further.
Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of
expense levels.
Apart from ICA and FCR, sensitivity testing is widely used to measure the capital required and volatility in earnings due to exposure to life
insurance risks. This assessment is taken at both business unit level and at Group level where the impact of aggregation of similar risks
can be measured. This enables the Group to determine whether action is required to reduce risk, or whether that risk is within the overall
risk appetite.
3. Concentrations of life insurance risk The Group writes a diverse mix of business in worldwide markets that are all subject to similar risks
(mortality, persistency etc). The Group assesses the relative costs and concentrations of each type of risk through the ICA capital
requirements and material issues are escalated to and addressed at the Life Insurance Risk committee. This analysis enables the Group to
assess whether accumulations of risk exceeds risk appetite.
One key concentration of life insurance risk for the Group is improving longevity risk from pensions in payment and deferred annuities in
the UK and the Netherlands where the Group has material portfolios. The Group continually monitors this risk and the opportunities for
mitigating actions through reinsurance, improved asset liability matching, or innovative solutions that emerge in the market.
4. Embedded derivatives within insurance contracts The Group has exposure to a variety of embedded derivatives in its long-term savings
business due to product features offering varying degrees of guaranteed benefits at maturity or on early surrender, along with options to
convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs
considerably between business units.
Examples of each type of embedded derivative affecting the Group are:
Options: call, put, surrender and maturity options, guaranteed annuity options, option to cease premium payment, options for
withdrawals free of market value adjustment, annuity option, guaranteed insurability options.
Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, guaranteed minimum rate of
annuity payment.
Other: indexed interest or principal payments, maturity value, loyalty bonus.
Aviva plc 2005 Financial statements
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