Aviva 2005 Annual Report Download - page 183

50 – Risk management policies continued
General Insurance Business
The risk management framework for general insurance risks is set out as follows:
1. Types of General Insurance Risk General insurance risk in the Group arises from:
– Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;
– Unexpected claims arising from a single source, inaccurate pricing of risks when underwritten;
– Inadequate reinsurance protection or other risk transfer techniques; and
– Inadequate reserves.
The majority of the general insurance business underwritten by the Group is of a short tail nature such as motor, household and
commercial property insurances. The Group’s underwriting strategy and appetite is agreed by the Executive Committee and
communicated via specific policy statements and guidelines.
The vast majority of the Group’s general insurance business is managed and priced in the same country as the domicile of the customer.
2. Risk management Significant insurance risks will be reported through the Group Risk monitoring framework. Additionally, the ICA
framework is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying
their impact and calculating appropriate capital requirements.
Increasingly risk-based capital models are being used to support the quantification of risk under the ICA framework. All general insurance
business units undertake a quarterly review of their insurance risks, the output from which is a key input into the ICA and risk-based
capital assessments.
A General Insurance Risk Committee has been established to monitor and develop the management of risk in the general insurance
business units, and to assess the aggregate risk exposure. There are Group policies for underwriting, claims handling, reinsurance and
reserving that operate within the Group risk management framework whose implementation is regularly reviewed by this committee.
Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits
of the appetite of the Group. The Group has pioneered various developments, such as the Norwich Union UK Digital Flood Map to
effectively manage exposures arising from specific perils. Where appropriate such projects are employed throughout the business units to
promote the adoption of best practice as a standard.
Reinsurance Strategy Reinsurance purchases are reviewed annually at both business unit and Group level, to verify that the levels of
protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is
underpinned by extensive financial modelling and actuarial analysis to optimise the cost and risk management benefits. For the larger
business units, this involves utilising externally sourced probabilistic models to verify the accumulations and loss probabilities based on the
Group’s specific portfolios of business. Where external models are not available, scenarios are developed and tested using the Group’s
data to determine potential losses and appropriate levels of reinsurance protection. The reinsurance is placed with providers who meet
the Group’s counterparty security requirements.
3. Concentrations of general insurance risk Processes are in place to manage catastrophe risk in individual business units and at a Group
level. The Group’s businesses purchase catastrophe reinsurance to protect against significant natural hazard events. Due to the geographic
concentration of some large business units in northern Europe, the Group purchases additional catastrophe reinsurance cover to limit
Group retentions in the event of a northern European windstorm event.
For a single realistic catastrophic event (for the Group, this is a northern European windstorm) this maximum amount is approximately
£350 million which equates to 3.2% of shareholders’ equity on a net basis.
Actuarial Management The adequacy of the Group’s general insurance claims provisions is ultimately overseen by the Reserving
Committee, which covers both life and general insurance reserving. Actuarial claims reserving is conducted by local actuaries in the
various general insurance business units according to the General Insurance Reserving policy. The General Insurance Risk Committee
monitors and maintains the General Insurance Reserving policy, and conducts quarterly reviews of the Group’s general insurance
claims provisions, and their adequacy. The reviews are conducted under the direction of the Aviva General Insurance Actuarial Director
and include peer reviews of the business unit’s own conclusions as well as independent analysis to confirm the reasonableness of the
local reviews. A number of business units also have periodic external reviews by local consultant actuaries (often as part of the local
regulatory requirement).
Financial statements
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