Aviva 2005 Annual Report Download - page 187

50 – Risk management policies continued
The carrying amount of assets included on the balance sheet represents the maximum credit exposure.
Credit rating
Speculative
AAA AA A BBB grade Not-rated Total
£m £m £m £m £m £m £m
Debt securities 56,431 19,001 15,928 7,357 511 4,689 103,917
Reinsurance assets 1,967 2,238 2,416 60 – 449 7,130
Other investments 351 639 1,459 758 10 23,210 26,427
Loans – – – 39 351 24,154 24,544
58,749 21,878 19,803 8,214 872 52,502 162,018
Concentrations of credit risk
The long-term businesses and general insurance businesses are generally not individually exposed to significant concentrations of credit
risk due to the regulations, applicable in most markets, limiting investments in individual assets and asset classes. In cases where the
business is particularly exposed to credit risk (e.g. in respect of defaults on mortgages or debt matching annuity liabilities) this risk is
translated into a more conservative discount rate used to value the liabilities, creating a greater capital requirement, and this credit risk
is actively managed. The impact of aggregation of credit risk is monitored as described above. With the exception of AAA rated
Governments the largest aggregated counterparty exposure does not exceed 1.6% of the Group’s total financial assets.
Reinsurance credit exposures
The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted
range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures and
the impact from reinsurer default is measured regularly, in particular through the ICA tests, and is managed accordingly. Both the Credit
committee and Reinsurance Security committee have a monitoring role over this risk. The Group’s largest reinsurance counterparty is
National Indemnity Corporation, a member of the Berkshire Hathaway Group. At 31 December the reinsurance asset recoverable from
National Indemnity Corporation was £1.3bn. This exposure is monitored on a regular basis with the forecast to completion monitored
for any shortfall in the claims history to verify that the contract is progressing as expected and that no further exposure for the Group
will arise.
In the event of a catastrophic event the counterparty exposure to a single reinsurer is estimated not to exceed 1.4% of shareholders’
equity.
(v) Operational risk
Operational risk arises as a result of inadequately controlled internal processes or systems, human error, or from external events.
This definition is intended to include all risks to which the Group is exposed, other than the financial risks described previously, and
strategic and Group risks that are considered elsewhere. Hence, operational risks include for example, information technology,
information security, human resources, project management, outsourcing, tax, legal, fraud and compliance risks.
In accordance with Group policies, business unit management has primary responsibility for the effective identification, management,
monitoring and reporting of risks to the business unit executive management team and to Group. Business unit risk management and
governance functions are responsible for implementing the Group risk management methodologies and frameworks to assist line
management in this work. They also provide support and independent challenge on the completeness, accuracy and consistency of risk
assessments, and the adequacy of mitigating action plans. As a result, the business unit executive management team satisfies itself that
material risks are being mitigated and reported to an acceptable level.
Operational risks are assessed according to the potential impact and probability of the event concerned. These impact assessments are
made against financial, operational and reputational criteria. All operational risks are reported to Group on a quarterly basis. Risks
assessed by business units to be at the two highest impact assessments are escalated to Group intra-quarter. This reporting enables
the Group to:
– Assess and monitor overall operational risk exposures;
– Identify any concentrations of operational risk across the Group;
– Monitor progress in mitigating overall operational risk; and
– Verify that aggregate operational risk exposures remain within risk appetites.
Financial statements
Aviva plc 2005
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