Aviva 2005 Annual Report Download - page 49

47
Business review
Aviva plc 2005
Management of financial and non-financial risk
We have established a number of policies dealing with the
management of both 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. Additionally, we operate a number of oversight
committees that monitor aggregate risk data and take risk
management decisions.
We also monitor specific risks on a regular basis through
our risk monitoring framework. Business units are required to
disclose all material risks along with information on the likelihood
and severity of risks and mitigating actions taken or planned.
The framework enables us to assess the overall risk exposure of the
group, to develop a group-wide risk map identifying concentrations
of risk and to define the risks that we are prepared to accept.
The risk map is continually monitored and refreshed quarterly.
Insurance risk
Life insurance risk
Life insurance risk arises through our exposure to mortality,
morbidity and experience factors such as persistency and
unforeseen expenses.
The Life Insurance Risk committee monitors whether guidance and
procedures are in place for each of the major components of life
insurance risk and that businesses adopt a local risk management
framework. The local frameworks adopted in business units are
reviewed in detail and approved twice yearly by the committee.
The committee also considers the reinsurance coverage across
the life business. Business units can select reinsurers locally but the
overall programme is assessed centrally to manage group-wide
risk exposures.
We have exposure to the full range of life insurance risks, including
a significant exposure to annuity business and the associated
longevity risk. Longevity statistics are monitored in detail and
the results are used to inform the reserving for, and pricing of,
annuities. Inevitably, there remains uncertainty about future
longevity that cannot be removed.
General insurance risk
General insurance risk 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 risk when underwritten
– Inadequate reinsurance protection or other risk transfer techniques
– Inadequate reserves.
Our underwriting strategy is agreed by the executive committee
and communicated by specific policy statements and guidelines.
Group policies exist for underwriting, claims management,
reinsurance and reserving and operate within the group
risk-management framework. The General Insurance Risk
committee has been established to oversee management of
these risks.
The Group’s approach to risk management
Governance framework
We have established a risk and financial management framework
whose primary objective is to protect the group from events that
hinder sustainable achievement of our objectives and financial
performance, including failing to exploit opportunities. Additionally,
we have an established governance framework, details of which
are given in the Corporate Governance section on pages 57 to 61.
The framework has three key elements:
– Clear terms of reference for the board, its committees and the
associated executive management committees
– A clear organisation structure with documented delegated
authorities and responsibilities from the board to executive
management committees and senior management
– A group policy framework that sets out risk appetite, risk
management and control and business conduct standards for
the group’s worldwide operations. Each policy has a member of
senior management who is charged with overseeing compliance
with the policy throughout the group.
The governance structure and policy set is regularly reviewed
to reflect the changing commercial and regulatory environment
and our own organisational structure.
Integration of financial risk and capital management
We have developed a framework using Individual Capital
Assessment (ICA) principles for identifying the risks that business
units, and the group as a whole, are exposed to and quantifying
their impact on economic capital. The ICA estimates the capital
required to mitigate the risk of insolvency to a 99.5% confidence
level against financial and non-financial tests. In addition, we are
developing a risk-based capital model for our businesses that will
provide a more detailed assessment of the capital needs of the
business. We also use financial condition reports (FCRs) to inform
capital management decisions.
Further details on the ICA and capital management are set out in
the “Group capital strength and solvency” section of this review
on pages 39 to 41.
Regulatory impact on risks and risk assessments
A significant proportion of our longer-term savings business
involves insurance products where the majority of the risk is
borne by the policyholder. Risks attributable to policyholders are
prudently managed to satisfy the policyholders’ risk and reward
objectives. In addition, our worldwide insurance operations are
subject to numerous local regulatory requirements that help to
inform the acceptable level of risk in each of the jurisdictions in
which we operate.
Risk and risk management