Aviva 2005 Annual Report Download - page 51

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Business review
Aviva plc 2005
Operational risk
Operational risk arises from inadequately controlled internal
processes or systems, human error and from external events.
This definition is intended to include all risks that we are exposed
to, other than the financial risks described above and the strategic
and group risks considered below. Operational risks include,
for example, information technology, information security,
human resources, project management, outsourcing, tax, legal,
fraud and compliance.
In accordance with group-wide policies, line management
in business units has primary responsibility for the effective
identification, management, monitoring and reporting of
operational risks to the business unit executive management team
and to group. Business unit risk management and governance
functions are responsible for implementing the group-wide
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, business unit executive management
teams satisfy themselves that material risks that fall outside
pre-set appetite levels are being mitigated and reported to
an acceptable level.
Operational risks are assessed according to the potential impact
and probability of the event concerned. Impact assessments
are made against financial, operational and reputational criteria
and are reported on a quarterly basis by business units to group.
Risks assessed by business units to be at the two highest impact
assessments are escalated to group between quarterly reporting.
This reporting enables us to:
– Assess and monitor overall operational risk exposures
– Identify any concentrations of operational risk across the group
– Monitor progress towards the mitigation of operational risk
– Verify that operational risk exposures remain within risk appetites.
More detail of the operational and financial risks we face and the
frameworks, processes and controls in place to mitigate those risks
are given in note 50 on pages 178 to 187. Note 50 also contains
data on significant financial risks we face and the sensitivity of the
result to those risks.
Andrew Moss
Group Finance Director
Property price risk
We are subject to property price risk through fluctuations
in the value of investment properties that we hold in a variety
of locations worldwide. Property price risk is managed at business
unit level and is subject to local regulations on asset admissibility
and liquidity requirements.
Equity price risk
We are subject to equity price risk due to changes in the market
values of equity securities. The equity price risk is actively managed
by the use of derivative instruments, including futures and options,
to lessen anticipated unfavourable market movements. The Asset
Liability Management committee actively monitors directly owned
equities and material shareholdings in our strategic business
partners. Business units model the performance of equities using
stochastic models, in particular to understand the impact of equity
performance on guarantees, options and bonus rates. We do not
have material holdings of unquoted securities.
Derivatives risk
We are subject to derivatives risk due to the use of derivative
contracts for efficient investment management, risk hedging
purposes or structuring specific retail-savings products. We have a
derivatives policy that sets out the minimum standards for the use
and approval of derivatives. The Derivatives committee exists to
maintain and monitor an appropriate control environment, monitor
exposures and approve any proposed derivative transactions that
fall outside the control framework.
Credit risk
Credit risk is the risk of loss in the value of financial assets due
to counterparties failing to meet part or all of their obligations,
or changes to the market value of assets caused by changed
perceptions of the creditworthiness of counterparties.
Our management of credit risk includes monitoring of aggregate
group exposures to individual counterparties. The aggregate
exposure is then measured against centrally set limits based on
the credit ratings issued by companies such as Standard and Poor’s.
The process measures exposure to individual counterparties across
a broad range of asset types including fixed income securities,
bank deposits and mortgages. These specific credit risks are
monitored by the Credit and Reinsurance Security committees.
In addition to monitoring specific credit risks, we assess general
credit risks such as the concentration of exposures by industry
sector and geographic region. This general credit risk is the
responsibility of the Investment committee.