Aviva 2006 Annual Report Download - page 207

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 203
50 – Risk management continued
Embedded derivatives
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.
The impact of these is reflected in ICA and EEV reporting and managed as part of the asset liability framework.
(ii) General insurance risk
Type of 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 naturesuch 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. Like life insurance risk, General Insurance risk is managed at business unit
level and Group level.
The vast majority of the Group’s general insurance business is managed and priced in the same country as the domicile of the customer.
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.
The General Insurance Risk Committee monitors and develops the management of insurance risk in the general insurance business units,
and assesses the aggregate risk exposure. It is responsible for the development, implementation, and review of the Group policies
for underwriting, claims handling, reinsurance and reserving that operate within the Group risk management framework.
The implementation of these policies and the management of these risks is supported by sub-committees for each of these
four areas of risk.
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 standard.