Aviva 2013 Annual Report Download - page 278

Aviva plc
Annual report and accounts 2013
Risk and capital management
276
Risk management objectives
As a global insurance group, risk management is at the heart of
what we do and is the source of value creation as well as a vital
form of control. It is an integral part of maintaining financial
stability for our customers, shareholders and other stakeholders.
Our sustainability and financial strength are underpinned by
an effective risk management process which helps us identify
major risks to which we may be exposed, establish appropriate
controls and take mitigating actions for the benefit of our
customers and investors. The Group’s risk strategy is to invest its
available capital to optimise the balance between return and risk
whilst maintaining an appropriate level of economic (i.e. risk-
based) capital and regulatory capital in accordance with our risk
appetite. Consequently, our risk management objectives are to:
 Embed rigorous risk management throughout the business,
based on setting clear risk appetites and staying within
these;
 Allocate capital where it will make the highest returns on
a risk-adjusted basis; and
 Meet the expectations of our customers, investors and
regulators that we will maintain sufficient capital surpluses
to meet our liabilities even if a number of extreme risks
materialise.
Aviva’s risk management framework has been designed and
implemented to support these objectives. The key elements of
our risk management framework comprise our risk appetite; risk
governance, including risk policies and business standards, risk
oversight committees and roles & responsibilities; and the
processes we use to identify, measure, manage, monitor and
report (IMMMR) risks, including the use of our risk models and
stress and scenario testing. These elements are expanded in the
IFRS Financial statements – note 58.
Principal risks and uncertainties
In accordance with the requirements of the FCA Handbook
(DTR 4.1.8) we provide a description of the principal risks and
uncertainties facing the Group here and in note 58. Our
disclosures covering ‘risks relating to our business’ in line with
reporting requirements of the Securities Exchange Commission
(SEC) provide more detail and can be found in the shareholder
information section ‘Risks relating to our business’.
Risk environment
Financial market conditions during 2013 were more benign
than recent years past, benefiting from the maintenance of
expansionary monetary policies followed by central banks across
a number of economies. While some but not all western
economies are beginning to grow strongly, high levels of debt
will continue to act as a brake on growth and the low interest
rate environment compared to historic norms is likely to persist
in the immediate future at least. There are, however, still several
sources of macroeconomic and geopolitical uncertainty, which
have the potential to depress economic growth and cause
financial market volatility such as the potential for adverse
consequences from the removal of quantitative easing,
negotiations over the US debt ceiling and political impasse in
the Eurozone.
During the year the Group was designated a Global
Systemically Important Insurer (G-SII), which brings the Group
within scope of the policy requirements issued by the
International Association of Insurance Supervisors (IAIS),
including the development by July 2014 of a Systemic Risk
Management Plan, the development of recovery and resolution
plans and additional loss absorbency capital requirements from
January 2019, if the Group remains a G-SII.
It is now likely that Solvency II will be implemented on
1 January 2016, following political agreement in November
2013. Until all of the relevant Solvency II regulation is finalised,
there remains some uncertainty over the final capital impact on
the Group.
Risk profile
The types of risk to which the Group is exposed have not
changed significantly over the year and remain credit, market,
insurance, asset management, liquidity, operational and
reputational risks as described in note 58 of the IFRS financial
statements.
Reflecting Aviva’s objective of building financial strength and
reducing capital volatility, the Group continued to take steps to
amend its risk profile, in particular credit risk exposure,
successfully completing a number of management actions in
progress at the 2012 year-end. These include the completion of
the sale of the Group’s US subsidiary and the continued net sell-
down of exposures to Italian and Spanish sovereign debt and
European financial institutions offset by an increase in market
values. Restrictions on non-domestic investment in sovereign
and corporate debt from Greece, Italy, Portugal and Spain
remain in place and balance sheet volatility was further reduced
through the sale of the Group’s remaining stake in Delta Lloyd
in January 2013. As described in note 58 a number of foreign
exchange, credit and equity hedges are also in place. These
actions have reduced the Group’s credit and equity exposure,
reflecting a broader move towards a more balanced risk profile,
and enabling the Group to accept other credit risks offering
better risk adjusted returns while remaining within appetite.
In February 2013, the Group took action to improve its
access to dividends from the Group’s insurance and asset
management businesses by undertaking a corporate
restructuring whereby Aviva Group Holdings (AGH) has
purchased from Aviva Insurance Limited (AIL) its interest in the
majority of its overseas businesses. This resulted in an inter-
company loan of £5.8 billion from AIL to AGH to fund the
purchase. At 31 December 2013 the loan balance had been
reduced by £1.0 billion to £4.8 billion. At the end of February
2014, the balance of the loan stood at £4.1 billion.
We have agreed with the Board of the UK General Insurance
Company (AIL) an appropriate target for the long term level of
the internal loan between a Group Holding Company (AGH)
and AIL. That level has been set such that AIL places no reliance
on the loan to meet its stressed insurance liabilities assessed on
a 1:200 basis. Our prudential regulators, PRA, agree with this
approach. The effect of this would be to reduce the internal
loan balance from its current level of £4.1 billion to
approximately £2.2 billion. We will complete this reduction by
the end of 2015.
In 2013 the Group made significant progress in completing
its strategy set out in 2012 of focusing on fewer businesses, as a
result of the successful completion of the sales of our US
business, the Romanian pensions business, Aviva Russia, and our
stake in the Malaysian joint venture CIMB and the agreed sale
pending regulatory approval of our stake in Eurovita. The
process of exiting these non-core businesses has reduced the
amount of the Group’s capital employed in less economically
profitable areas, decreased balance sheet volatility and required
capital, and will allow capital to be re-employed in businesses
that enhance the Group’s return on risk based capital.
As a result of the sale of businesses (in particular the US),
the Group’s future earnings have been reduced and the tangible
net asset value of the Group has fallen, resulting in an IFRS
leverage ratio23 of close to 50%. We have plans in place to
improve earnings through managing the deployment of capital
to maximise return and expense reduction (though clearly
execution risk remains). These additional earnings, combined
with higher retained profits, should enable us to reduce our
external IFRS leverage ratio to 40% in the medium term and
reduce internal leverage.
23 IFRS tangible capital employed / External debt including preference shares and direct capital instruments (DCI)