Aviva 2013 Annual Report Download - page 46

Aviva plc
Annual report and accounts 2013
44
Risks to our business
Key statistics
in 2013
£8.3bn
Economic capital1
surplus
(2012: £5.3bn)
182%
Economic capital
cover ratio
(2012: 147%)
Our risks
Our focus on three core business lines with scale –
life, general insurance and asset management –
means we have chosen to accept and manage
the risks inherent to these lines of business.
We achieve signicant diversication of risk
through our scale, our multi-product offering
to customers, the differing countries we choose
to operate in and through the different
distribution channels we use to sell products
to our customers.
Our business is about protecting our customers
from the impact of risk. We receive premiums
which we invest in order to maximise risk
adjusted returns, so that we can full our
promises to customers while providing a return
to our shareholders. In doing so, we accept the
risks set out below.
General insurance risk:
Includes risks arising from
loss events (re, ooding,
windstorms, accidents etc.)
covered under the policies
we underwrite.
Life insurance risk: Includes
longevity risk (annuitants
living longer than we expect),
mortality risk (customers
with life protection dying),
expense risk (cost to service
contracts) and persistency
risk (customers not renewing
their policies).
Some of our life and savings
products provide guaranteed
minimum investment returns
to customers. As a result we
accept from them investment
type risks such as credit and
market risk in order to offer
upside potential but providing
them with protection against
the downside.
Uncertain returns on our
investments as a result of
credit risk (actual defaults
and market expectation of
defaults) and market risks
(resulting from uctuations
in asset values, including
equity prices, property prices,
foreign exchange rates and
interest rates) affect our
ability to fund our promises
to customers and other
creditors, as well as pay a
return to our shareholders.
Liquidity risk is the risk
of not being able to make
payments as they become
due because there are
insufcient assets in cash
form. The relatively illiquid
nature of insurance liabilities
is a potential source of
additional investment return,
by allowing us to invest in
higher yielding, but less
liquid, assets.
Operational risk is the
risk of direct or indirect loss,
arising from inadequate or
failed internal processes,
people and systems, or
external events including
changes in the regulatory
environment.
Such operational failures
may adversely impact our
reputation with the public,
customers, agents and
regulators, and impair our
ability to attract new business.
Asset management risk
is the risk of customers
redeeming funds, not
investing with us or switching
funds, resulting in reduced
fee income. We manage
funds on behalf of our
customers, so they do not
have to manage the credit,
market and operational
risks themselves.
Risks customers
transfer to us
Risks arising
through our
investments
Risks arising from
our operations and
other business risks
1 The economic surplus represents an estimated unaudited position. The capital requirement is based on Aviva’s own internal assessment and capital management policies, measuring the amount of
economic capital at risk in a 1-in-200 year loss event over a one year time horizon. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.