Aviva 2006 Annual Report Download - page 206

Aviva plc
Annual Report and Accounts 2006 202
Notes to the consolidated financial statements continued
50 – Risk management continued
(d) Insurance risk
(i) Life insurance risk
Type of risk
Life insurance risk in the Group arises through its exposure to mortality and morbidity insurance and exposure to worse than anticipated
operating experience on factors such as persistency levels and management and administration expenses.
Risk management
The Group has developed a life insurance risk policy and guidelines on the practical application of this policy. Individual life insurance risks
are managed at a business unit level.
The management of life insurance risk is undertaken primarily in business units but is also monitored at Group level. The impact of life
insurance risks is monitored by the business units as part of the control cycle of business management. Exposure is monitored through
the assessment of liabilities, the asset liability management framework, profit reporting (under both IFRS and EEV), financial condition
reporting, and the ICA process. Significant insurance risks will be reported through the Group Risk Monitoring framework and overseen
by the Life Insurance Risk Committee. At Group level the overall exposure to life insurance risk is measured through the ICA, FCRs, and
other management reporting.
The Life Insurance Risk Committee monitors the risk framework developed and implemented in each business, and receives management
information on life insurance risks. The committee considers all areas of life insurance risk, but in particular has a remit to monitor
mortality,longevity,morbidity,persistency,pricing, unit pricing and expenses. The committee also considers the reinsurance coverage
across the life businesses. It confirms that guidance and procedures are in place for each of the major components of life insurance risk,
and that businesses adopt a risk management framework to mitigate against any life insurance risk outside local appetite, within the
parameters for the overall Group risk appetite. The framework adopted in business units is reviewed in detail and approved twice yearly.
The committee has also developed guidance for business units on management of a number of areas of life insurance risk to ensure best
practice is shared throughout the group and common standards are adopted.
Mortality and morbidity risks aremitigated by use of reinsurance. The Group allows business units to select reinsurers, from those
approved by the Group, based on local factors, but assesses the overall programme to manage group-wide risk exposures and monitor
the aggregation of risk ceded to individual reinsurers is within appetite for credit risk.
Longevity risk is carefully monitored against the latest external industry data and emerging trends. Whilst individual businesses are
responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and the capital implications to
manage the impact on the group-wide exposure and the capital funding that businesses may require as a consequence. The Group has
used reinsurance solutions to reduce the risks from longevity where possible and desirable and continually monitors emerging market
solutions to mitigate this risk further.
Persistency risk is managed at a business unit level through frequent monitoring of company experience, benchmarked against local
market information. Where possible the financial impact of lapses is reduced through appropriate product design. The Group Life
insurance Risk Committee has developed guidelines on persistency management.
Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of
expense levels.
Apart from ICA and FCR, sensitivity testing is widely used to measure the capital required and volatility in earnings due to exposure to life
insurance risks, typically through EEV reporting (examples of which arecontained elsewherein this report). This assessment is taken at
both business unit level and at Group level wherethe impact of aggregation of similar risks can be measured. This enables the Group
to determine whether action is required to reduce risk, or whether that risk is within the overall risk appetite.
Concentration risk
The Group writes a diverse mix of business in worldwide markets that areall subject to similar risks (mortality,persistency etc). The Group
assesses the relative costs and concentrations of each type of risk through the ICA capital requirements and material issues are escalated
to and addressed at the Life Insurance Risk committee. This analysis enables the Group to assess whether accumulations of risk exceeds
risk appetite.
One key concentration of life insurance risk for the Group is improving longevity risk from pensions in payment and deferred annuities
in the UK and the Netherlands where the Group has material portfolios. The Group continually monitors this risk and the opportunities
for mitigating actions through reinsurance, improved asset liability matching, or innovative solutions that emerge in the market.
When looking at concentrations of risk, for example market risk, the risk within Aviva staff pension schemes is also considered.
ICA analysis and EEV sensitivity testing help identify both concentrations of risk types and the benefits of diversification of risk.
Financial statements continued