Aviva 2006 Annual Report Download - page 208

Aviva plc
Annual Report and Accounts 2006 204
Notes to the consolidated financial statements continued
50 – Risk management continued
Actuarial management
The adequacy of the Group’s general insurance claims provisions is ultimately overseen by the Reserving Committee, which covers both
life and general insurance reserving. Actuarial claims reserving is conducted by local actuaries in the various general insurance business
units according to the General Insurance Reserving policy. The General Insurance Risk Committee monitors and maintains the General
Insurance Reserving policy, and conducts quarterly reviews of the Group’s general insurance claims provisions, and their adequacy.
The reviews are conducted under the direction of the Aviva General Insurance Actuarial Director and include peer reviews of the business
unit’s own conclusions as well as independent analysis to confirm the reasonableness of the local reviews. A number of business units also
have periodic external reviews by local consultant actuaries (often as part of the local regulatory requirement).
Reinsurance strategy
Reinsurance purchases are reviewed annually at both business unit and Group level, to verify that the levels of protection being bought
reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by extensive
financial and capital modelling and actuarial analysis to optimise the cost and capital efficiency benefits. For the larger business units, this
involves utilising externally sourced probabilistic models to verify the accumulations and loss probabilities based on the Group’s specific
portfolios of business. Where external models are not available, scenarios are developed and tested using the Group’s data to determine
potential losses and appropriate levels of reinsurance protection. The reinsurance is placed with providers who meet the Group’s
counterparty security requirements.
Concentration risk
Processes arein place to manage catastrophe risk in individual business units and at a Group level. The Group cedes much of its
worldwide catastrophe risk to third party reinsurers but retains a pooled element for its own account gaining economic diversification
benefit. Aviva’stotal retained risk increases as catastrophe events become more remote, so that the total Group loss from its most
concentrated catastrophe exposure(NorthernEuropean windstorm) is approximately £370 million, one in ten years, compared to
approximately £700 million, one in 100 years.
(e) Operational risk
Operational risk arises as a result of inadequately controlled internal processes or systems, human error, or from external events.
This definition is intended to include all risks to which the Group is exposed, other than the financial risks described previously,
and strategic and Group risks that are considered elsewhere. Hence, operational risks include for example, information technology,
information security, human resources, project management, outsourcing, tax, legal, fraud and compliance risks.
In accordance with Group policies, business unit management has primary responsibility for the effective identification, management,
monitoring and reporting of risks to the business unit executive management team and to Group as part of the quarterly risk reporting
process. Each operational risk is assessed by considering the potential impact and the probability of the event occurring. Impact
assessments are made against financial, operational and reputational criteria.
Business unit risk management and governance functions are responsible for implementing the Group 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, the business unit executive
management team satisfies itself that all material risks falling outside our risk appetite are being mitigated, monitored and reported at an
appropriate level. Any risks with a high impact level are continually monitored centrally.
The Group Operational Risk Committee (ORC) has been established and determines the risk appetite that the group can work within for
these types of risk, assesses and monitors overall operational risk exposures, identifying any concentrations of operational risk across the
group, and in particular verifies that mitigating action plans are implemented.
(f) Liquidity risk
The Group has a strong liquidity position and through the application of a Group Liquidity Management policy seeks to maintain
sufficient financial resources to meet its obligations as they fall due. In addition to its strong liquidity position, the Group maintains
significant committed borrowing facilities from a range of highly rated banks to further mitigate this risk.
Financial statements continued