Aviva 2006 Annual Report Download - page 212

Aviva plc
Annual Report and Accounts 2006 208
Notes to the consolidated financial statements continued
50 – Risk management continued
Fund management and non-insurance business
Sensitivities as at 31 December 2006
Impact on profit before tax (£m)
Interest Interest Equity/ Equity/
rates rates property property
+1% –1% +10% –10%
Total (26) 26 44 (44)
Impact before tax on shareholders’ equity (£m)
Interest Interest Equity/ Equity/
rates rates property property
+1% –1% +10% –10%
Total (52) 51 78 (78)
Sensitivities as at 31 December 2005
Impact on profit before tax (£m)
Interest Interest Equity/ Equity/
rates rates property property
+1% –1% +10% –10%
Total (35) 35 26 (26)
Impact before tax on shareholders’ equity (£m)
Interest Interest Equity/ Equity/
rates rates property property
+1% –1% +10% –10%
Total (70) 70 60 (60)
Limitations of sensitivity analysis
The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality,there
is a correlation between the assumptions and other factors. It should also be noted that these sensitivities arenon-linear,and larger or
smaller impacts should not be interpolated or extrapolated from these results.
The sensitivity analyses do not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the
financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk
management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels,
management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to
policyholders, and taking other protective action.
Anumber of the business units use passive assumptions to calculate their long-term business liabilities. Consequently,the actual impact
of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value on the balance sheet.
In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity.Similarly,for
general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding
interest (discount) rates or future inflation.
Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that
only represent the Group’s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption
that all interest rates move in an identical fashion.
Financial statements continued