Aviva 2006 Annual Report Download - page 63

Overview Business review Governance Financial statements Other information
Aviva plc
Annual Report and Accounts 2006 59
Credit risk
Wehave a significant exposure to credit risk through our
investments in corporate bonds, commercial mortgages, and other
securities. We hold these investments for the benefit of both our
policyholders and shareholders. We monitor and manage two
types of credit risk. Firstly, we manage the exposure to individual
counterparties, by measuring exposure against centrally set limits.
The aggregate exposure we are prepared to accept takes account
of credit ratings issued by rating agencies such as Standard & Poor’s.
We also manage the level of risk we are prepared to take, and we
are using increasingly detailed analysis to define our optimal balance
between risk and reward, monitoring the types of investment
available to us to achieve best our aims.
Our group credit committee (GCC) takes responsibility for
monitoring credit exposures to individual counterparties and
determining who we are prepared to work with. Our GIC sets the
credit risk appetite as part of our overall management of market risk.
Weare also exposed to credit risk through our use of reinsurance.
Our reinsurance security committee, part of our GCC, verifies that
reinsurance arrangements are only placed with providers who meet
our counterparty credit standards.
Life Insurance risk
Our life insurance businesses areexposed to the full range of life
insurance risks from the products that they have written, typically
mortality, morbidity risk, as well as experience on persistency and
unforeseen expenses.
Our policy on life insurance risk sets out the practice standards we
expect our business units to follow in underwriting such risks, and
our life insurance risk committee regularly monitors its application,
and develops detailed guidance on managing the major areas of
risk, and sponsors the sharing of best practice between businesses.
Wehave a significant exposure to annuity business and our most
significant life insurance risk is associated with longevity. Longevity
statistics are monitored in detail, compared with emerging industry
trends, and the results are used to inform both the reserving and
pricing of annuities. Inevitably, there remains uncertainty about
the development of future longevity that cannot be removed.
Should our annuitant mortality assumptions worsen by 5%
then shareholders’ equity would decrease by £300 million pre-tax
on an IFRS basis and decrease embedded value by £185 million on
an EEV basis, net of tax.
Our business units manage mortality and morbidity risk on
protection business using reinsurance and while they can select
reinsurers locally, we review reinsurance coverage across the group
and our overall reinsurance program is assessed centrally to manage
group-wide risk exposures. Sensitivity tests show that we arenot
materially affected by mortality risk. Our equity reduces by only
£20 million for a 5% worsening in assurance mortality experience
on an IFRS basis and decreases embedded value by £165 million on
an EEV basis, net of tax.
4
Shareholders equity by currency
1
2
3
1 Sterling
2 Euro
3 US dollar
4 Other
5
Credit risk exposures
1
1 AAA
2 AA
3 A
4 BBB
5 Speculative grade and not rated* *
2
3
4
* * Not Rated includes mortgages and other debt that does not attract an external rating.