Aviva 2006 Annual Report Download - page 64

Aviva plc
Annual Report and Accounts 2006 60
Finance continued
Persistency risk is managed at a business unit level through frequent
monitoring of current experience, benchmarked against local
market information. Actual experience against the expected level of
lapses is also assessed within the analysis of embedded value
operating profit. 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, sharing best practice on the setting of lapse
assumptions, product design, experience monitoring, and
management action.
Expenses are managed at a business unit level, as part of general
business management.
General Insurance risk
Our general insurance businesses are exposed to a typical range of
general insurance risks from the business that they underwrite.
Such risks include:
–Fluctuation in the timing, frequency and severity of claims and
claim settlements compared to that expected when the business
was written
–Unexpected claims arising from a single source
–Inadequate reinsurance protection or other risk transfer
techniques
–Inadequate reserves.
Our group general insurance risk committee (GIRC) oversees the
risk management framework, within a clearly communicated
underwriting strategy. We have, as a group, made a clear statement
on the target for the combined operating ratio (COR). To achieve
this goal, we operate technical management committees focusing
on each of our key general insurance risks in detail for example,
underwriting, claims management, and reinsurance.
Our largest risk is claims incurred from catastrophe events.
This risk is controlled through monitoring risk aggregations and
using catastrophe reinsurance cover.
Another material risk is the impact of worsening claims ratios.
This risk is actively managed through business unit focus on
underwriting discipline, control of claims management, and finding
innovative solutions to the way we measure and price the risk we
underwrite. For example, our UK business has developed digital
flood mapping to understand better the risk to household insurance
from flood damage, and has developed “ telematics” , our Pay
As You Drive™ technology to provide a closer link between risk
and pricing.
Weactively use reinsurance to help reduce the financial impact
of a catastrophe and to manage the volatility of our earnings.
Reinsurance purchases are reviewed annually at both business unit
and group level to verify that the protection we have purchased
matches the level of exposure. Reinsurance arrangements are
only placed with providers who meet our counterparty security
standards. Weuse extensive financial modelling and actuarial
analysis to optimise the cost and risk management benefits from
our reinsurance program.
Wecede much of our worldwide catastrophe risk to third-party
reinsurers, but retain a pooled element for our own account,
gaining diversification benefits. Our total retained risk increases
as catastrophe events become more remote, so that our total
loss from our most concentrated exposure (northern European
wind storm) is approximately £370 million for a one in ten year
event, compared to approximately £700 million for a one in
100 year event.
Liquidity risk
Maintaining sufficient available liquid assets to meet our obligations
as they fall due is an important part of our financial management
practice. Our business units must all operate controls to identify
sources of liquidity risk, monitor potential exposures, and manage
their liquidity requirements. At group level, we maintain a prudent
level of liquidity consistent with the expectations of the FSA and the
investment community. We also maintain a buffer of liquid assets
to cover unforeseen contingencies including the provision of
temporary funds to any of our business units that experience
temporary liquidity shortfalls.
Operational risk
We are also exposed to operational risk arising from inadequately
controlled internal processes or systems, human error and from
external events. This includes all risks that we are exposed to, other
than the financial risks described above and strategic and group
risks. Operational risks include, for example, information technology,
information security, human resources, project management,
outsourcing, tax, legal, fraud and compliance.
Our business units areprimarily responsible for identifying,
managing and reporting these risks as part of our quarterly risk
reporting processes. Each operational risk is assessed by considering
the potential impact and the probability of the event occurring.
Impact assessments aremade against financial, operational and
reputational criteria.
Business unit management teams must be satisfied 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.
Our operational risk committee (ORC) 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 areimplemented.
Accounting basis of preparation
International Financial Reporting Standards (IFRS)
The consolidated financial statements and financial data contained
in the report and accounts has been prepared using the group’s
accounting policies on an IFRS basis, as set out on pages 104 to
113. These policies are in accordance with standards issued by the
IASB and endorsed by the EU, including the early adoption of IFRS 7
as detailed in policy A. The date of transition from UK GAAP to IFRS
was 1 January 2004.
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