Aviva 2007 Annual Report Download - page 226
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Please find page 226 of the 2007 Aviva annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.55 – Risk management continued
Property price risk
The Group is subject to property price risk due to holdings of investment properties in a variety of locations worldwide.
Investment in property is managed at business unit level, and will be subject to local regulations on asset admissibility,
liquidity requirements and the expectations of policyholders as well as overall risk appetite. The Investment Committee also
actively monitors property assets owned directly by the Group.
At 31 December 2007, no material derivative contracts had been entered into to mitigate the effects of changes in
property prices.
A sensitivity to changes in property prices is given in section (g) below.
Interest rate risk
Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities, which are
exposed to fluctuations in interest rates.
Interest rate risk also exists in products sold by the group, in particular from policies that carry investment guarantees on
early surrender or at maturity, where claim values can become higher than the value of backing assets when interest rates
rise or fall. The Group manages this risk by adopting close asset liability matching criteria, to minimise the impact of
mismatches between the value of assets and liabilities from interest rate movements. However, where any residual
mismatch is within our risk appetite, the impact is monitored through economic capital measures such as ICA.
On short-term business such as general insurance business the Group requires a close matching of assets and liabilities to
minimise this risk.
Interest rate risk is monitored and managed by the Group Investment Committee, and the Group Asset Liability
Management Committee.
Exposure to interest rate risk is monitored through several measures that include Value-at-Risk analysis, position limits,
scenario testing, stress testing and asset and liability matching using measures such as duration. The impact of exposure to
sustained low interest rates is regularly monitored.
Interest rate risk is also managed using a variety of derivative instruments, including futures, options, swaps, caps and
floors, in order to provide a degree of hedging against unfavourable market movements in interest rates inherent in the
assets backing technical liabilities.
At 31 December 2007, the Group had entered into a number of interest rate swap agreements to mitigate the effects of
potential adverse interest rate movements, and to enable close matching of assets and liabilities.
A sensitivity to changes in interest rates is given in section (g) below.
Further information on borrowings is included in note 47.
Currency risk
The Group has minimal exposure to currency risk from financial instruments held by Business Units in currencies other than
their functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contract liabilities. For this
reason, no sensitivity analysis is given for these holdings.
The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in
exchange rates of various currencies. Approximately half of the Group’s premium income arises in currencies other than
sterling and the Group’s net assets are denominated in a variety of currencies, of which the largest are euro, sterling, and
US dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the
growth of the Group’s business and meet local regulatory and market requirements.
The Group’s foreign exchange policy requires that each of our subsidiaries maintains sufficient assets in its local currency to
meet local currency liabilities. Therefore, capital held by the Group’s business units should be able to support local business
activities regardless of foreign currency movements. However, such movements may impact the value of the Group’s
consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and
managed centrally, against pre-determined limits. The Group’s foreign exchange policy is to manage these exposures by
aligning the deployment of capital by currency with the Group’s capital requirements by currency. Limits are set to control
the extent to which the deployment of capital is not aligned fully with the Group’s capital requirement for each major
currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set.
At 31 December 2007, the Group’s total equity deployment by currency was:
Sterling Euro US$ Other Total
£m £m £m £m £m
Capital at 31 December 2007 4,488 8,655 1,456 1,993 16,592
Capital at 31 December 2006 3,289 7,698 1,508 1,569 14,064
Aviva plc
Annual Report and
Accounts 2007
222
Financial
statements
Notes to the consolidated financial statements continued