Aviva 2007 Annual Report Download - page 227
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Please find page 227 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
Net assets are stated after taking account of the effect of currency swaps and forward foreign exchange contracts.
A 10% change in sterling to euro/US$ foreign exchange rates would have had the following impact on net assets.
Apart from the impact on financial instruments covered below, the changes arise from retranslation of Business Unit balance
sheets from their functional currencies into sterling, with movements being taken through the currency translation reserve.
These movements in exchange rates therefore have no impact on profit.
10% 10% 10% 10%
increase decrease in increase in decrease in
in sterling/ sterling/ sterling/ sterling/
euro rate euro rate US$ rate US$ rate
£m £m £m £m
Net assets at 31 December 2007 (866) 866 (146) 146
Net assets at 31 December 2006 (770) 770 (151) 151
Derivatives risk
Derivatives are used by a number of the larger businesses, within policy guidelines agreed by the Board of directors, as set
out in the group policy on derivatives use. Activity is overseen by the Group Derivatives Committee, which monitors
implementation of the policy, exposure levels and approves large or complex transactions proposed by businesses.
Derivatives are primarily used for efficient investment management, risk hedging purposes or to structure specific retail-
savings products. Derivative transactions are covered by either cash or corresponding assets and liabilities. Speculative
activity is prohibited, unless approval has been obtained from the Group Derivatives Committee. Over the counter
derivative contracts are entered into only with approved counterparties, in accordance with our Group credit policies,
thereby reducing the risk of credit loss.The Group also manages a number of hedge funds which use derivatives
extensively within a defined derivative framework.
The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework
that is consistent with market and industry practice for the activity that is undertaken.
Correlation risk
The Group recognises that identified lapse behaviour and potential increases in consumer expectations are sensitive to and
interdependent with market movements and interest rates. These interdependencies are taken into consideration in the
ICA in the aggregation of the financial stress tests with the operational risk assessment. FCRs also consider scenarios
involving a number of correlated events.
A number of policyholder participation features have an influence on the Group’s interest rate risk. The major features
include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of
material guarantees and options are given in note 40.
(c) Credit risk
Monitoring credit risk
We have 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.
Credit risk is the risk of loss in the value of financial assets due to counterparties failing to meet all or part of their
obligations. The Group risk management framework also includes the market related aspect of credit risk. This is the risk of
a fall in the value of fixed interest securities from changes in the perceived worthiness of the issuer and is manifested
through changes in the fixed interest securities’ credit spreads.
The Group’s management of credit risk includes monitoring exposures at a Group level and requiring business units to
implement local credit risk policies. The local business unit credit risk policies involve the establishment and operation of
specific risk management committees and the detailed reporting and monitoring of the financial asset portfolio against
pre-established risk criteria. Large individual counterparty exposures exceeding £25 million are aggregated and monitored
at Group level against centrally-set limits reflecting the credit ratings by companies such as Standard & Poor’s. In addition,
the Group evaluates the concentration of exposures by industry sector and geographic region through the Group Credit
Committee.
Aviva plc
Annual Report and
Accounts 2007
223
Financial
statements