Aviva 2007 Annual Report Download - page 231
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Please find page 231 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
Management of life insurance risks
The individual life insurance risks are managed as follows:
– Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows business units to select reinsurers,
from those approved by the Group, based on local factors, but assesses the overall programme to manage group-wide
risk exposures and monitor the aggregation of risk ceded to individual reinsurers is within appetite for credit risk.
– Longevity risk is carefully monitored against the latest external industry data and emerging trends. Whilst individual
businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk
and the capital implications to manage the impact on the group-wide exposure and the capital funding that businesses
may require as a consequence. The Group has used reinsurance solutions to reduce the risks from longevity where
possible and desirable and continually monitors and evaluates emerging market solutions to mitigate this risk further.
– Persistency risk is managed at a business unit level through frequent monitoring of company experience, benchmarked
against local market information. Where possible the financial impact of lapses is reduced through appropriate product
design. Businesses also implement specific initiatives to improve retention of policies which may other wise lapse. The
Group Life insurance Risk Committee has developed guidelines on persistency management.
– Expense risk is primarily managed by the business units through the assessment of business unit profitability and
frequent monitoring of expense levels.
Apart from ICA and FCR, sensitivity testing is widely used to measure the capital required and volatility in earnings due to
exposure to life insurance risks, typically through EEV reporting (examples of which are contained elsewhere in this report).
This assessment is taken at both business unit level and at Group level where the impact of aggregation of similar risks can
be measured. This enables the Group to determine whether action is required to reduce risk, or whether that risk is within
the overall risk appetite.
Concentration risk
The Group writes a diverse mix of business in worldwide markets that are all subject to similar risks (mortality, persistency
etc). The Group assesses the relative costs and concentrations of each type of risk through the ICA capital requirements
and material issues are escalated to and addressed at the Life Insurance Risk Committee. This analysis enables the Group
to assess whether accumulations of risk exceeds risk appetite.
One key concentration of life insurance risk for the Group is improving longevity risk from pensions in payment and
deferred annuities in the UK and the Netherlands where the Group has material portfolios. The Group continually monitors
this risk and the opportunities for mitigating actions through reinsurance, improved asset liability matching, or innovative
solutions that emerge in the market.
When looking at concentrations of risk, for example market risk, the risk within Aviva staff pension schemes is also
considered.
ICA analysis and EEV sensitivity testing help identify both concentrations of risk types and the benefits of diversification
of risk.
Embedded derivatives
The Group has exposure to a variety of embedded derivatives in its long-term savings business due to product features
offering varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their
benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs
considerably between business units.
Examples of each type of embedded derivative affecting the Group are:
Options: call, put, surrender and maturity options, guaranteed annuity options, option to cease premium payment, options
for withdrawals free of market value adjustment, annuity option, guaranteed insurability options.
Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, guaranteed minimum
rate of annuity payment.
Other: indexed interest or principal payments, maturity value, loyalty bonus.
The impact of these is reflected in ICA and EEV reporting and managed as part of the asset liability framework.
Aviva plc
Annual Report and
Accounts 2007
227
Financial
statements