Aviva 2007 Annual Report Download - page 232
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Please find page 232 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
(ii) General insurance risk
Type of risk
General insurance risk in the Group arises from:
– Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;
– Unexpected claims arising from a single source;
– Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten;
– Inadequate reinsurance protection or other risk transfer techniques; and
– Inadequate reserves.
The majority of the general insurance business underwritten by the Group is of a short tail nature such as motor,
household and commercial property insurances. The Group’s underwriting strategy and appetite is agreed by the Executive
Committee and communicated via specific policy statements and guidelines. Like life insurance risk, general insurance risk
is managed primarily at business unit level with oversight at a Group level, through a number of general insurance risk
committees.
The vast majority of the Group’s general insurance business is managed and priced in the same country as the domicile of
the customer.
Management of general insurance risks
Significant insurance risks will be reported through the Group Risk monitoring framework. Additionally, the ICA framework
is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying
their impact and calculating appropriate capital requirements. Increasingly risk-based capital models are being used to
support the quantification of risk under the ICA framework. All general insurance business units undertake a quarterly
review of their insurance risks, the output from which is a key input into the ICA and risk-based capital assessments.
The General Insurance Risk Committee monitors and develops the management of insurance risk in the general insurance
business units, and assesses the aggregate risk exposure. It is responsible for the development, implementation, and review
of the Group policies for underwriting, claims handling, reinsurance and reserving that operate within the Group risk
management framework. The implementation of these policies and the management of these risks is supported by sub-
committees for each of these four areas of risk.
Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them
within the limits of the appetite of the Group. The Group has pioneered various developments, such as the Norwich Union
UK Digital Flood Map to effectively manage exposures arising from specific perils. Where appropriate such projects are
employed throughout the business units to promote the adoption of best practice as standard.
General Insurance claims reserving
Actuarial claims reserving is conducted by local actuaries in the various general insurance business units according to the
General Insurance Reserving policy. The General Insurance Risk Committee monitors and maintains the General Insurance
Reserving policy, and conducts quarterly reviews of the Group’s general insurance claims provisions, and their adequacy.
The reviews are conducted under the direction of the Aviva General Insurance Actuarial Director and include peer reviews
of the business unit’s own conclusions as well as independent analysis to confirm the reasonableness of the local reviews.
The adequacy of the Group’s general insurance claims provisions is ultimately overseen by the Group Reserving
Committee, which covers both life and general insurance reserving.
A number of business units also have periodic external reviews by local consultant actuaries (often as part of the local
regulatory requirement).
Reinsurance strategy
Significant reinsurance purchases are reviewed annually at both business unit and Group level, to verify that the levels of
protection being bought reflect any developments in exposure and the risk appetite of the Group. Reinsurance purchases
must be in line with the strategy set out in our Group reinsurance policy . The basis of these purchases is underpinned by
extensive financial and capital modelling and actuarial analysis to optimise the cost and capital efficiency benefits. For the
larger business units, this involves utilising externally sourced probabilistic models to verify the accumulations and loss
probabilities based on the Group’s specific portfolios of business. Where external models are not available, scenarios are
developed and tested using the Group’s data to determine potential losses and appropriate levels of reinsurance
protection.
The reinsurance is placed with providers who meet the Group’s counterparty security requirements, and large reinsurance
placements may also require approval from the Group Asset Liability Management Committee.
Concentration risk
Processes are in place to manage catastrophe risk in individual business units and at a Group level. The Group cedes
much of its worldwide catastrophe risk to third party reinsurers but retains a pooled element for its own account
gaining diversification benefit. Aviva’s total retained risk increases as catastrophe events become more remote, so that
the total Group loss from its most concentrated catastrophe exposure (Northern European windstorm) is approximately
£370 million, on a “one in ten years” basis, compared to approximately £700 million when measured on a “one in
100 years” basis.
Aviva plc
Annual Report and
Accounts 2007
228
Financial
statements
Notes to the consolidated financial statements continued