Aviva 2007 Annual Report Download - page 233
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Please find page 233 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
(f) Operational risk
Types of operational risk
Operational risk arises as a result of inadequately controlled internal processes or systems, human error, or from external
events.
This definition is intended to include all risks to which the Group is exposed, other than the financial risks described
previously, and strategic and Group risks that are considered elsewhere. It includes risks relating to:
– Regulation, information technology, financial crime, business protection, human resources, outsourcing, purchasing,
communications and legal
– Brand management, customer management, products, sales management and distribution
– Financial processes including financial reporting and taxation
– External development
Risk management framework
In accordance with Group policies, business unit management has primary responsibility for the effective identification,
management, monitoring and reporting of risks to the business unit executive management team and to Group as part of
the quarterly risk reporting process. Each operational risk is assessed by considering the potential impact and the
probability of the event occurring. Impact assessments are made against financial, operational and reputational criteria.
Business unit risk management and governance functions are responsible for implementing the Group risk management
methodologies and frameworks to assist line management in this work. They also provide support and independent
challenge on the completeness, accuracy and consistency of risk assessments, and the adequacy of mitigating action plans.
As a result, the business unit executive management team satisfies itself 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.
The Group Operational Risk Committee (ORC) oversees the Group’s aggregate operational risk exposure on behalf of the
Group Executive Committee and reports to the Board Risk & Regulatory Committee. It makes recommendations on the
risk appetite that the group can work within for operational 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 are
implemented. The ORC operates a number of sub-committees which focus on specific areas of operational risk covering
business protection, IT, compliance, human resources, and business standards.
(g) Risk and capital management
Sensitivity test analysis
The Group uses a number of sensitivity test-based risk management tools to understand the volatility of earnings, the
volatility of its capital requirements, and to manage its capital more efficiently. Primarily, EEV, ICA, and FCRs are used.
Sensitivities to economic and operating experience are regularly produced on all of the Group’s financial performance
measurements to inform the Group’s decision making and planning processes, and as part of the framework for
identifying and quantifying the risks that each of its business units, and the Group as a whole are exposed to.
For long-term business in particular, sensitivities of EEV performance indicators to changes in both economic and non-
economic experience are continually used to manage the business and to inform the decision making process. More
information on EEV sensitivities can be found in the presentation of results on an EEV basis in the supplementary notes
to this report.
Life insurance and investment contracts
The nature of long-term business is such that a number of assumptions are made in compiling these financial statements.
Assumptions are made about investment returns, expenses, mortality rates, and persistency in connection with the in-force
policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business.
A number of the key assumptions for the Group’s central scenario are disclosed elsewhere in these statements for both
IFRS reporting and reporting under EEV methodology.
General insurance and health business
General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques.
These methods extrapolate the claims development for each accident year based on the observed development of earlier
years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic
claims development on which the projections are based. As such, in the analysis below, the sensitivity of general insurance
claim liabilities is primarily based on the financial impact of changes to the reported loss ratio.
Aviva plc
Annual Report and
Accounts 2007
229
Financial
statements