Aviva 2007 Annual Report Download - page 61
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Please find page 61 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.Aviva plc
Annual Report and
Accounts 2007
57
Business
review
Regulatory basis - Solvency II
Solvency II represents new legislation which proposes a
fundamental review of the capital adequacy regime for the
European insurance industry. It aims to establish a revised
set of EU-wide capital requirements and risk management
standards that will replace the current requirements
applicable to European insurance firms and Groups.
Solvency II is a unique opportunity to modernise the
regulation of insurance companies and groups. Aviva is
fully committed to contributing to the success of Solvency
II and continues to play an active role in its development
through participation in the consultation and quantitative
impact studies run by the European Commission and
European Regulators, as well as working with industry
forums and working parties. Solvency II has the potential
to align regulatory capital with internal risk processes and
measures, provided the possible problems and pitfalls are
avoided. While the proposed regime is still at an early
stage, the progress has been encouraging; the European
Commission published its draft proposal for the high level
principles, “Level 1 Framework Directive”, in July 2007 and
it is envisaged that the full suite of rules will be in place by
the end of 2010, with full implementation by 2012.
Rating agency bases
Ratings are important in supporting access to debt capital
markets and in providing assurance to business partners
and policyholders over the financial strength of the
Group and its ability to service contractual obligations.
In recognition of this, the Group has solicited rating
relationships with a number of rating agencies.
Rating agencies generally assign ratings based on an
assessment of a range of financial (e.g. capital strength,
gearing and fixed charge cover ratios) and non financial
(e.g. competitive position and quality of management)
factors. Managing our capital and liquidity position in
accordance with the Group’s target rating levels is a core
consideration in all material capital management and
capital allocation decisions.
Economic bases
The Group uses a risk based capital (RBC) model to assess
its economic capital requirements and to aid in risk and
capital management across the Group. This model is used
to support the Group’s Individual Capital Assessments
(ICA) which are reported to the FSA for all UK regulated
insurance businesses.
This model is based on a framework for identifying
the risks that business units, and the Group as a whole,
are exposed to. The FSA now uses the results of our ICA
process when setting target levels of capital for the UK
regulated businesses. In line with FSA requirements, the
ICA estimates the capital required to mitigate the risk of
insolvency to a 99.5% confidence level over a one year
time horizon (equivalent to events occurring in one
out of 200 years) against financial and non-financial
tests. Currently our ICA uses a mixture of scenario based
approaches and stochastic economic capital models.
Tests covering investment and insurance scenarios are
specified centrally to provide consistency across businesses
and to achieve a minimum standard. Where appropriate,
businesses may also supplement these with tests specific
to their own situation. In aggregating the various risk tests
at business unit and Group level, we allow for correlation
effects between different risks as well as diversification
benefits. This means that the aggregate sum of the
risks is less than the sum of all of the individual risks.
Financial modelling techniques enhance our practice of
active risk and capital management, ensuring sufficient
capital is available to protect against unforeseen events
and adverse scenarios. Our aim continues to be the
optimal usage of capital through appropriate allocation
to our businesses. We continue to develop our economic
capital modelling capability for all our businesses as
part of our development programme to increase the
focus on economic capital management.
Capital management actions
During the year, we have undertaken a number of
proactive actions in relation to capital management:
– In the UK, Norwich Union generated operational
capital of £0.3bn through financial reinsurance,
improving the returns for shareholders through the
use of leveraged capital. Norwich Union also recently
completed a capital transaction transferring to
Swiss Re an economic interest in part of the UK Life
policy book to be administered by them under the
outsourcing agreement made earlier in 2007,
which comes into effect as this business migrates
to Swiss Re over 2008 and 2009.
– In the US, our Life business completed a transaction
to offset the onerous capital requirements imposed
by regulation AXXX. The transaction relates to equity
indexed life contracts including a no lapse guarantee.
At the end of 2007, approximately £0.1bn of liability
was ceded to a captive reinsurance company.
The amount ceded is expected to grow significantly
in future years.
– Consistent with a focus on EPS growth, we have
also announced the withdrawal of the current scrip
dividend scheme and the introduction of a Dividend
Reinvestment Plan, which avoids new share issuance,
from the 2008 interim dividend onwards.
– We also continue to actively manage our exposure
to investment risk and in the second half of 2007
we reduced our exposure to equity market volatility
by selling £2.6bn and £0.8bn of equities in our
general insurance shareholder funds and the staff
pension schemes respectively. These actions are
consistent with our ongoing focus on efficient capital
management and enhancing returns to shareholders.