Aviva 2007 Annual Report Download - page 63
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Please find page 63 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.Risk and capital management
We believe that the measurement of economic capital
provides a clear and consistent way to monitor and
compare the risks in our businesses.
As previously explained, we have developed a capital
management framework using Individual Capital
Assessment (ICA) principles for identifying the risks that
business units, and the group as a whole are exposed
to, quantifying their impact on economic capital.
ICA analysis is now incorporated into our key decision
making processes. Our ICA models inform us about the
relative impact on economic capital from the risks we face,
enabling us to formulate mitigating strategies.
We also use financial condition reports which
cover the medium-term financial outlook of the business,
including forecasts of the overall financial position and
key performance indicators under a variety of economic
and operating scenarios, allowing for new business sales,
to inform our capital and risk management decisions.
We monitor specific risks on a regular basis through
our risk monitoring framework. Our businesses are
required to disclose all material risks along with
information on the likelihood and severity of these risks
and the mitigating actions taken or planned. This process
enables us to assess the overall risk exposure of the
group, to develop a group-wide risk map identifying
concentrations of risk and to define the risks that we
are prepared to accept. This risk map is continually
monitored and is refreshed quarterly.
The risks facing Aviva
Aviva faces a wide variety of financial, insurance, and
other risks from our business’s operations, which we
have categorised in four groups. These are shown in
the chart below:
The types of risks in our business and the way in
which we manage them are discussed in detail below.
Market risk
We are exposed to potential adverse financial impact
from variation in the values of our investments, caused by
changes in equity and property prices, credit risk,
interest rates, liquidity, and foreign exchange rates.
Our business has market risk from fluctuations in both
the values of assets held and the value of liabilities.
At a group level, we have market risk from owning a
portfolio of international businesses whose values can
change, and from assets that support the liabilities of
our staff pension scheme.
We recognise that market risk is part of the businesses
that we run, and that a certain level of market risk is
acceptable in order to deliver benefits to both policyholders
and shareholders. For each type of market risk, we have
developed clear policies and procedures on how that risk
should be monitored and managed, either within our
business units or at a group level. Our group investment
committee (GIC) is responsible for overseeing market
risk. For example, the GIC identifies the levels of market
movement at which mitigating actions should be taken.
Actions could include buying downside protection
against movements in equity prices or interest rates.
The GIC also considers aggregation of market risk,
including indirect market risk exposure from our staff
pension schemes, and formulates risk appetite decisions
for the amounts invested in different types of asset,
and where appropriate reduces or increases exposure
to asset classes.
We manage market risk and apply our market risk
policy to all of the group’s financial assets, including both
policyholder assets (those assets supporting the technical
liabilities) and shareholder assets (the surplus assets held
within the businesses and Aviva group centre not required
to meet policyholder benefits, and any additional assets
held to cover regulatory margins). In practice assets can
move between these categories. The total of policyholder
and shareholder assets will account for all the investments
of the business.
Asset liability management is ultimately overseen
by the Group Asset Liability Management Committee
in which all the members of the Executive Committee
are members.
We also continually monitor the financial impact
of changes to market values through a number of
measurements of economic capital or sensitivities
to key performance indicators.
Several of our long term savings businesses sell
products where the majority of the market risk is
borne by the policyholder. Any market risk attributable
to policyholders is prudently managed to satisfy the
policyholders’ objectives for risk and reward.
Aviva plc
Annual Report and
Accounts 2007
59
Business
review
Risk
Life
insurance
risk
General
insurance
risk
Insurance risk Credit risk Operational riskMarket risk
Foreign
exchange
Property
risk
Liquidity
risk
Interest
rate risk
Equity
risk