Aviva 2007 Annual Report Download - page 65
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Please find page 65 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.We generally do not hedge foreign currency revenues,
as we prefer to retain revenue locally in each business
to support business growth, to meet local and regulatory
market requirements, and to maintain sufficient assets
in their local currency to match local currency liabilities.
We are also exposed to some exchange risk from assets
held in staff pension schemes, as a part of the investment
strategy agreed with the scheme trustees, although this
has now been largely hedged.
Movements in exchange rates may affect the value
of consolidated shareholders’ equity, which is expressed in
sterling. This aspect of foreign exchange risk is monitored
centrally against limits that we have set to control the
extent to which capital deployment and capital requirements
are not aligned. We use currency borrowings and derivatives
when necessary to keep currency exposures within these
predetermined limits, and to hedge specific foreign
exchange risks when we feel it is appropriate; for example,
in any acquisition or disposal activity.
Derivatives risk
We use derivatives in a number of our businesses to enable
efficient investment management, to hedge investment risks,
or as part of structured retail savings products. Derivatives
can involve complex financial transactions and to minimise
the risks involved we have set minimum standards we
expect our businesses to adopt when using derivatives
and our group derivatives committee monitors exposures,
the control framework, and approves any proposed
transactions that fall outside the local business delegated
authorities. A number of our investment management
businesses operate hedge funds; these are subject to
the same Aviva control framework for using derivatives
in addition to local regulatory supervision of such funds.
Credit risk
We have a significant exposure to credit risk through our
investments in corporate bonds, commercial mortgages,
and other securities. We hold these investments for the
benefit of both our policyholders and shareholders.
We monitor and manage two types of credit risk.
Firstly, we manage the exposure to individual
counterparties, by measuring exposure against centrally set
limits. The aggregate exposure we are prepared to accept
takes account of credit ratings issued by rating agencies
such as Standard & Poor’s. We also manage the level of
risk we are prepared to take, and we are using increasingly
detailed analysis to define our optimal balance between
risk and reward, monitoring the types of investment
available to us to achieve best our aims.
We also consider the risk of a fall in the value of fixed
interest securities from changes in the perceived credit
worthiness of the issuer which is typically recognised through
changes in the fixed interest securities’ credit spreads.
Our group credit committee (GCC) takes responsibility
for monitoring credit exposures to individual counterparties
and determining who we are prepared to work with.
Our GIC sets the credit risk appetite as part of our overall
management of market risk. In 2008 we will be enhancing
our capability to monitor and manage credit risk through
the development of credit risk management systems.
We are also exposed to credit risk through our use
of reinsurance. Our reinsurance security committee, part
of our GCC, verifies that reinsurance arrangements are
only placed with providers who meet our counterparty
credit standards.
Insurance risk
Our core business is insurance, and we carefully manage
the risks arising from the life and general insurance business
that we write.
Life insurance risk
Our life insurance businesses are exposed to the full range
of life insurance risks from the products that they have
written, typically longevity, mortality, and morbidity risk,
as well as experience on persistency and unforeseen expenses.
Our policy on life insurance risk sets out the practice
standards we expect our business units to follow in
underwriting such risks, and our life insurance risk
committee regularly monitors its application,
and develops detailed guidance on managing the
major areas of risk, and sponsors the sharing of best
practice between businesses.
Longevity risk
We have a significant exposure to annuity business and
our most significant life insurance risk is associated with
longevity. Longevity statistics are monitored in detail,
compared with emerging industry trends, and the results
are used to inform both the reserving and pricing of
annuities. Inevitably, there remains uncertainty about the
development of future longevity that cannot be removed.
Should our annuitant mortality assumptions worsen
by 5% then shareholders’ equity would decrease by
£295 million pre-tax on an IFRS basis and decrease
embedded value by £210 million on an EEV basis,
net of tax.
Mortality and morbidity risk
Our business units manage mortality and morbidity
risk on protection business using reinsurance and while
they can select reinsurers locally, we review reinsurance
coverage across the group and our overall reinsurance
programme is assessed centrally to manage group-wide
risk exposures. Sensitivity tests show that we are not
materially affected by mortality risk. Our equity reduces by
only £20 million for a 5% worsening in assurance mortality
experience on an IFRS basis and decreases embedded
value by £145 million on an EEV basis, net of tax.
Persistency risk
Persistency risk affects all of our life insurance businesses
and is managed at a business unit level through frequent
monitoring of current experience, benchmarked against
local market information. Actual experience against
the expected level of lapses is also assessed within
the analysis of embedded value operating profit.
Where possible, the financial impact of lapses is reduced
through appropriate product design. The group life
insurance risk committee has developed guidelines
on persistency management, sharing best practice
on the setting of lapse assumptions, product design,
experience monitoring, and management action.
Expense risk
Expenses are managed at a business unit level, as part of
general day-to-day business management, and expense
management is a key part of a business’ ability to meet
financial targets.
Aviva plc
Annual Report and
Accounts 2007
61
Business
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