Aviva 2007 Annual Report Download - page 66
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Please find page 66 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.General insurance risk
Our general insurance businesses are exposed to a
typical range of general insurance risks from the business
that they underwrite.
Such risks include:
– Fluctuation in the timing, frequency and severity
of claims and claim settlements compared to that
expected when the business was written
– Unexpected claims arising from a single source
– Inadequate reinsurance protection or other risk
transfer techniques
– Inadequate reserves
Our group general insurance risk committee (GIRC)
oversees the risk management framework, within a
clearly communicated underwriting strategy. We have,
as a group, made a clear statement on the target for
the combined operating ratio (COR). To achieve this
goal, we operate technical management committees
focusing on each of our key general insurance risks in
detail for example, underwriting, claims management,
and reinsurance.
Catastrophe Risk
Our largest risk is claims incurred from catastrophic events.
This risk is controlled through monitoring risk aggregations
and using catastrophe reinsurance cover.
Reinsurance cover
We actively use reinsurance to help reduce the financial
impact of a catastrophe and to manage the volatility of
our earnings. Reinsurance purchases are reviewed annually
at both business unit and group level to verify that the
protection we have purchased matches the level of
exposure. Reinsurance arrangements are only placed with
providers who meet our counterparty security standards.
We use extensive financial modelling and actuarial analysis
to optimise the cost and risk management benefits from
our reinsurance programme.
We cede much of our worldwide catastrophe risk to
third-party reinsurers, but retain a pooled element for our
own account, gaining diversification benefits. Our total
retained risk increases as catastrophe events become more
remote, so that our total loss from our most concentrated
exposure (northern European wind storm) is approximately
£370 million for a one in ten year event, compared to
approximately £700 million for a one in 100 year event.
Claims ratios
Another material risk is the impact of worsening claims
ratios. This risk is actively managed through business
unit focus on underwriting discipline, control of claims
management, and finding innovative solutions to the
way we measure and price the risk we underwrite.
For example, our UK business has developed digital
flood mapping to understand better the risk to household
insurance from flood damage, and has developed
“telematics”, our Pay As You Drive™ technology to
provide a closer link between risk and pricing.
Emerging insurance risks
Both life and general insurance business are subject to
new types of risk which may emerge. By their very nature
these risks are evolving, uncertain, and difficult to quantify.
Recent developments relating to avian flu and other
pandemic risks have raised considerable interest in the
life insurance market. Our life insurance risk committee
monitors developments in these risks based on published
industry research, and makes assessments of the impact
on the group through stress and scenario testing.
In general insurance potential risks include the impact
of climate change. Emerging claims types are considered
when setting latent claims reserves, and through the
underwriting and pricing process.
Operational risk
We are also exposed to operational risk arising from
inadequately controlled internal processes or systems,
human error and from external events. This includes
all risks that we are exposed to, other than the financial
risks described above and strategic and group risks.
Operational risks include 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 developments
Our businesses are primarily responsible for identifying,
managing and reporting these risks as part of our quarterly
risk reporting processes. 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 management teams must be satisfied 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.
Our operational risk committee (ORC) determines
the risk appetite that the group can work within for
these types of 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.
Aviva plc
Annual Report and
Accounts 2007
Business review continued:
Risk management continued
62
Business
review