Aviva 2009 Annual Report Download - page 257

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Performance review
Aviva plc Notes to the consolidated financial statements continued
Corporate responsibility
Annual Report and Accounts 2009
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
56 – Risk management continued
At a business unit level, equity price risk is actively managed in order to mitigate anticipated unfavourable market movements
where this lies outside the risk appetite of either the company in respect of shareholder assets or the fund in respect of
policyholder assets concerned. In addition local asset admissibility regulations require that business units hold diversified
portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted
equity securities.
Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model
the performance of equities through the use of stochastic models, in particular to understand the impact of equity performance
on guarantees, options and bonus rates.
The Group Assets Committee actively monitors equity assets owned directly by the Group, which may include some material
shareholdings in the Group’s strategic business partners.
Sensitivity to changes in equity prices is given in section (i) below.
Property price risk
The Group is subject to property price risk due to holdings of investment properties in a variety of locations worldwide. Investment
in property is managed at regional and business level, and will be subject to local regulations on asset admissibility, liquidity
requirements and the expectations of policyholders as well as overall risk appetite. The Group Assets Committee also monitors
property assets owned directly by the Group.
As at 31 December 2009, no material derivative contracts had been entered into to mitigate the effects of changes
in property prices.
Sensitivity to changes in property prices is given in section (i) below.
Interest rate risk
Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities, which are exposed
to fluctuations in interest rates.
The Group manages this risk by adopting close asset liability matching criteria, to minimise the impact of mismatches between
the value of assets and liabilities from interest rate movements.
A number of policyholder participation features have an influence on the Group’s interest rate risk. The major features include
guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material
guarantees and options are given in note 40.
In short-term business such as general insurance business, the Group requires a close matching of assets and liabilities to
minimise this risk.
Interest rate risk is monitored and managed by the Group Assets Committee, and the Group Asset Liability Committee.
Exposure to interest rate risk is monitored through several measures that include Value-at-Risk analysis, position limits, scenario
testing, stress testing and asset and liability matching using measures such as duration. The impact of exposure to sustained low
interest rates is regularly monitored.
Interest rate risk is also managed using a variety of derivative instruments, including futures, options, swaps, caps and floors,
in order to provide a degree of hedging against unfavourable market movements in interest rates inherent in the assets backing
technical liabilities.
As at 31 December 2009, the Group had entered into a number of initiatives, including interest rate swap agreements and
changes in asset mix, to mitigate the effects of potential adverse interest rate movements, and to enable closer matching of assets
and liabilities.
Sensitivity to changes in interest rates is given in section (i) below.
Further information on borrowings is included in note 48.
Currency risk
The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their
functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contract liabilities. For this reason,
no sensitivity analysis is given for these holdings.
The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in
exchange rates of various currencies. Approximately half of the Group’s premium income arises in currencies other than sterling
and the Group’s net assets are denominated in a variety of currencies, of which the largest are euro, sterling, and US dollars. The
Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group’s
business and meet local regulatory and market requirements.
The Group’s foreign exchange policy requires that each of our subsidiaries maintains sufficient assets in its local currency to
meet local currency liabilities. Therefore, capital held by the Group’s business units should be able to support local business
activities regardless of foreign currency movements. However, such movements may impact the value of the Group’s consolidated
shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally,
against pre-determined limits. The Group’s foreign exchange policy is to manage these exposures by aligning the deployment of
regulatory capital by currency with the Group’s regulatory capital requirements by currency. Limits are set to control the extent
to which the deployment of capital is not aligned fully with the Group’s regulatory capital requirement for each major currency.
Currency borrowings and derivatives are used to manage exposures within the limits that have been set.
Financial statements IFRS