Aviva 2009 Annual Report Download - page 258

256
Aviva plc Notes to the consolidated financial statements continued
Annual Report and Accounts 2009
56 – Risk management continued
At 31 December 2009, the Group’s total equity deployment by currency was:
Sterling
£m
Euro
£m
US$
£m
Other
£m
Total
£m
Capital 31 December 2009
Capital 31 December 2008 restated
Capital 31 December 2007 restated
1,737
2,041
3,809
8,781
8,108
8,763
2,605
2,130
1,456
1,963
2,294
1,999
15,086
14,573
16,027
A 10% change in sterling to euro/US$ foreign exchange rates would have had the following impact on total equity.
10% 10% 10% 10%
increase decrease increase decrease
in sterling/
euro rate
in sterling/
euro rate
in sterling/
US$ rate
in sterling/
US$ rate
£m £m £m £m
Net assets at 31 December 2009
Net assets at 31 December 2008 restated
Net assets at 31 December 2007 restated
(802)
(811)
(876)
802
811
876
(228)
(213)
(146)
228
213
146
The changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling,
with above movements being taken through the currency translation reserve. These movements in exchange rates therefore have
no impact on profit. Net assets are stated after taking account of the effect of currency hedging activities.
Derivatives risk
Derivatives are used by a number of the businesses, within policy guidelines agreed by the Board of Directors, as set out in the
Group policy on derivatives use. Activity is overseen by the Derivatives Approvals Committee, which monitors implementation of
the policy, exposure levels and approves large or complex transactions proposed by businesses. Derivatives are primarily used for
efficient investment management, risk hedging purposes or to structure specific retail savings products. Derivative transactions are
covered by either cash or corresponding assets and liabilities. Speculative activity is prohibited, unless prior approval has been
obtained from the Derivatives Approvals Committee. Over the counter derivative contracts are entered into only with approved
counterparties and using ISDA documentation and credit support annexes (or equivalent) in accordance with the Group derivatives
policy. Adherence to the collateral requirements as set out in the Group derivatives and Group credit policies thereby reduces the
risk of credit loss.
The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that
is consistent with market and industry practice for the activity that is undertaken.
Correlation risk
The Group recognises that identified lapse behaviour and potential increases in consumer expectations are sensitive to and
interdependent with market movements and interest rates. These interdependencies are taken into consideration in the ICA
in the aggregation of the financial stress tests with the operational risk assessment and in scenario analysis.
(c) Credit risk
Credit risk is the risk of financial loss as a result of the default or failure of third parties to pay on their obligations to Aviva. Our
credit risks arise through exposures to debt investments, structured asset investments, derivative counterparties, mortgage lending
and reinsurance placement counterparties. We hold these investments for the benefit of both our policyholders and shareholders.
The Group manages its credit risk at business unit, regional and Group levels. All business units and regions are required to
implement local credit risk processes (including limits frameworks), operate specific risk management committees, and ensure
detailed reporting and monitoring of their exposures against pre-established risk criteria. At Group level, we manage and monitor
all exposures across our business units on a consolidated basis, and operate group limit frameworks that must be adhered to by all.
The Group risk management framework also includes the market related aspect of credit risk. This is the risk of a fall in the
value of fixed interest securities from changes in the perceived worthiness of the issuer and is manifested through changes in the
fixed interest securities’ credit spreads.
Management of credit risk is effected by five core functions:
— The maintenance and adherence of an effective governance structure. This includes clear guidance, scope and frameworks for
all aspects of the credit risk function to ensure accountability and clarity. This also includes delegated authority to the Group
Credit Approvals Committee, a quorum of key senior risk officers, that is authorised to make key decisions within certain risk
appetite levels.
— The accurately and timely reporting of detailed exposure information, and their aggregation by counterparty, exposure types,
sectors, geography and ratings.
— The implementation of a sophisticated capital charge based credit limits framework that considers and quantifies the key specific
attributes of each exposure (eg seniority, maturity etc) and provides a counterparty level aggregation methodology
on a risk neutral basis. This is then managed against centrally set limits. Absolute upper bound limits are also set to ensure
unexpected jump to default risks are kept within appetite. Additional limit frameworks are applied for structured assets and
reinsurance counterparty exposures. The limits framework also considers more systemic risk factors such as sector and
geographic concentrations, and these are continually assessed throughout our global portfolio to ensure optimal diversification
levels are maintained and improved.