Aviva 2009 Annual Report Download - page 261

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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
Loans
The majority of the Group loans portfolio is unrated. However, we use the following metrics to internally monitor our exposure:
— Property collateralisation
— Interest service cost
— Diversity of the tenant base
— Lower risk nature of loans made to the UK healthcare sector; and
— Existence of government guarantees for some residential mortgages.
Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies. As such, we believe
such collateralisation minimises our risk.
Credit concentration risk
The long-term businesses and general insurance businesses are generally not individually exposed to significant concentrations
of credit risk due to the regulations, applicable in most markets, limiting investments in individual assets and asset classes
supplemented by the Group credit policy and limits framework. In cases where the business is particularly exposed to credit risk
(eg in respect of defaults on mortgages matching annuity liabilities) this risk is translated into a more conservative discount rate
used to value the liabilities, creating a greater capital requirement, and this credit risk is actively managed. The impact of
aggregation of credit risk is monitored as described above. With the exception of Government bonds the largest aggregated
counterparty exposure is approximately 0.8% of the Group’s total shareholder assets.
Reinsurance credit exposures
The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the
restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance
counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance
exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Credit Approvals Committee
has a monitoring role over this risk.
The Group’s largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December
2009, the reinsurance asset recoverable from Swiss Reinsurance Company Ltd was £1,433 million. This exposure is monitored
on a regular basis. In the event of a catastrophic event, the counterparty exposure to a single reinsurer is estimated not to exceed
4.6% of shareholders’ equity.
Securities finance
The Group has significant securities financing operations within the UK. The risks within this business are mitigated by over
collateralisation which is designed to result in minimal residual risk. The Group operates strict standards around collateral
management and controls.
Derivative credit exposures
The Group is exposed to counterparty credit risk through derivative trades. This risk is mitigated through collateralising almost
all trades (the exception being certain FX trades where it has historically been the market norm not to collateralise). The Group
operates strict standards around collateral management and controls including the requirement that all “Over the Counter”
derivatives are supported by credit support annexes and ISDAs.
Unit-linked business
As discussed previously, in unit-linked business the policyholder bears the market risk, including credit risk, on investment assets
in the unit funds, and the shareholders’ exposure to credit risk is limited to the extent that their income arises from asset
management charges based on the value of assets in the fund.
Financial statements IFRS