Aviva 2009 Annual Report Download - page 267

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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
(ii) General insurance risk
Types of risk
General insurance risk in the Group arises from:
— Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations
— Unexpected claims arising from a single source
— Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten
— Inadequate reinsurance protection or other risk transfer techniques
— Inadequate reserves
The majority of the general insurance business underwritten by the Group is of a short tail nature such as motor, household and
commercial property insurances. The Group’s underwriting strategy and appetite is agreed by the Executive Committee and
communicated via specific policy statements and guidelines. Like life insurance risk, general insurance risk is managed primarily
at business unit level with oversight at a Group level, through the General Insurance Committee.
The vast majority of the Group’s general insurance business is managed and priced in the same country as the domicile
of the customer.
Management of general insurance risks
Significant insurance risks will be reported through the Group risk management framework. Additionally, the ICA is used to assess
the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and
calculating appropriate capital requirements. Increasingly risk-based capital models are being used to support the quantification of
risk under the ICA framework. All general insurance business units undertake a quarterly review of their insurance risks, the output
from which is a key input into the ICA and risk-based capital assessments.
The General Insurance Committee monitors and develops the management of insurance risk in the general insurance business
units, and assesses the aggregate risk exposure. It is responsible for the development, implementation, and review of the Group
policies for underwriting, claims, reinsurance and reserving that operate within the Group risk management framework.
Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within
the limits of the appetite of the Group. The Group has pioneered various developments, such as the Aviva UK Digital Flood Map to
effectively manage exposures arising from specific perils. Where appropriate such projects are employed throughout the business
units to promote the adoption of best practice as standard.
General insurance claims reserving
Actuarial claims reserving is conducted by local actuaries in the various general insurance business units according to the General
Insurance Reserving policy. The General Insurance Committee monitors and maintains the General Insurance Reserving policy,
and conducts quarterly reviews of the Group’s general insurance claims provisions, and their adequacy. The reviews include peer
reviews of the business unit’s own conclusions as well as independent analysis to confirm the reasonableness of the local reviews.
The adequacy of the Group’s general insurance claims provisions is ultimately overseen by the General Insurance Committee.
A number of business units also have periodic external reviews by local consultant actuaries (often as part of the local
regulatory requirement).
Reinsurance strategy
Significant reinsurance purchases are reviewed annually at both business unit and Group level, to verify that the levels of protection
being bought reflect any developments in exposure and the risk appetite of the Group. Reinsurance purchases must be in line with
the strategy set out in our Group General Insurance Reinsurance policy. The basis of these purchases is underpinned by extensive
financial and capital modelling and actuarial analysis to optimise the cost and capital efficiency benefits from our reinsurance
program. For the larger business units, this involves utilising externally sourced probabilistic models to verify the accumulations
and loss probabilities based on the Group’s specific portfolios of business. Where external models are not available, scenarios
are developed and tested using the Group’s data to determine potential losses and appropriate levels of reinsurance protection.
The reinsurance is placed with providers who meet the Group’s counterparty security requirements, and large reinsurance
placements may also require approval from the Group Asset Liability Committee.
Concentration risk
Processes are in place to manage catastrophe risk in individual business units and at a Group level. The Group cedes much of its
worldwide catastrophe risk to third party reinsurers but retains a pooled element for its own account gaining diversification benefit.
The total Group potential loss from its most concentrated catastrophe exposure (Northern European windstorm) is approximately
£335 million, for a one in ten year annual loss scenario, compared to approximately £620 million when measured on a one in a
hundred year annual loss scenario.
For the 2010 underwriting year the Group will participate in a share of a reinsurer’s US property catastrophe reinsurance
portfolio. This exposure is not correlated with the Group’s other General Insurance exposure and therefore provides diversification
benefit. The total expected loss from a one in ten year annual loss scenario is approximately £50 million compared to
approximately £145 million when measured on a one in a hundred year annual loss scenario.
Financial statements IFRS