Aviva 2009 Annual Report Download - page 269

267
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
(i) Risk and capital management
Sensitivity test analysis
The Group uses a number of sensitivity test-based risk management tools to understand the volatility of earnings, the volatility
of its capital requirements, and to manage its capital more efficiently. Primarily, MCEV, ICA, and scenario analysis are used.
Sensitivities to economic and operating experience are regularly produced on all of the Group’s financial performance
measurements to inform the Group’s decision making and planning processes, and as part of the framework for identifying and
quantifying the risks that each of its business units, and the Group as a whole are exposed to.
For long-term business in particular, sensitivities of MCEV performance indicators to changes in both economic and non-
economic experience are continually used to manage the business and to inform the decision making process. More information
on MCEV sensitivities can be found in the presentation of results on an MCEV basis in the supplementary section of this report.
Life insurance and investment contracts
The nature of long-term business is such that a number of assumptions are made in compiling these financial statements.
Assumptions are made about investment returns, expenses, mortality rates, and persistency in connection with the in-force policies
for each business unit. Assumptions are best estimates based on historic and expected experience of the business. A number of the
key assumptions for the Group’s central scenario are disclosed elsewhere in these statements for both IFRS reporting and reporting
under MCEV methodology.
General insurance and health business
General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques.
These methods extrapolate the claims development for each accident year based on the observed development of earlier years.
In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims.
Sensitivity test results
Illustrative results of sensitivity testing for long-term business, general insurance and health business and the fund management
and non-insurance business are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor
is shown, with other assumptions left unchanged.
Sensitivity factor Description of sensitivity factor applied
Interest rate and investment return The impact of a change in market interest rates by a 1% increase
or decrease. The test allows consistently for similar changes to
investment returns and movements in the market value of backing
fixed interest securities.
Equity/property market values The impact of a change in equity/property market values by ± 10%.
Expenses The impact of an increase in maintenance expenses by 10%.
Assurance mortality/morbidity (life insurance only) The impact of an increase in mortality/morbidity rates for assurance
contracts by 5%.
Annuitant mortality (life insurance only) The impact of a reduction in mortality rates for annuity contracts by 5%.
Gross loss ratios (non-life insurance only) The impact of an increase in gross loss ratios for general insurance and
health business by 5%.
Financial statements IFRS