Aviva 2013 Annual Report Download - page 223

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
221
Notes to the consolidated financial statements continued
58 – Risk management continued
(iii) Other investments
Other investments (including assets of operations classified as held for sale) include unit trusts and other investment vehicles;
derivative financial instruments, representing positions to mitigate the impact of adverse market movements; and other assets
includes deposits with credit institutions and minority holdings in property management undertakings.
The credit quality of the underlying debt securities within investment vehicles is managed by the safeguards built into the
investment mandates for these funds which determine the funds’ risk profiles. At the Group level, we also monitor the asset
quality of unit trusts and other investment vehicles against Group set limits.
A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally
applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall appetite for
market risk.
(iv) Loans
The Group loan portfolio principally comprises:
 Policy loans which are generally collateralised by a lien or charge over the underlying policy;
 Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions.
These loans are fully collateralised by other securities; and
 Mortgage loans collateralised by property assets.
We use loan to value; interest and debt service cover; and diversity and quality of the tenant base metrics to internally monitor our
exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our
stock lending activities. Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies.
(v) Credit concentration risk
The long-term and general insurance businesses are generally not individually exposed to concentrations of credit risk due to the
regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual
assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to
Group ALCO. With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets is
approximately 1.9% of the total shareholder assets (gross of ‘held for sale’).
(vi) 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 Group risk function has an
active monitoring role with escalation to the Chief Financial Officer (CFO), Group ALCO and the Board Risk Committee as
appropriate.
The Group’s largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2013,
the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was £1,620 million.
(vii) Securities finance
The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks
within this activity are mitigated by over-collateralisation and minimum counterparty credit quality requirements which are
designed to minimise residual risk. The Group operates strict standards around counterparty quality, collateral management,
margin calls and controls.
(viii) 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 foreign exchange trades where it has historically been the market norm not to collateralise).
Residual exposures are captured within the Group’s credit management framework.
(ix) Unit-linked business
In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the
shareholders’ exposure to credit risk is limited to the extent of the income arising from asset management charges based on the
value of assets in the fund.