Aviva 2013 Annual Report Download - page 306

Aviva plc
Annual report and accounts 2013
304
Shareholder information continued
The extent of losses from a catastrophe is a function of both the
total amount of insured exposure in the area affected by the
event and the severity of the event. Most catastrophes are
restricted to small geographic areas; however, pandemics,
hurricanes, earthquakes and man-made catastrophes may
produce significant damage in larger areas, especially those that
are heavily populated. Catastrophic events could also harm the
financial condition of our reinsurers and thereby increase the
probability of default on reinsurance recoveries and could also
reduce our ability to write new business. Furthermore,
pandemics, natural disasters, terrorism and fires could disrupt
our operations and result in significant loss of property, key
personnel and information about our clients and our business
if our business continuity plans fail to cope with the scale or
nature of the catastrophe. Such events could adversely affect
our business, results of operations, corporate reputation and
financial condition for a substantial period of time.
Furthermore, market conditions beyond our control determine
the availability and cost of the reinsurance protection we
purchase. Accordingly, we may be forced to incur additional
expenses for reinsurance or may not be able to obtain sufficient
reinsurance on acceptable terms, which could adversely affect
our ability to write future business.
Operational risks relating to Aviva’s business
All of our businesses are subject to operational risks,
including the risk of direct or indirect loss resulting from
inadequate or failed internal and external processes, systems
and human error or from external events.
Our business is dependent on processing a large number of
complex transactions across numerous and diverse products.
Furthermore, the long-term nature of the majority of our
business means that accurate records have to be maintained
for significant periods.
Our systems and processes on which we are dependent to
serve our customers are designed to identify appropriately and
address the operational risks associated with our activities.
However, they may nonetheless fail due to IT malfunctions,
human error, intentional disruption or hacking of IT systems by
third parties, business interruptions, non-performance by third
parties or other external events. This could disrupt business
operations resulting in material reputational damage and the
loss of customers, and have a consequent material adverse
effect on our results of operations and financial condition.
Although we have taken steps to upgrade systems and
processes to reduce these operational risks, we cannot
anticipate the details or timing of all possible operational and
systems failures which may adversely impact our business.
Our businesses are exposed to risk from potential non-
compliance with policies, employee misconduct or negligence
and fraud, which could result in regulatory sanctions and serious
reputational or financial harm. In recent years, a number of
multinational financial institutions have suffered material losses
due to the actions of “rogue traders” or other employees. It is
not always possible to deter employee misconduct, and the
precautions we take to prevent and detect this activity may not
always be effective.
Our risk mitigation strategies may prove less effective than
anticipated.
We employ a range of risk mitigation strategies including the
use of equity, interest rate and credit derivatives and reinsurance
arrangements to reduce market, credit and insurance risk.
A range of different modelling approaches are used to derive
and evaluate the strategies adopted. The breakdown of the
assumptions used in these modelling approaches, which may
occur during market dislocations, could cause these risk
mitigation strategies to be less effective than anticipated and
thereby adversely affect our financial condition and results
of operations.
There is a risk that customer data could be lost or misused.
As a financial services group, we maintain significant amounts
of sensitive customer data. Despite the controls put in place,
there remains a risk that this data could be lost and/or misused
as a result of an intentional or unintentional act by parties
internal or external to us. This could result in fines, the need to
compensate customers, the cost of remediation and a negative
impact on our reputation with the consequential impact on
sales volumes, persistency levels, and third party managed
funds, and hence adversely impact our results of operations.
We operate in several markets through arrangements with
third parties. These arrangements involve certain risks that
we do not face with our subsidiaries.
Our ability to exercise management control over our partnership
operations, our joint ventures and our investment in them
depends on the terms of the legal agreements. In particular, the
relationships depend on the allocation of control among, and
continued co-operation between, the participants.
We may also face financial or other exposure in the event
that any of our partners fail to meet their obligations under the
agreement or encounter financial difficulty. For example, a
significant proportion of our product distribution, such as
bancassurance, is carried out through arrangements with third
parties not controlled by us and is dependent upon the
continuation of these relationships. A temporary or permanent
disruption to these distribution arrangements could affect our
financial condition. Some of these arrangements require our
third-party partners to participate in and provide capital to our
joint venture, associate and subsidiary undertakings. Our
partners may change their strategic priorities or encounter
financial difficulties preventing them from providing the
necessary capital to promote future growth.
In addition, we outsource certain customer service,
technology and legacy policy administration functions to third
parties and may do so increasingly in the future. If we do not
effectively develop and implement our outsourcing strategy,
third-party providers do not perform as anticipated or we
experience technological or other problems with a transition
to or between such providers, we may not realise the full extent
of productivity improvements or cost efficiencies and may
experience operational difficulties, increased costs and a loss
of business. Failings in our outsource partners may also affect
our reputation.
Our fund management operation depends on a number of
key vendors for various fund administration, accounting,
valuations, custody and transfer agent roles and other
operational needs. The failure or inability to diversify sources
for key services or the failure of any key vendors to fulfill their
obligations could lead to operational issues for us and in
certain products, which could result in financial losses for us
and our clients.
The failure to attract or retain the necessary personnel could
have a material adverse effect on our results and/or financial
condition.
As a global financial services organisation with a decentralised
management structure, we rely to a considerable extent on the
quality of local management in the countries in which we
operate. The success of our operations is dependent, among
other things, on our ability to attract and retain highly qualified
professional employees. Competition for such key employees
is intense. Our ability to attract, retain and motivate key
employees is dependent on a number of factors, including
prevailing market conditions, our working environment and
compensation packages offered by companies competing for
the same talent.