Aviva 2013 Annual Report Download - page 47

Aviva plc
Annual report and accounts 2013
45
Strategic report Governance IFRS Financial statements Other information
Risks to our business continued
How we manage our risks
Our core expertise is understanding and
managing these risks, so that we can
competitively price our products, deliver on our
promises to customers and provide sustainable
earnings growth to our shareholders.
We manage risk through our choice of business
strategy, underpinned by our business culture
and values, continuously seeking to identify
opportunities to maximise risk-adjusted returns.
Rigorous and consistent risk management is
embedded across the Group through our risk
management framework, comprising:
§Our risk appetite: The risks that we select in
pursuit of return, the risks that we accept but
seek to minimise and the risks we seek to avoid
or transfer, including quantitative expressions of
the level of risk we can support (e.g. the amount
of capital we are prepared to put at risk)
§Our risk governance: Includes risk policies
and business standards, risk oversight
committees and roles and responsibilities
§Our processes: The processes we use to
identify, measure, manage, monitor and
report risks, including the use of our risk
models, and stress and scenario testing.
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Risk
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framework
How we manage our risks
Line management in the business is accountable
for risk management, which together with the
risk function and internal audit form our ‘three
lines of defence’ of risk management.
Having identied and measured the risks of
our business, depending on our risk appetite,
we either accept these risks or take action to
reduce, transfer or mitigate them.
Top risks ranked by economic capital at risk
Ranked according to the amount of economic
capital at risk in a 1-in-200 year loss event over a
one year time horizon; the three most signicant
types of risk affecting our current in-force
business and investments are credit, longevity
and equity.
Our appetite is to retain most of our exposure
to these risks due to the better risk-adjusted
returns we expect to earn compared to accepting
other risks, and our expertise in managing them.
This appetite is supported in part by our belief
that longevity risk diversies well against other
risks we retain (i.e. has little or no correlation).
While assuming credit risk enables us to take
advantage of the structural investment
advantages enjoyed by insurers with long-dated,
relatively illiquid liabilities to earn superior
investment returns.
We manage credit and equity risk through
rigorous research and analysis at the point of
investment, and continuous monitoring of our
exposures and setting investment limits to our
exposure by asset class, counterparty, geography,
sector and other pre-established risk criteria,
such as credit rating. We monitor longevity risk
against the latest external industry data and
emerging trends.
While we have appetite for our top three risks
by type, we transfer or mitigate specic risks
within these categories, where the risk-adjusted
returns are insufcient or where we believe that
we have excess exposure. Specic risk transfer
and mitigation solutions which we employ
to manage these and other risks include:
§Reinsurance, to transfer insurance risks
including longevity risk
§Derivatives, to hedge equity, credit and
other risks
§Collateral requirements, to mitigate credit risk
§Business disposals.
Emerging risks
We also manage and monitor risks which
may impact our ability to write protable new
business over the longer term. For example,
such risks include:
§Climate change: potentially resulting in
higher than expected weather related claims
and inaccurate pricing of general insurance risk
§New technologies: failure to understand and
react to the impact of new technology and its
effect on customer behaviour and how we
distribute products could potentially result in
our business model becoming obsolete
§Regulatory change: our businesses face
considerable regulatory change as a result of
Solvency II, our designation by the Financial
Stability Board as a Global Systemically
Important Insurer (G-SII) and developments in
conduct regulation, which will affect how
much capital we hold, how we operate and
how we sell and distribute our products.
US disposal –
bolstering our
nancial strength
and reducing our
credit and interest
rate risk exposure
In October 2013 we
successfully disposed of our
US Life business, resulting in
an increase in the Group’s
economic capital surplus
coverage ratio by 19
percentage points (or the
economic capital surplus by
approximately £1.2 billion).
The sale reduced the
Group’s exposure to credit
and interest rate risk, and
also reduced the sensitivity
of the Group’s economic
capital results to credit
spread movements.
The disposal means the
Group is now within its risk
appetite for total required
economic capital and
credit risk.
Read about how we address the risks
and the opportunities presented
by new technologies through our
strategic framework on page 19
Read about how we address the
risks of climate change through our
corporate responsibility programmes
overleaf