Aviva 2014 Annual Report Download - page 280

Aviva plc Annual report and accounts 2014
Risk and capital management
276
Risk management objectives
As a global insurance group, risk management is at the heart of
what we do and is the source of value creation as well as a vital
form of control. It is an integral part of maintaining financial
stability for our customers, shareholders and other stakeholders.
Our sustainability and financial strength are underpinned by
an effective risk management process which helps us identify
major risks to which we may be exposed, establish appropriate
controls and take mitigating actions for the benefit of our
customers and investors. The Group’s risk strategy is to invest its
available capital to optimise the balance between return and risk
whilst maintaining an appropriate level of economic (i.e. risk-
based) capital and regulatory capital in accordance with our risk
appetite. Consequently, our risk management objectives are to:
• Embed rigorous risk management throughout the business,
based on setting clear risk appetites and staying within these;
• Allocate capital where it will make the highest returns on a
risk-adjusted basis; and
• Meet the expectations of our customers, investors and
regulators that we will maintain sufficient capital surpluses to
meet our liabilities even if a number of extreme risks
materialise.
Aviva’s risk management framework has been designed and
implemented to support these objectives. The key elements of
our risk management framework comprise our risk appetite; risk
governance, including risk policies and business standards, risk
oversight committees and roles & responsibilities; and the
processes we use to identify, measure, manage, monitor and
report (IMMMR) risks, including the use of our risk models and
stress and scenario testing. These elements are expanded in the
IFRS Financial statements – Note 58.
Principal risks and uncertainties
In accordance with the requirements of the FCA Handbook (DTR
4.1.8) we provide a description of the principal risks and
uncertainties facing the Group here and in note 58 to the IFRS
Financial statements. Our disclosures covering ‘risks relating to
our business’ in line with reporting requirements of the
Securities Exchange Commission (SEC) provide more detail and
can be found in the shareholder information section ‘Risks
relating to our business’.
Risk environment
The benign financial market conditions experienced in 2013
continued during 2014, albeit with increased volatility in the
second half of the year as a result of concerns over eurozone
growth and deflation, China economic slowdown, the severe
fall in the price of oil and other commodities, the prospect of an
end to US monetary policy easing and geopolitical concerns over
Russia, Ukraine and the Middle East. These concerns are likely to
continue into 2015 with the potential to cause further financial
market volatility and divergence amongst developed economies
(US compared to eurozone in particular) in monetary policy,
interest rates and economic growth, and exacerbate
macroeconomic imbalances in the global economy. However,
even for those western economies (including the UK) expected
to grow strongly, high levels of debt will continue to act as a
brake on growth and the low interest rate environment
compared to historic norms is likely to persist in the
intermediate future at least.
2014 saw significant changes in UK public policy over long
term savings and pension provision, most notably the
announcement in March 2014 in the Budget ending compulsory
annuitisation. In 2015 general elections in the UK, Poland,
Spain and Canada will exacerbate uncertainty over public policy
and, in the UK, uncertainty over continued membership of the
European Union.
In November 2014 the Group’s designation as a Global
Systemically Important Insurer (G-SII) was re-confirmed. Among
other policy requirements, this will result in additional loss
absorbency capital requirements, which are still under
development, to be applied from January 2019, if the Group
remains a G-SII.
In April 2014 the implementation date of Solvency II was
finally confirmed in law as 1 January 2016, with the formal
approval of the Omnibus II amendments. On-going work on the
“Level 2” Delegated Acts, Implementing Technical Standards
and Supervisory Guidelines, to be finalised in 2015, have
reduced the level of uncertainty over the final capital impact on
the Group. However, some uncertainty remains including over
the outcome of the Group’s application to use an internal
model to calculate its capital requirement.
Risk profile
The types of risk to which the Group is exposed have not
changed significantly over the year and remain credit, market,
insurance, asset management, liquidity, operational and
reputational risks as described in note 58 of the IFRS financial
statements.
Reflecting Aviva’s objective of building financial strength and
reducing capital volatility, the Group continued to take steps to
amend its risk profile, successfully completing a number of
management actions in progress at the 2013 year-end. These
include the disposal of the Group’s interest in Eurovita resulting
in a reduction in exposure to Italian sovereign and corporate
debt, partly offset by an increase in exposures due to a
reduction in minority interests in the Group’s remaining Italian
businesses following their restructure during the year, and in
addition the disposal of our Turkish general insurance business,
South Korean Life business and one of our Spanish joint
ventures, CxG. Restrictions on non-domestic investment in
sovereign and corporate debt from Greece, Italy, Portugal and
Spain remain in place. However, in light of the improving
economic situation in Ireland, we have made a modest increase
in our exposure to Irish sovereign debt during the year. As
described in note 58 to the IFRS Financial statements, a number
of foreign exchange, credit and equity hedges are also in place.
These are used to mitigate the Group’s credit and equity
exposure, and enable the Group to accept other credit risks
offering better risk adjusted returns while remaining within
appetite. In addition, the Group reduced its exposure to
longevity risk as a result of the Aviva Staff Pension Scheme
entering into a longevity swap covering £5 billion of pensioner
in payment scheme liabilities on 5 March 2014.
During 2014, the Group continued to pay-down the inter-
company loan between Aviva Insurance Limited (AIL) and Aviva
Group Holdings (AGH) from £4.8 billion at 31 December 2013
to £3.2 billion at 31 December 2014. At the end of February
2015, the balance of the loan stood at £2.8 billion with plans to
reduce the balance by end of 2015 to the level at which we
estimate AIL would no longer rely on the loan to meet its
stressed liabilities, equating currently to a balance of
approximately £2.2 billion.
In 2014, the Group established Aviva International Insurance
Limited (AII) as its primary on-shore internal reinsurance mixing
vehicle with the conclusion of 10% and 5% quota share
internal reinsurance treaties covering the Group’s UK annuity
and general insurance businesses respectively. The Group has
plans to significantly increase the amount of business ceded to
AII. The objective of these plans is to promote capital efficiency
and realise the benefits of group diversification of risk through
lower solo capital requirements in the ceding entities.
The successful completion of the sale of Eurovita in Italy and
our general insurance business in Turkey means that the Group
has largely completed its strategy set out in 2012 of focusing on
fewer businesses, allowing capital to be redeployed to
businesses that enhance the Group’s return on risk based
capital.
On 2 December 2014, the Group and Friends Life Group
Limited (“Friends Life”) announced they had reached agreement
on the terms of the recommended all share acquisition of
276 | Aviva plc Annual report and accounts 2014