Aviva 2014 Annual Report Download - page 309

Aviva plc Annual report and accounts 2014
305
Our risk management methods may leave us exposed to
unidentified, unanticipated or incorrectly quantified risks,
which could lead to material losses or material increases in
liabilities. In particular, our risk mitigation strategies may
prove less effective than anticipated, including in relation to
our reinsurance arrangements.
We have in place risk management policies, procedures and
assessment methods to identify, assess and control risks to avoid
or limit potential losses or liabilities. However, such policies,
procedures and assessment methods may not be fully effective
in identifying and mitigating the risk exposure of such
businesses in all market environments or against all types of risk.
Unanticipated or incorrectly quantified risk exposures and/or
inadequate or incorrect responses to these risk exposures could
result in a material adverse effect on our business, results of
operations and/or financial condition.
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.
We currently use the reinsurance markets primarily to limit
our risk, to support growth and to manage our capital more
efficiently. We are 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. We operate a policy to manage our 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 counterparty risk is within appetite. Our asset and
liability management and risk functions have an active
monitoring role with escalation to the Chief Financial Officer,
the Group’s asset liability committee and the Board’s risk
committee as appropriate. Our largest reinsurance counterparty
is BlackRock Life Ltd (including subsidiaries). At 31 December
2014, the reinsurance asset recoverable, including debtor
balances, from BlackRock Life Ltd was £2,048 million.
Reductions in risk appetite among reinsurers may result in
changes in price or willingness to reinsure certain risks, which
could have a material adverse effect on our results of operations
or financial condition. If reinsurers do not offer to renew their
products and services, in whole or in part, for any reason, there
is a risk that we may be unable to procure replacement cover
for any reinsurance agreements terminated at rates equivalent
to those of the terminated cover, or at all, and we may be
exposed to un-reinsured losses during any interim period
between termination of the existing agreements and the start of
any replacement cover.
While reinsurance makes the assuming reinsurer liable to the
Group to the extent of the risk ceded, it does not discharge us
from our primary obligation to pay under an insurance policy for
losses incurred. We are therefore subject to credit risk with
respect to our current and future reinsurers. The insolvency of
any reinsurers or their inability or refusal to pay claims under the
terms of any of their agreements with us could therefore have a
material adverse effect on the Group. Collectability of
reinsurance is largely a function of the solvency of reinsurers.
Significant reinsurance purchases are reviewed annually by us to
verify that the levels of protection being bought reflect any
developments in exposure and our risk appetite.
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, and this may expose us to additional risks.
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. Partnership
agreements may also be terminated on certain dates or subject
to certain conditions and could be subject to renewal on less
favourable terms. In addition, 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.
For example, DBS Bank is a significant distribution partner of the
Group in Hong Kong and Singapore and the current agreement
with DBS Bank, which is subject to renewal in 2015, is not
guaranteed to be renewed. 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, implement and maintain 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 administration and cost
efficiencies and, as a result, may experience operational
difficulties, increased costs and a loss of business. In particular,
failings by our outsource partners to perform outsourced
functions, or to perform them to the required standards, may
adversely affect our reputation and lead to the loss of customers
and operating profit or to regulatory fines.
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 fulfil 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
Other information
Aviva plc Annual report and accounts 2014 |305