Aviva 2014 Annual Report Download - page 63

Emerging risks and
causal factors
We also manage and monitor risks and
causal factors which may impact our
longer term protability and viability, in
particular our ability to write protable
new business. For example, such risks
andfactors 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. While
ongoing consultations on implementing
standards and supervisory guidelines
have reduced the level of uncertainty
over the nal capital impact on our
business of Solvency II (effective
1 January 2016), some uncertainty
remains, including over the outcome
ofthe Group’s application to use an
internal model to calculate our capital
requirements.
• Political risk – governments in the
markets in which we operate incentivise
long-term saving and private pension
provision through tax benets, while also
providing an alternative through state
provision. In some markets there are (or
could be in the future) restrictions and
controls on premium rates, rating factors
and charges. Any change in public policy
could inuence the demand for, and
protability of, our products. For example,
in March 2014 the UK Government
announced the end of compulsory
annuitisation, which has signicantly
reduced demand for individual annuities.
The diversity of our product offering and
the geographies in which we operate
partly mitigates this risk.
• Cyber crime – criminals may attempt to
access our IT systems to steal or utilise
company and customer data, or plant
malware viruses, in order to access
customer or company funds, and/or
damage our reputation and brand. While
we have IT security and data encryption
to prevent this happening, the increasing
sophistication of criminals and the focus
on digital automation as part of our
strategy make this an increasing risk.
• Prolonged low interest rate
environment – if current low interest
rates continue for a prolonged period it
will adversely affect the ‘spread’ we can
earn between the returns we can offer
customers and the return we earn on
our investments, as well as the
attractiveness of the returns we can offer
to new customers.
• Macroeconomic growth – the
slowdown in economic growth in Asia,
and re-emerging concerns over the
economic performance of the eurozone,
could precipitate a wider global economic
slowdown, which could adversely impact
our investments, customer retention and
new business levels.
• New and emerging latent claims
– new claims on policies written a long
time in the past may arise as a result of
future court judgements extending
liability, new legislation, new historic
evidence and interpretation, emerging
medical science on health effects of
long-term exposures to chemicals etc.
Examples over the last 30 years include
asbestosis, repetitive strain injury and
industrial deafness.
• Medical advances and healthier life
styles – medical advances and healthier
life styles may increase life expectancy of
our annuitants and thus future payments
over their lifetime may be in excess of the
amounts we currently expect. Historic
examples include the positive impact on
life expectancy of reduced rates of
smoking over the last 40 years.
• Pandemics, new diseases and
antibiotic resistance – the adverse
impact on mortality could negatively
impact the protability of our life
protection products, increase private
health insurance claims, and even affect
general insurance claims. A pandemic
might also disrupt our operations.
• Big Data – failure to keep pace with
the use of data to price more accurately
and to detect insurance fraud could
lead to loss of competitive advantage
and nancial losses.
• Changes in customer behaviour
– changes in the legal environment or
as a result of advances in technology
may change the rates at which
customers exercise options embedded
in their contracts or enable them to take
advantage of additional information
available to them to exercise options in
a way that is adverse to us.
See pages 18 and 52 on how we address
the risks of new technologies and climate
change through our business strategies
and corporate responsibility respectively.
Case study
Being prepared for
the worst
The Group and its businesses have
contingency plans in place to ensure a
swift and effective response in case risks
crystallise into major loss events, including:
• Financial Event Response Plans – to
ensure we can respond promptly to severe
adverse nancial events (e.g. equity market
crash, sovereign default etc.) that may
weaken the nancial position of Aviva
• Business Continuity Plans – to ensure
we can continue to operate and serve
our customers in the event of terrorism,
pandemic, cyber-attack or other events
disrupting our operations
• Major Incident Response Plans – to
ensure we can maintain our level of
customer service in response to a spike in
demand resulting from a major weather
event (e.g. oods, windstorms) or other
loss event.
We use ‘war-gaming’ to test the
effectiveness of our plans in the event
theserisks crystallise.
Strategic report
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