IFRS condensed financial statements
A17 - Risk management
Risk management
As a global company, we face a large and diverse number of risks. Each of these risks has the potential to impact our financial performance or hinder the achievement of our strategic objectives.
To ensure that risks are effectively identified and assessed and that appropriate controls and responses are in place, the Chief Risk Officer co-ordinates all group-wide risk management activities supported by local chief risk officers in each of our regions. A full description of our approach and management of risks is set out in the 2008 Annual Report and Accounts.
In accordance with the requirements of the Transparency Directive (DTR 4.2.7) we provide an update here on the material risks and uncertainties facing the group for the next six months.
Market risk
The world-wide economic backdrop to this half year report remains negative. Even though some indicators are beginning to show a positive trend there is a risk that recovery could be delayed, or in a worst case reverse. As a result we expect to continue to see heightened levels of market volatility in respect of interest rates, asset values and foreign exchange rates.
Aviva regularly monitors its investment holdings and asset-liability matching and we continue to explore new ways of mitigating the risks we are exposed to. We actively manage our equity exposures and have purchased additional protection in the half year to June 2009. Equity markets have demonstrated significant liquidity despite adverse economic conditions. We consider equity hedging to continue to be appropriate to protect the Group's statement of financial position against a general decline in the economic position.
Credit risk
Credit spreads have reduced in recent months reflecting some return of confidence to the market and the removal of some forms of hybrid capital from the market indices. However default experience will tend to lag the financial markets.
Aviva has taken a prudent approach to its overall credit risk exposure including a reduction in some counter party credit limits and through increased monitoring of exposures. A new credit risk management information system has been introduced which improves the timeliness of information to support the management and optimisation of our credit risk.
Liquidity risk
We need to ensure that we maintain sufficient liquid assets to meet our cash flow obligations as they fall due. All our businesses identify their sources of liquidity risk and monitor the potential exposures.
At a group level we maintain a prudent level of liquidity by maintaining a buffer of liquid assets to cover unforeseen circumstances. In addition, the group maintains significant committed undrawn borrowing facilities from a range of leading international banks.
Foreign exchange risk
As an international business we are exposed to fluctuations in exchange rates; these affect the value of shareholder funds which are expressed in sterling. Generally we don't hedge these currency risks as profits are retained to support growth in the business units. However significant declared dividends from overseas businesses or other material transaction exposure risks such as mergers and acquisitions are hedged.
We centrally monitor against limits the amount of foreign exchange risk to our group regulatory capital positions. We use currency borrowings and derivatives when necessary to keep currency exposures within these limits.
Insurance risk
We continue to monitor our insurance risks, particularly those most affected by the economic crisis, such as customer retention, creditor insurance and general insurance claims. Where appropriate we take steps to address emerging trends via underwriting or rating changes in order to ensure we deliver the right level of profit from our insurance business.
Regulatory risk
The financial crisis is driving increased regulatory scrutiny of the group's business; however we continue to maintain constructive relationships with our regulators around the globe. We face substantial change in the regulatory framework driven by the implementation of the Solvency II Directive in Europe as well as national, European and global regulatory reform proposals in response to the financial crisis.
We are actively involved in the consultation exercises on these new regulatory proposals both through direct lobbying activity and via influencing the input of UK, European and international bodies representing the financial services industry. In this way we are seeking to ensure effective but proportionate regulation is applied.
Regulatory changes will also influence future distribution opportunities for our products and services. In the USA, there is a significant likelihood that distribution of equity indexed annuity products will be subject to regulation by the SEC rather than by state insurance departments by 2011. In the UK, the Retail Distribution Review, which is scheduled for implementation in 2012, is expected to significantly change the landscape for the distribution of life and pensions contracts. We continue to influence these developments and prepare for the business changes each will necessitate.
Other risks
We have noted no material changes to the other risks identified in the 2008 Annual Report and Accounts.
