Aviva (GU80) Risk Analysis
Risk Overview Q4, 2021
Risk Change Over Time
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- Accounting & Financial Operations - Risk 1Longevity advancements (e.g. due to medical advances)
these contribute to an increase in life expectancy of our annuity customers and thus future payments over their lifetime may be higher than we currently expect. Stable Life insurance risk (longevity) We monitor our own experience carefully and analyse external population data to identify emerging trends. Detailed analysis of the factors that influence mortality informs our pricing and reserving policies. We add qualitative medical expert inputs to our statistical analysis and analyse factors influencing mortality and trends in mortality by cause of death. We also use longevity swaps to hedge some of the longevity risk from the Aviva Staff Pension Scheme and longevity reinsurance for bulk purchase annuities and for some of our individual annuity business. There is considerable uncertainty as to whether the improvements in life expectancy that have been experienced over the last 40 years will continue into the future. In particular, there is likely to be a reduced level of improvement from the two key drivers of recent improvements, smoking cessation (as you can only give up smoking once) and the use of statins in the treatment of cardiovascular disease (where the most significant benefit from use in higher risk groups has now been seen). Despite continued medical advances emerging, dietary changes, increasing obesity and strains on public health services have slowed the historical trend since around 2011. In the UK, this has led to some significant industry-wide longevity reserve releases in recent years, as the assumptions around future longevity improvements have been weakened. The potential impact of the COVID-19 pandemic on medium and longer term longevity projections, via ongoing direct effects (e.g. endemic COVID-19) or via indirect effects (e.g. strains on the NHS), also adds to the uncertainty but we do not currently anticipate a material impact on the overall outlook.
Risk Highlights Q4, 2021
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 15
- Economy & Political Environment - Risk 1Changes in public policy
any change in public policy (government or regulatory) could influence the demand for, and profitability of, our products. In some markets there are (or could be in the future) restrictions and controls on premium rates, rating factors and charges. The nature of the UK relationship with the EU and the EU's treatment of 3rd countries in respect of financial services has implications for our business models for our asset management and insurance businesses in the EU. Uncertain Operational risk We actively engage with governments and regulators globally in the development of public policy and regulation. We do this to understand how public policy may change and to help ensure better outcomes for our customers and the Group. The Group's multi-channel distribution and product strategy and geographic diversification, although reduced following the divestment programme, underpin the Group's adaptability to public policy risk, and often provides a hedge to the risk. For example, since the end of compulsory annuitisation in the UK, we have compensated for falling sales of individual annuities by increasing sales of other pension products - particularly bulk purchase annuities. We continue to actively monitor developments in EU policy towards third countries such as the UK, which could impact our business model and identify contingent management actions to address these. In the UK pressure on public finances may result in further erosion of tax relief for pension savings, and increase in Insurance Premium Tax. The FCA expect to confirm new consumer duty rules by end-July 2022, while new PRA and FCA regulations on operational resilience take effect end-March 2022. In Ireland the regulator has expressed concerns over renewal pricing and is expected to adopt reforms similar to those recently implemented in the UK. In Canada, where motor premium increases are approved by provincial regulators, pressure to minimise these will persist. The Future Regulatory Framework Review will determine the post Brexit regulatory and policy settlement, which will have a direct bearing on the outcome of the UK Solvency II review. The UK and EU separate reviews of Solvency II continue through 2022. Both reviews could impact the amount of prudential capital our businesses are required to hold in the UK and EU. EU policy towards financial services provided from third countries continues to incrementally harden. Some restrictions on delegation of asset management activities to the UK are expected in the Alternative Investment Fund Managers Directive (AIFMD) review. Emerging UK policy on data potentially threaten data adequacy with the EU.
- Economy & Political Environment - Risk 2Economic & credit cycle
uncertainty over prospects for future macroeconomic growth (including the impact of the conflict between Russia and Ukraine), inflation, credit and current low interest rates, and the response of Central Banks, could adversely impact the valuation of our investments or credit default experience. This could also impact the level of the returns we can offer to customers going forwards and our ability to profitably meet our promises of the past. Uncertain Credit risk, Market risk, Liquidity risk We limit the sensitivity of our balance sheet to investment risks. While interest rate exposures are complex, we aim to closely duration-match assets and liabilities and take additional measures to limit interest rate risk. We hold substantial capital against market risks, and we protect our capital with a variety of hedging strategies to reduce our sensitivity to shocks. We regularly monitor our exposures and employ both formal and ad-hoc processes to evaluate changing market conditions. Other actions taken in the past include reducing sales of products with guarantees and shifting our sales towards protection and unit-linked products. The follow-on effects of the financial stimulus measures to cope with the pandemic are now coming more into focus including the impact of interest rate rises, risk of a deflating asset bubble and the risk of inflation (potentially impacting credit quality of counterparties, as well as squeezing real wages adversely impacting discretionary saving, insurance new business and renewals and lapse risk). While inflation pressures are expected to recede in 2023, there is a risk inflation becomes entrenched and persistent. The Group's balance sheet has hedges in place to mitigate these risks.
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