Avivs Economic Capital

8/2/2019 Avivs Economic Capital

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m arr s

DRAFT 12 January 2011 V1DRAFT 12 January 2011 V1

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Agenda

Economic Capital and its role at Aviva

Economic Capital and Solvency II

How we calculate our Economic Capital

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Economic Capital: Part of our continual developmentof risk management

Front line

Accountabilit for

econ nedefence

r nedefence

managing all risks

CEO, CFO, operational

challenge & oversight

Executive level

assurance

Internal & external

management etc appointment au , n epen en

actuarial reviews etc

A CEO & CFO team with a

comprehensive knowledge &experience in financial

Aiming for a balance oftechnical & businessexpertise

A comprehensive range ofleading industry advisorsactively engaged in

services

Deep bench of expertise withstrong succession planning

Recent recruitment ofrecognised industry talent

Ongoing and high priority

independent audits &reviews

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Solvency IIEconomic

CapitalCalculation What & How


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One of a range of measures used forcapital assessment

Economic Avivas own assessment of both capital available and capital required*

Formula-based assessment of both capital available and

Agencycapital required

Each agency uses a defined set of rules for rating assessment

IGD(Solvency I)

Current means for assessing regulatory capital, will be replaced by

Solvency II in 2013

Not a risk-based measure

ICA UK regulated entities risk-based measure which allows some

economic principles to be used

Solvency II Detailed requirements and transition rules remain uncertain

4Solvency IIEconomic


* throughout this presentation this capital is required based on internal assessment andcapital management policies. The term required does not imply required by regulators orother third parties


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Solvency II

Solvency II

2013

Public

Solvency I

1970s

Public

ICA

2005

Private

EU market consistent

Based on three pillars

Internal economic

Not market consistent

Arbitrary

Factor based

UK regulated entitiesonly

Firms required to

models

Prudent person

Own Risk & Solvency

No incentive foreffective riskmanagement

to mitigate risk to 99.5%VAR

Consider all risks

incentives for improved

risk management

Incentives for improvedrisk management




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Solvency II on track for a sensible outcome

Solvency II likely to go ahead on 1 January 2013

but lengthy transition arrangements likely to be

Final requirements and transitional

arrangements remain unclear but:

Current outlookRecent proposals

in place

QIS 5 is a request for information.

The final Solvenc II rinci les will not be in line

VIF expected to be allowable

Hybrid debt expected to be allowable under

transition rovisions

with some principles in QIS5 Liquidity premium likely to be allowable

Transition arrangements likely to be put in

competitively disadvantaged against theUSA & other non equivalent countries




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Economic Capital management

Available Economic Ca ital Re uired Economic Ca ital*

Capital resources available tothe group measured on an

Our Required Economic Capitalis the amount of risk capital,

,

which is needed to cover riskstaken by the group, such as

market risk, credit risk, insurancerisk and operational risk

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* throughout this presentation this capital is required based oninternal assessment and capital management policies.The term required does not imply required by regulators or otherthird parties

Solvency IIEconomic



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Setting the Target Capital Requirement

Required Economic Capital

The Tar et ca italisation of the Grou is to have

sufficient surplus capital to meet policyholderliabilities following:

a 1 in 200 year loss, followed by a further

1 in 10 year loss

This is broadly similar to a 1:2000 calibration.

percentile percentile

cons s en w cap a o an ra e rm

Surplus is expressed as the buffer over 1:200

Target Surplus

Important to avoid excessive, inefficient,capitalisation by adding a further buffer on top of

these two - better to plan management actions torespond to risks if they occur

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90th

percentile50th

percentileSolvency II

EconomicCapital

Calculation What & How


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Calculation of Available Economic Capital at Aviva plc

Available Economic Capital (AEC) - The amount of Economic Capital we hold

Based on the audited MCEV balance sheet adjusted for:

Intangible assets (excl. VIF) and goodwill are excluded

GI businesses adjusted from IFRS basis to an economic valuation (by removing reserve

margins and discounting the liabilities) u or na e y r e s rea e as ava a e cap a

Adjustments to arealistic basis

bn

Hybrid debt

MCEVBalance Sheet

Economic

Balance Sheet(1.6)bn5.0bn

14.2bn

17.6bn

FY09 Adjustments FY09

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MCEV

Shareholders Equity*

Available Economic

Capital

Solvency IIEconomic


* including preference shares and DCI


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Calculating the Required Economic Capital

Distribution ofbalance sheet outcomes

Evolution of risks Balance sheetvaluation

50th

percentile

Capitalrequi

A L

99.5th percentile

rement

t=0 t=1

All-risk scenariosallowing forde endenc

A L

Identify all of therisks

Choose stresses to

cover all of these

Define the

confidence levelsand the time

Model the impactof these stresses

on the economic

Quantify and

modelde endencies or

horizon balance sheet correlationsbetween the risks

Spreads widen, defaultsIncluding Credit, Equity, 1 in 10, 1 in 200 over Pension Scheme risk Geographic, risk andon bonds, fall in shareprices, claims inflation,bodily injury, floods,higher lapses, medicalbreakthroughs, fraud,

General Insurance(reserving, underwriting,catastrophe etc.), LifeInsurance (persistency,longevity, mortality etc.),

(1 year) allowed for through fiveyears of stressedcontributions

scale diversificationeffects

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, ,foreign exchange

Solvency IIEconomic



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Available and Required Capital at Aviva plc FY09

bn

Surplus Surplus

Within the range of a AA-calibrated

AvailableEconomic

. r s appet te

Available EconomicCapital (AEC)

17.6bn RequiredEconomic

The amount of Economic

Capital we hold

Required Economic Capital (REC)*

The amount of capital required to cover

12.8bn

e r s s ace



* throughout this presentation this capital is required based onAvivas own assessment and capital management policies. Theterm required does not imply required by regulators or other thirdparties


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Model Review and Governance

.evolved significantly over that period and will continue to do so

There are 3 internal lines of internal model review

1st Line: Review and sign off of results by Businesses, Regional teams andthen Group Finance teams

2nd Line: Risk function review of results at all levels 3rd Line: Internal Audit review of processes and results

Board review

Avivas external auditors, Ernst & Young, provide a reasonable assurance report* on

Engagements (ISAE 3000)



* this report is made solely to the company's directors, as a body. Tothe fullest extent permitted by law, Ernst & Young do not accept orassume responsibility to anyone other than the company and thecompany's directors for the opinions. The inherent limitations involvedwith setting assumptions are highlighted in the basis of opinion


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What does Economic Capital tell us?

Avivas risk profile FY09The graph illustrates the relative

Credit

Othermarket

8%

Credit is the single largest exposurefor the grou followed by general

25%Operational12%

insurance and life insurance risks

Equity risk exposure has been

Life15%

Equity12%

is residual exposure in policyholderfunds

Interestrate10%

GI

18%

Credit & Insurance related risks

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er r s s

Solvency IIEconomic



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How do we use Economic Capital?

Economicmodels

Optimise capital deploymentStrategy

(capital & risk) Product design

Pricing

Ca ital structure

enterprise wide holistic basis

Optimise product design

Increasingly anintegral part ofrunning the

Reinsurance

Asset/liability

Transparent evaluation of assets, risks,

scenarios and strategic options

Optimal diversification of riskma c ng

Investmentmanagement

Business lines/liability mix

Prosperity and peace of mind forour customers

Hedging

Enterprise risk

management

Use of Economic Capital models helps to inform strategy and support decision making tomaximise return on shareholder capital while protecting policyholders




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Conclusion

Economic capital models calibrated to AA risk appetite

.

Economic capital key to optimising financial discipline and performance

15This reflects Avivas own assessment of economic capital and is separate from capital required by regulators

Documents

Avivs Economic Capital