Annual Financial Report

RNS Number : 2968D

Aviva PLC

02 March 2022

 

2 March 2022

Aviva plc

2021 Annual Report and Accounts

On 2 March 2022, Aviva plc (the "Company") released its 2021 Results Announcement for the year ended 31 December 2021. The Company announces that it has today issued the 2021 Annual Report and Accounts.

The 2021 Annual Report and Accounts was approved by the Board on 1 March 2022 and provides information about the Company as at 31 December 2021. 

The document is available to view on the Company's website at https://www.aviva.com/investors/reports/   and copies have been submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

Printed copies of the 2021 Annual Report and Accounts will be mailed to shareholders on 1 April 2022 together with the Company's 2022 Notice of Annual General Meeting, in line with shareholder communication preferences.

The 2021 Annual Report and Accounts can be requested free of charge by shareholders from the date they are mailed to shareholders by contacting the Company's Registrar, Computershare Investor Services PLC, on 0371 495 0105 or at [e-mail], or by writing to the Group Company Secretary, Aviva plc, St Helen's, 1 Undershaft, London EC3P 3DQ.

Enquiries:

Kirsty Cooper, Group General Counsel and Company Secretary    [phone]

Roy Tooley, Head of Secretariat - Corporate                                                   [phone]

Information required under Disclosure & Transparency Rule 6.3

This announcement should be read in conjunction with the Company's results announcement issued on 2 March 2022. Together these constitute the material required by DTR 6.3 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the Company's 2021 Annual Report and Accounts. Page references in the text below refer to page numbers in the 2021 Annual Report and Accounts. 

Directors' responsibilities

The directors are responsible for preparing the Annual Report and Accounts, the Directors' Remuneration report and the financial statements in accordance with applicable law and regulations.

Company law required the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent financial statements in accordance with UK-adopted international accounting standards. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for that period. In preparing these financial statements, the directors are required to:

• select suitable accounting policies and apply them consistently;

• make reasonable and prudent judgements and accounting estimates;

• state where applicable the directors have prepared the Group and parent company financial statements in accordance with UK-adopted international accounting standards; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and Group will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and Group, enable them to ensure that the financial statements and the Directors' Remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for making, and continuing to make, the Company's Annual Report and Accounts available on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's and the Company's position, performance, business model and strategy.

Each of the current directors whose names and functions are detailed in the 'Our Board of Directors' section and in the Directors' and Corporate Governance report confirm that, to the best of their knowledge: the Group financial statements, which have been prepared in accordance with UK-adopted international accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and the Strategic report and the Directors' and Corporate Governance report in this Annual report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Listing Rules requirements

For the purposes of Listing Rule (LR) 9.8.4C R, the information required to be disclosed by LR 9.8.4 R can be found in the following locations:

Section in LR 9.8.4C R	Topic	Location in the Annual Report and Accounts
12	Shareholder waivers of dividends	IFRS Financial Statements - note 34
13	Shareholder waivers of future dividends	IFRS Financial Statements - note 34

By order of the Board on 1 March 2022.

Principal risks and uncertainties

In accordance with the requirements of the FCA Handbook (DTR 4.1.8) we provide a description of the principal risks and uncertainties facing the Group in note 57 to the IFRS Financial statements. More detail on the risks and uncertainties facing the Group can be found in the Risk and risk management section of the Annual Report and Accounts.

Our risks and risk management

Risk management is key to Aviva's success. We accept the risks inherent to our core business lines of life, health and general insurance and asset management. We diversify these risks through our scale, the variety of the products and services we offer and the channels through which we sell them.

We receive premiums which we invest to maximise risk-adjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders.

In doing so we, have a preference for retaining those risks we believe we are capable of managing to generate a return.

Looking forward, these risks may be magnified or dampened by current and emerging external trends (including those set out in 'Principal emerging trends and causal factors' section) which may impact our current and longer-term profitability and viability, in particular our ability to write profitable new business.

This includes the strategic risk of failing to develop and execute a strategy that addresses and takes advantage of these trends. The 'Principal emerging risk trends and causal factors' table in this section describes these trends, their impact, future outlook and how we manage these risks .

How we manage risk

Our Risk Management Framework comprises our systems of governance, risk management processes and risk appetite framework. It applies Group-wide, ensuring a rigorous and consistent approach to risk management is embedded across the business. 

Our governance

This includes risk policies and business standards, risk oversight committees (both Board and Management) and clearly defined roles and responsibilities. Line management in the business is accountable for risk management which, together with the risk function and internal audit, form our 'three lines of defence'. The roles and responsibilities of the Customer, Conduct and Reputation Committee, Audit and Risk Committees in relation to the oversight of risk management and internal control is set out in the 'Directors' and Corporate Governance report'.

Our risk processes

The processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models, and stress and scenario testing, are designed to enable dynamic risk-based decision-making and effective day-to-day risk management. Having identified the risks of our business and measured their impact, depending on our risk appetite, we either accept these risks or take action to reduce, transfer or mitigate them. The standards required are set out in our risk policies that all in the business need to adhere to.

Our risk appetite framework

This refers to the risks that we select in pursuit of our strategic objectives. Our risk preferences define the risks that we prefer, accept or avoid. In 2021, we added a risk appetite for conduct risk explicitly referencing good customer outcomes and integrated climate risk into our risk appetite framework, defined our climate risk appetite and incorporated climate risks into our business planning, to facilitate risk-based decision-making. See 'Our climate-related financial disclosure' for more information.

Types of risk inherent to our business model:

Risks customers transfer to us

• Life insurance risk includes longevity risk (annuity customers living longer than we expect), mortality risk (customers with life protection), expense risk (the amount it costs us to administer policies) and persistency risk (customers lapsing or surrendering their policies).

• General insurance risk arises from loss events (fire, flooding, windstorms, accidents etc) and inflation (on expenses and claims). Health insurance exposes the Group to morbidity risk (the proportion of our customers falling sick) and medical expense inflation.

Risks arising from our investments

• Credit risks (actual defaults and market expectation of defaults) create uncertainty in our ability to offer a minimum investment return on our investments.

• Liquidity risk is the risk of not being able to make payments when they become due because there are insufficient assets in cash form.

1  Market risks result from fluctuations in asset values, including equity prices, property prices, foreign exchange, inflation and interest rates.

Risks from our operations and other business risks

• Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment.

• Conduct risk is the risk of causing harm to our customers, the markets in which we operate or our regulatory relationships.

• Asset management risk is the risk of customers redeeming funds, not investing with us, or switching funds, resulting in reduced fee income .

Principal risk types

While the types of risk to which the Group is exposed have not changed significantly over the year, we have de-risked our risk profile through our business divestment programme and strengthened our risk and control framework to manage these risks . All of the risks below, and in particular operational risks, may have an adverse impact on our brand and reputation.

Risk preference	Mitigation
Credit Risk We take a balanced approach to credit and believe we have the expertise to manage it and the structural investment advantages conferred to insurers with long‑dated, relatively illiquid liabilities that enables us to earn superior investment returns. For more information see Note 57b - Risk Management: Credit risk.	• Risk frameworks considering macroeconomic risk tolerances, which includes credit risk • Credit limit framework imposes limits on credit concentration by issuer, sector and type of instrument • Investment restrictions on certain sovereign and corporate exposures • Credit risk hedging programme and asset de-risking
Market Risk We actively seek some market risks as part of our investment and product strategy. We have a limited appetite for interest rate and property risks as we do not believe that these are adequately rewarded. For more information see Note 57c - Risk Management: Market risk.	• Risk frameworks considering macroeconomic risk tolerances, which includes market risk • Active asset management and hedging in business units. Group-level equity and foreign exchange hedging. • Pension fund active risk management • Through product design , asset and liability duration matching limits impact of interest rate changes
Life insurance risk We take measured amounts of life insurance risk provided we have the appropriate core skills in underwriting and pricing. For more information see Note 57e - Risk Management: Life insurance risk.	• Risk selection (includes risk tolerance for longevity risk) and underwriting on acceptance of new business • Longevity swaps covering pensioner-in-payment scheme liabilities • Product development and management framework ensures products and propositions meet customer needs • Use of reinsurance on longevity risk for our annuity business and the staff pension scheme
General insurance and health risk We take general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. We have a preference for those risks that we understand well, that are intrinsically well managed and where there is a spread of risks in the same category. General insurance risk diversifies well with our Life Insurance and other risks. For more information see Note 57f - Risk Management: General insurance and health risk.	• Use of reinsurance to reduce the financial impact of a catastrophe and manage earnings volatility. • Application of robust and consistent reserving framework to derive best estimate with results subject to internal and external review, including independent reviews and audit reviews • Extensive use of data, financial models and analysis to improve pricing and risk selection • Underwriting appetite framework linked to delegations of authority that govern underwriting decisions/limits • Product development and management framework that ensures products meet customer needs
Liquidity Risk: The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages. For more information see Note 57d - Risk Management: Liquidity risk.	• Maintaining committed borrowing facilities from banks and commercial paper issuance • Ensure cash flows are sufficient to meet liabilities through asset liability matching methodology • Use of our limit framework covering minimum liquidity cover ratio and minimum Group Centre liquidity • Contingency funding plan in place to address liquidity funding requirements in a significant stress scenario
Asset management risk: Risks specific to asset management should generally be reduced to as low a level as is commercially sensible, on the basis that taking on these risks will rarely provide us with an upside. For more information see Note 57g - Risk Management: Asset management risk.	• Product development and review process with propositions based on customer needs • Investment performance and risk management oversight and review process • Client relationship teams managing client retention risk
Operational Risk: Operational risk, including conduct risk, should generally be reduced to as low a level as is commercially sensible. For more information see Note 57h - Risk Management: Operational risk.	• Our Operational Risk & Control Management Framework which includes the tools, processes and standardised reporting necessary to identify, measure, manage, monitor and report on the operational risks • Scenario-based approach to determine appropriate level of capital to be held in respect of operational risks • Improving the resilience and reliability of our systems and IT security to protect ours and our customers' data • Monitoring the potential conduct exposures and the key drivers of these, taking action to mitigate harm • Implementing mitigating controls to ensure all risks associated with our disposals are appropriately addressed

Principal emerging trends and causal factors

This table describes the emerging trends and causal factors impacting our inherent risks, their impact, future outlook and how we take action to manage these risks. We consider the individual and aggregate impact from these trends when designing and implementing our risk management processes:

Key trends and movement	Trend	Risks impacted	Risks managed	Outlook
Economic & 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.
Changes 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.
New technologies & data - 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. 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 underwriting losses.	Stable	Operational risk	Aviva continues to develop our data science capabilities to both inform and enable improvements in the customer journey, our understanding of how customers interact with us and our underwriting disciplines. Our Data Charter sets out our public commitment to use data responsibly and securely.	Data mastery and the effective use of 'Big Data' through artificial intelligence and advanced analytics has and will continue to be a critical driver of competitive advantage for insurers. However, this will be subject to increasing regulatory scrutiny to ensure this is being done so in an ethical, transparent and secure way. The competitive threat to traditional insurers will continue to persist with the potential for big technology companies and low cost innovative digital start-ups to grow their footprint in the insurance market, where previously underwriting capability, risk selection and required capital have proven to be a sufficient barrier to entry.
Climate change - potentially resulting in higher than expected weather-related claims (including business continuity claims), inaccurate pricing of general insurance risk, possible changes in morbidity and/or mortality rates, reputational impact from not being seen as a responsible steward/investor, as well as adversely impacting economic growth and investment markets. This also includes transition risks for our investments relating to the impact of the transition to a low carbon economy and litigation risk where we provide insurance cover.	Increasing	General insurance risk, Life insurance risk, Credit risk, Market risk	Our climate-related financial disclosure sets out how Aviva incorporates climate-related risks and opportunities into governance, strategy, risk management, metrics (e.g. Climate Value-at-Risk) and targets. We are committed to aligning our business to the 1.5oC Paris Agreement target and plan to be a Net Zero company by 2040. The Group CRO was responsible for overseeing the embedding of a framework for ensuring climate-related risks and opportunities are identified, measured, monitored, managed and reported through our risk management framework and in line with our risk appetite.	Aviva considers climate change to be a significant long-term risk to our business model. Global average temperatures over the last five years have been the hottest on record. Despite the UNFCCC Paris agreement, the current trend of increasing CO2 emissions is expected to continue, in the absence of radical action by governments, with global temperatures likely to exceed pre-industrial levels by at least 2oC and weather events (floods, droughts and windstorms) increasing in frequency and severity. Disclosure of potential impacts against various climate scenarios and time horizons will become increasingly common for all companies.
Cyber crime - criminals (including state sponsored activity) may attempt to access our IT systems to steal or utilise company and customer data, or plant malware viruses to access customer or company funds, and/or damage our reputation and brand.	Increasing	Operational risk	Aviva has invested significantly in cyber security with automated controls to protect our data and critical IT services. In response to the changing threat environment Aviva has increased the level of anti-malware protection during 2021 enhancing our ability to identify, detect and prevent such attacks. Aviva has extensive operational measures to assess and respond to data breaches and has continued to monitor the threat environment and enhance its IT infrastructure and cyber controls to prevent attacks. Aviva's cyber defences are regularly tested using our own 'ethical hacking' team as well as through using external penetration testing to evaluate our infrastructure. Aviva uses the Information Security Forum (ISF) Standard of Good Practice and cross references to ISO 27001 and the NIST Cybersecurity Framework. Aviva conducts regular internal audits using the financial services three lines of defence model and are audited externally at least annually.	High profile cyber security incidents have continued to impact corporates globally due to the increased use of destructive malware/ransomware. The cyber threat is expected to persist in 2022 with increasing levels of sophistication and industrialisation anticipated. Aviva continuously monitors the external threat environment to ensure that our cyber investment and the effectiveness of our controls remains appropriate to mitigate the continued and changing nature of the cyber threat.
Longevity 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.
Talent - an ageing workforce and new technologies requiring new skills will make recruitment, retention and investing in talent increasingly important.	Increasing	Operational risk	To attract and retain talent we have various internal talent development programmes and a broad variety of graduate and apprentice schemes. In 2021 we launched the new Aviva University, promoting life-long learning for colleagues enabling them to focus on developing key skills such as digital/data and change management. We launched a new talent strategy and career compass, designed to enable colleagues to have brilliant career conversations. Our retention measures include innovative policies such as flexible working and equal parental leave as well as providing great leadership and career progression for our people.	We expect technology and automation to increasingly change the skills required for our workforce, and the pace of change will accelerate the required reskilling of existing workforces and recruitment of new talent. Aviva is returning to 2019 (pre-pandemic) volumes of voluntary attrition, however in recent months rates have moved slightly above 2019 which could be attributed to pent up 'demand' from 2020 where leaver volumes significantly reduced. We anticipate the impact from any pent up "demand" to have a short term effect and aligned People teams will support leadership teams with interventions where required. Recruitment and retention will become more challenging as the relative size of the working age population declines, education systems fail to produce future generations with the right skills in sufficient numbers and immigration controls restrict the talent pool. Expectations of the next generation of employees (i.e. Generation Z) will require us to change how we operate if we are to retain talent.
Pandemic - in an increasingly globalised world, new or mutations of existing bacteria or viruses may be difficult for stretched healthcare systems to contain, disrupting national economies and affecting our operations and the health and mortality of our customers.	Stable	Life Insurance risk (mortality, longevity, morbidity), General Insurance (business interruption, travel) and Operational risk.	We have contingency plans which are designed to reduce as far as possible the impact on operational service arising from mass staff absenteeism, travel restrictions and supply chain disruption caused by a pandemic, which we were able to put into action during the current COVID‑19 pandemic. We reinsure much of the mortality risk arising from our Life Protection business and hold capital to cover the risks of a 1-in-200 year pandemic event. We model a range of extreme pandemic scenarios including  a repeat of the 1918 global influenza pandemic and COVID-19. In the Group and commercial insurance business we manage our potential exposure through our policy wordings. As an investment manager and investor, we engage with companies to ensure the responsible use of antibiotics to reduce the risk that antimicrobial resistance negates the efficacy of medical treatment.	There remains uncertainty around the outlook for the COVID-19 Omicron variant. The long-term impact on mortality and morbidity is dependent on the extent natural immunity develops in the general population, the efficacy of new healthcare treatments and possible future strains that may emerge. Trends such as global climate change, urbanisation, antimicrobial resistance and intensive livestock production are likely to increase the risk of future pandemics, while reductions in migration and international travel as a result of COVID-19 are likely to be temporary making the containment of future pandemics more challenging. We expect the experience and learnings from the current COVID-19 will improve the effectiveness of the public healthcare response to any future pandemics.

57 - Risk management  

Risk management is key to Aviva's success. We accept the risks inherent to our core business lines of life, general insurance and health, and asset management. We diversify these risks through our scale, geographic spread, the variety of the products and services we offer and the channels through which we sell them. We receive premiums which we invest to maximise risk-adjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders. In doing so we have a preference for retaining those risks we believe we are capable of managing to generate a return.

Our sustainability and financial strength are underpinned by an effective risk management process which helps us identify major risks to which we may be exposed, establish appropriate controls and take mitigating actions for the benefit of our customers and investors. The Group's risk strategy is to invest its available capital to optimise the balance between return and risk while maintaining an appropriate level of economic (i.e. risk-based) capital and regulatory capital.

The key elements of our risk management framework comprise our risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing.

The Group's overarching risk management and internal control system continues to respond to COVID-19 developments and remains intact. We are focused on ensuring that the control environment remains robust in the current operating environment.

57 - Risk management continued

Risk Environment

During the year, economies have experienced recovery support by fiscal measures, robust economic activity, vaccine roll-out and accommodating central bank policies. 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, the risks 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). Rising geo-political tensions, specifically conflict in the Ukraine, and the potential for disruption to energy supplies are an additional source of uncertainty for financial and commodity markets and trigger for inflation. The Group has been impacted by the COVID-19 pandemic through its operations, insurance products and asset holdings. General insurance products can be impacted as a result of disruption to businesses and travel insured by the Group, as well as changes in customer behaviour as a result of government restrictions; life protection products as a result of changes in mortality; savings and asset management revenues which are sensitive to asset values; and income protection, critical illness and health insurance products as a result of increased morbidity, offset by a potential reduction in annuity payments.

The Group continues to maintain strong solvency and liquidity positions through a range of scenarios and stress testing. The immediate threats to the Group's capital and liquidity position remain the macroeconomic implications of the COVID-19 pandemic, albeit this has become less likely in the year. Particular areas of uncertainty include credit downgrades where a specific focus has been our commercial mortgage portfolio which we continue to monitor closely and have taken a number of actions including debt restructuring. The Group's balance sheet exposure has been reviewed and actions taken to reduce the sensitivity to economic shocks, including placing hedges to mitigate these risks.

Aviva has completed the sale of a number of our businesses as part of the rationalisation of the Group. We agreed an approach that ensured all operational risks were managed effectively up to the point of completion and continue to track all transitional service agreements. We also carefully monitored and managed the risks associated with this divestment programme itself. In June 2021 the Group unwound a series of macro equity hedges to reflect the changing risk profile of our business through our divestment programme. As a result of these disposals, we have seen our currency risk exposures fall due to our reduced global footprint and a reduction in interest rate risk driven by the sale of our France business which was exposed to through the Eurofonds guaranteed life insurance product.

We have seen an increased threat of malware/ransomware attacks across the world. In response we have increased the protection level of anti-malware security controls. We continue to monitor threat intelligence data and update our security controls to maintain protection against new and emerging ransomware variants.

Aviva remains committed to supporting a low carbon economy that will improve the resilience of our economy, society and the financial system in line with the 2015 Paris Agreement target on climate change. In March 2021, we set an ambition to become a Net Zero carbon company by 2040 and we are acting now to mitigate and manage the impact of climate change on our business. We calculate a Climate VaR against IPCC scenarios to assess the climate-related risks and opportunities under different emission projections and associated temperature pathways. A range of different financial indicators are used to assess the impact on our investments and insurance liabilities.

The Group is on track to implement the new international accounting standards for insurance contracts, IFRS 17 Insurance Contracts. On adoption IFRS 17 will significantly impact the measurement and presentation of the contracts in scope of the standard. It is now expected that the standard will apply to annual reporting periods beginning on or after 1 January 2023. Regarding the transition to alternative risk-free rates from LIBOR settings, in the year we transitioned to a new risk-free rate ahead of the December 2021 deadline set by the Bank of England for the discontinuation of LIBOR.

(a) Risk management framework

Aviva's risk management framework is at the heart of every business decision and is key to ensuring a robust control environment and the Group's sustainable success. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing. A risk taxonomy is maintained to ensure a consistent approach to risk identification, measurement and reporting, and to determine application of the Group Risk Appetite Framework and the risks for which a Risk Policy is required. The taxonomy is arranged in a hierarchy with more granular risk types grouped into the following principal risk categories: credit & market, liquidity, life insurance, general insurance (including health), operational and strategic risk. Risks falling within these types may affect a number of outcomes including those relating to solvency, liquidity, profit, reputation and conduct.

To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group's worldwide operations. The business unit chief executive officers make an annual declaration supported by an opinion from the business unit chief risk officers that the system of governance and internal controls was effective and fit for purpose for their business throughout the year.

The Group's Risk Appetite Framework was refreshed during the year, with revised and new risk appetites, preferences and tolerances considered and approved by the Risk Committee. Climate Risk was integrated and defined within the risk appetite framework to be incorporated into risk-based decision-making.

A regular top-down key risk identification and assessment process is carried out by the Risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees.

57 - Risk management continued

Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. For those risk types managed through the holding of capital, being our principal risk types except for liquidity risk, we measure and monitor our risk profile on the basis of the SCR.

Roles and responsibilities for risk management in Aviva are based around the 'three lines of defence model' where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the risk identification, measurement, monitoring, management and reporting processes and for developing the risk management framework. Internal Audit provides an independent assessment of the risk management framework and internal control processes.

Board oversight of risk and its management across the Group is maintained on a regular basis through its Risk Committee and Customer, Conduct and Reputation Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Three Group-level management committees (Group Executive Risk Committee, Group Asset Liability Committee and Disclosure Committee) exist to assist members of the Aviva Executive Committee in the discharge of their delegated authorities and their accountabilities within the Aviva Governance Framework and in relation to their defined regulatory responsibilities.

The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva's framework.

The types of risks to which the Group is exposed have not changed significantly during the year and remain credit, market, liquidity, life insurance, general insurance and health, asset management and operational risks. These risks are described below.

(b) Credit risk

Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result of changes in expectations related to these risks. Credit risk is taken so that we can provide the returns required to satisfy policyholder liabilities and to generate returns for our shareholders. In general we prefer to take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities.

Our approach to managing credit risk recognises that there is a risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default, rating transition and credit spread movements. Our credit risks arise principally through exposures to debt security investments, structured asset investments, bank deposits, derivative counterparties, mortgage lending and reinsurance counterparties.

The Group manages its credit risk at business unit and Group level. All business units are required to implement credit risk management processes (including limits frameworks), operate specific risk management committees, and ensure detailed reporting and monitoring of their exposures against pre-established risk criteria. At Group level, we manage and monitor all exposures across our business units on a consolidated basis, and operate a Group limit framework that must be adhered to by all.

As economies recover, we have seen credit upgrades outpacing downgrades, a fall in default rates and credit outlooks stabilising to pre-pandemic limits. We continue to monitor the UK Life commercial mortgage portfolio, actions include debt restructuring, and any events that could be indicative of systemic faults in the global market (e.g. Chinese property sector and municipal debt).

The business unit divestments in the year have resulted in shift to a higher credit quality distribution within the portfolio.

A detailed breakdown of the Group's current credit exposure by credit quality is shown below.

(i) Financial exposures by credit ratings

Financial assets are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as sub-investment grade. The following table provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings. 'Not rated' assets capture assets not rated by external ratings agencies.

As at 31 December 2021	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Assets classified as held for sale £m	Carrying value £m
Fixed maturity securities	13.3  %	43.2  %	22.2  %	12.1  %	3.7  %	5.5  %	133,251	-	133,251
Reinsurance assets	-  %	76.7  %	18.9  %	3.8  %	-  %	0.6  %	15,032	-	15,032
Other investments	-  %	0.1  %	-  %	-  %	-  %	99.9  %	36,541	-	36,541
Loans	16.4  %	4.3  %	-  %	0.5  %	-  %	78.8  %	38,624	-	38,624
Total							223,448	-	223,448

57 - Risk management continued

As at 31 December 2020	AAA	AA	A	BBB	Below BBB	Not rated	Carrying value including held for sale £m	Less: Assets classified as held for sale £m	Carrying value £m
Fixed maturity securities	9.7 %	34.0%	21.4 %	23.2 %	7.3 %	4.4 %	216,154	(13,317)	202,837
Reinsurance assets	-	77.4 %	21.0 %	-	-	1.6 %	13,356	(18)	13,338
Other investments	-	0.1 %	0.3 %	-	-	99.6 %	51,627	(3,490)	48,137
Loans	9.0 %	10.2 %	7.9 %	0.4 %	-	72.5 %	43,679	-	43,679
Total							324,816	(16,825)	307,991

The majority of non-rated fixed maturity securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £4.3 billion (2020: £4.6 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.

The following table provides information on the Group's exposure by credit ratings to financial assets that meet the definition of 'solely payment of principal and interest' (SPPI).

As at 31 December 2021	AAA £m	AA £m	A £m	BBB £m	Below BBB £m	Not rated £m
Loans	6,318	1,678	-	-	-	648
Receivables	-	165	670	89	-	3,715
Accrued income & interest	-	-	-	-	-	284
Other investments	-	-	-	-	-	-
Total	6,318	1,843	670	89	-	4,647

As at 31 December 2020	AAA £m	AA £m	A £m	BBB £m	Below BBB £m	Not rated £m
Loans	3,920	4,468	3,453	-	-	153
Receivables	-	497	539	459	2	4,555
Accrued income & interest	-	-	-	-	-	283
Other investments	-	-	-	-	-	12
Total	3,920	4,965	3,992	459	2	5,003

At the period end, the Group held cash and cash equivalents of £10,100 million (2020: £12,576 million) that met the SPPI criteria, of which all is placed with financial institutions with issuer ratings within the range of AAA to BBB. Further information on the extent to which unrated receivables, including those that meet the SPPI criteria, are past due may be found in section (ix) of this note.

The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure. The Group's maximum exposure to credit risk of financial assets, without taking collateral or these hedges into account, is represented by the carrying value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance assets, derivative assets, loans and receivables. The carrying values of these assets are disclosed in the relevant notes: financial investments (note 27), reinsurance assets (note 44), loans (note 24) and receivables (note 28). The collateral in place for these credit exposures is disclosed in note 59 Financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar agreements.

(ii) Other investments

Other investments include unit trusts and other investment vehicles; derivative financial instruments, representing positions to mitigate the impact of adverse market movements; and other assets, including deposits with credit institutions and minority holdings in property management undertakings.

The credit quality of the underlying debt securities within investment vehicles is managed by the safeguards built into the investment mandates for these funds which determine the funds' risk profiles. At the Group level, we also monitor the asset quality of unit trusts and other investment vehicles against Group set limits.

A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall appetite for market risk.

(iii) Loans

The Group loan portfolio principally comprises:

• Policy loans which are generally collateralised by a lien or charge over the underlying policy;

• Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities;

• Healthcare, infrastructure and PFI loans secured against healthcare, education, social housing and emergency services related premises; and

• Mortgage loans collateralised by property assets.

We use loan to value, interest and debt service cover, and diversity and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our stock lending activities. Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies.

57 - Risk management continued

(iv) Credit concentration risk

The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to the Group Asset Liability Committee (ALCO). With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets is to the Swiss Reinsurance Company Ltd (including subsidiaries), representing approximately 2.0% of the total shareholder assets.

(v) Reinsurance credit exposures

The Group is 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. The Group operates a policy to manage its 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 risk is within appetite. The Group Capital and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.

The Group's largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2021, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was £2,633 million (2020: £2,399 million).

(vi) Securities finance

The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by collateralisation and minimum counterparty credit quality requirements.

(vii) Derivative credit exposures

The Group is exposed to counterparty credit risk through derivative trades. This risk is generally mitigated through holding collateral for most trades. Residual exposures are captured within the Group's credit management framework.

(viii) Unit-linked business

In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the shareholders' exposure to credit risk is limited to the extent of the income arising from asset management charges based on the value of assets in the fund.

(ix) Impairment of financial assets

In assessing whether financial assets carried at amortised cost or classified as available for sale are impaired, due consideration is given to the factors outlined in accounting policies (T) and (V). The following table provides information regarding the carrying value of financial assets subject to impairment testing that have been impaired and the ageing of those assets that are past due but not impaired. The table excludes assets carried at fair value through profit or loss and held for sale.

		Financial assets that are past due but not impaired
As at 31 December 2021	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months- 1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Fixed maturity securities	-	-	-	-	-	-	-
Reinsurance assets	9,924	-	-	-	-	-	9,924
Other investments	-	-	-	-	-	-	-
Loans	8,644	-	-	-	-	-	8,644
Receivables and other financial assets	6,073	15	-	-	-	-	6,088

		Financial assets that are past due but not impaired
As at 31 December 2020	Neither past due nor impaired £m	0-3 months £m	3-6 months £m	6 months- 1 year £m	Greater than 1 year £m	Financial assets that have been impaired £m	Carrying value £m
Fixed maturity securities	1,573	-	-	6	-	-	1,579
Reinsurance assets	9,478	-	-	-	-	-	9,478
Other investments	1	-	-	-	-	-	1
Loans	13,840	-	-	-	-	-	13,840
Receivables and other financial assets	9,326	18	-	8	-	-	9,352

Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £113.4 billion of fixed maturity securities (2020: £214.6 billion), £30.8 billion of other investments (2020 : 42.3 billion), 30.0 billion of loans (2020: £29.8 billion) and £5.1 billion of reinsurance assets (2020: £3.9 billion).

Where assets have been classed as 'past due and impaired', an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.

57 - Risk management continued

(c) Market risk

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, inflation, foreign currency exchange rates, equity and property prices. Market risk arises in business units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. We actively seek some market risks as part of our investment and product strategy. However, we have limited appetite for interest rate risk as we do not believe it is adequately rewarded.

The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group Capital is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements.

In addition, where the Group's long-term savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders' risk and reward o bjectives. The Group writes unit-linked business, primarily in the UK. The shareholders' exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund.

The most material types of market risk that the Group is exposed to are described below.

(i) Equity price risk

The Group is subject to direct equity price risk arising from changes in the market values of its equity securities portfolio. Our most material indirect equity price risk exposures are to policyholder unit-linked funds, which are exposed to a fall in the value of the fund thereby reducing the fees we earn on those funds, and participating contracts, which are exposed to a fall in the value of the funds thereby increasing our costs for policyholder guarantees. We also have some equity exposure in shareholder funds through equities held to match inflation-linked liabilities.

We continue to limit our direct equity exposure in line with our risk preferences. At a business unit level, investment limits and local investment regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.

Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. An equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. In June 2021 the Group unwound a series of macro equity hedges to reflect the changing risk profile of our business through our divestment programme.

Sensitivity to changes in equity prices is given in section (i) Risk and capital management, below.

(ii) Property price risk

The Group is subject to property price risk directly due to holdings of investment properties in a variety of locations worldwide and indirectly through investments in mortgages and mortgage backed securities. Investment in property is managed at business unit level, and is subject to local regulations on investments, liquidity requirements and the expectations of policyholders.

As at 31 December 2021, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Exposure to property risk on equity release mortgages from sustained underperformance in the UK House Price Index (HPI) is mitigated by capping loan to value on origination at low levels and regularly monitoring the performance of the mortgage portfolio.

Sensitivity to changes in property prices is given in section (i) Risk and capital management, below.

(iii) Interest rate risk

Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options are given in note 43.

Aviva launched a formal Group-wide programme of change activity in 2019 to manage the transition to alternative risk-free rates from LIBOR settings. Three sub programmes were established covering the UK insurance business, Aviva Investors and other Group activities, reporting into a Group Steering Committee. The majority of Aviva's exposure to LIBOR rates existed within the UK insurance business and Aviva Investors, where Aviva has reviewed all financial instruments, engaged with counterparties to either transition to alternative risk-free rates or have exited positions where required. Aviva has adhered to the ISDA Fallback Protocol. Significant progress has been made, with a substantive majority of Aviva's original GBP LIBOR exposure already resolved. A small number of exposures remain which are expected to transition in the first half of 2022 before they are impacted by LIBOR cessation. Aviva has worked closely with UK regulators, impacted clients, industry experts and industry associations to ensure a smooth and transparent transition of the exposures. The programme continues to address all risks posed by the transition, including the risk of non-transition of outstanding exposures. No change to the Company's risk management strategy has been required in response to the transition.

At 31 December 2021, £837 million of non-derivative financial assets, £213 million of derivative financial assets, £984 million of non-derivative financial liabilities and £296 million of derivative financial liabilities had yet to transition to an alternative risk-free rate.

Exposure to interest rate risk is monitored through several measures that include duration, capital modelling, sensitivity testing and stress and scenario testing. The impact of exposure to sustained low interest rates is considered within our scenario testing.

57 - Risk management continued

The Group typically manages interest rate risk by investing in fixed interest securities which closely match the interest rate sensitivity of the liabilities where such investments are available. In particular, a key objective is to at least match the duration of our annuity liabilities with assets of the same duration, and in some cases where appropriate cash flow matching has been used. These assets include corporate bonds, residential mortgages and commercial mortgages. Should they default before maturity, it is assumed that the Group can reinvest in assets of a similar risk and return profile, which is subject to market conditions. Interest rate risk is also managed in some business units using a variety of derivative instruments, including futures, options, swaps, caps and floors.

Historic low interest rates in our core markets are expected to increase with the Bank of England already raising interest rates in the UK. Our interest rate exposure reduced in 2021 as a result of our disposal programme, this was primarily driven by the sale of our France business which was exposed to interest rate risk from the Eurofonds guaranteed life insurance product.

Other product lines of the Group, such as protection, are not significantly sensitive to interest rate or market movements. For unit-linked business, the shareholder margins emerging are typically a mixture of annual management fees and risk/expense charges. Risk and expense margins will be largely unaffected by low interest rates. Annual management fees may increase in the short term as the move towards low interest rates increases the value of unit funds. However, in the medium term, unit funds will grow at a lower rate which will reduce fund charges. For the UK annuities business interest rate exposure is mitigated by closely matching the duration of liabilities with assets of the same duration.

Some of the Group's products in UK and Ireland, principally participating contracts, expose us to the risk that changes in interest rates will impact on profits through a change in the interest spread (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under those contracts). The UK participating business includes contracts with features such as guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. These liabilities are managed through duration matching of assets and liabilities and the use of derivatives, including swaptions. As a result, the Group's exposure to sustained low interest rates on this portfolio is not material. The Group's exposures to low interest rates arising through its other participating contracts has reduced in the year principally due to the divestment of Italy and France. Details of material guarantees and options are given in note 43.

Profit before tax on General Insurance and Health Insurance business is generally a mixture of insurance, expense and investment returns. The asset portfolio is invested primarily in fixed income securities. The portfolio investment yield and average total invested assets in our general insurance and health business are set out in the table below.

	Portfolio investment yield¹	Average assets £m
2019	2.21  %	14,350
2020	1.88 %	15,024
2021	1.88 %	14,390

2  Before realised and unrealised gains and losses and investment expenses.

The nature of the business means that prices in certain circumstances can be increased to maintain overall profitability. This is subject to the competitive environment in each market. To the extent that there are further falls in interest rates the investment yield would be expected to decrease further in future periods.

Sensitivity to changes in interest rates is given in section (i) Risk and capital management, below.

(iv) Inflation risk

Inflation risk arises primarily from the Group's exposure to general insurance claims inflation, to inflation linked benefits within the defined benefit staff pension schemes and within the UK annuity portfolio and to expense inflation. Increases in long-term inflation expectations are closely linked to long-term interest rates and so are frequently considered with interest rate risk. Exposure to inflation risk is monitored through capital modelling, sensitivity testing and stress and scenario testing. The Group typically manages inflation risk through its investment strategy and, in particular, by investing in inflation linked securities and through a variety of derivative instruments, including inflation linked swaps. Inflation risk is a rising concern and we are monitoring the potential impact on the profits and margins of the Group and our counterparties which could impact their credit quality.

(v) Currency risk

The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profits contract liabilities or are hedged. As a result the foreign exchange gains and losses on investments are largely offset by changes in unit-linked and with-profits liabilities and fair value changes in derivatives attributable to changes in foreign exchange rates recognised in the income statement.

57 - Risk management continued

The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 21% of the Group's gross written premium income from continuing operations arises in currencies other than sterling and this has decreased in the year due to our disposal programme. Our Euro net liability exposure reflects the sale of our France and Italy businesses and our Euro denominated external debt. The Group's net assets are denominated in a variety of currencies, of which the largest are sterling, euro and Canadian dollars (CAD$). The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group's business and meet local regulatory and market requirements. However, the Group does use foreign currency forward contracts to hedge planned dividends from its subsidiaries.

Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group's consolidated shareholders' equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group's regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting (see note 58(a)), foreign exchange gains and losses on foreign currency borrowings are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At
31 December 2021 and 2020, the Group's total equity deployment by currency including assets held for sale was:

	Sterling £m	Euro £m	CAD$ £m	Other £m	Total £m
Net Assets at 31 December 2021	19,300	(769)	222	701	19,454
Net Assets at 31 December 2020	16,438	2,374	635	1,113	20,560

A 10% change in sterling to euro/CAD$ period-end foreign exchange rates would have had the following impact on total equity.

	10% increase in sterling/euro rate £m	10% decrease in sterling/euro rate £m	10% increase in sterling/CAD$ rate £m	10% decrease in sterling/CAD$ rate £m
Net assets at 31 December 2021	77	(77)	(22)	22
Net assets at 31 December 2020	(237)	237	(64)	64

A 10% change in sterling to euro/$ average foreign exchange rates applied to translate foreign currency profits would have had the following impact on profit before tax, including resulting gains and losses on foreign exchange hedges.

	10% increase in sterling/euro rate £m	10% decrease in sterling/euro rate £m	10% increase in sterling/CAD$ rate £m	10% decrease in sterling/CAD$ rate £m
Impact on profit before tax 31 December 2021	206	(252)	(23)	28
Impact on profit before tax 31 December 2020	(48)	59	(31)	37

The balance sheet changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling, with above movements being taken through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit. Net asset and profit before tax figures are stated after taking account of the effect of currency hedging activities.

(vi) Derivatives risk

Derivatives are used by a number of the businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. Activity is overseen by the Group Capital and Group Risk teams, which monitor exposure levels and approve large or complex transactions.

The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken.

(vii) Correlation risk

The Group recognises that lapse behaviour and potential increases in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies are taken into consideration in the internal capital model and in scenario analysis.

(d) Liquidity risk

Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages and infrastructure loans. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,700 million) from a range of leading international banks to further mitigate this risk.

57 - Risk management continued

Maturity analysis

The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets held to meet them. A maturity analysis of the contractual amounts payable for borrowings and non-hedge derivatives is given in notes 50 and 58, respectively. Contractual obligations under leases and capital commitments are given in note 22 and note 54.

(i) Analysis of maturity of insurance and investment contract liabilities

For non-linked insurance business, the following table shows the gross liability at 31 December 2021 and 2020 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts.

Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date.

As at 31 December 2021	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	98,412	7,382	22,148	37,916	30,966
Investment contracts - non-linked	16,893	1,645	5,367	7,654	2,227
Linked business	164,218	5,359	19,197	51,443	88,219
General insurance and health	15,179	6,010	6,716	1,908	545
Total contract liabilities	294,702	20,396	53,428	98,921	121,957

As at 31 December 2020	Total £m	On demand or within 1 year £m	1-5 years £m	5-15 years £m	Over 15 years £m
Long-term business
Insurance contracts - non-linked	116,352	8,433	26,288	43,385	38,246
Investment contracts - non-linked	78,024	4,348	17,555	32,203	23,918
Linked business	178,932	8,187	27,420	58,411	84,914
General insurance and health	17,596	7,413	7,260	2,325	598
Total contract liabilities	390,904	28,381	78,523	136,324	147,676

The following table provides an analysis, by maturity date of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise. This table excludes assets held for sale.

As at 31 December 2021	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term £m
Fixed maturity securities	133,251	43,432	27,187	62,632	-
Equity securities	95,169	-	-	-	95,169
Other investments	36,541	30,949	489	4,748	355
Loans	38,624	8,840	4,636	25,148	-
Cash and cash equivalents	12,485	12,485	-	-	-
	316,070	95,706	32,312	92,528	95,524

As at 31 December 2020	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term £m
Fixed maturity securities	202,837	50,488	45,917	106,432	-
Equity securities	100,404	-	-	-	100,404
Other investments	48,137	39,681	126	7,469	861
Loans	43,679	14,049	4,339	25,290	1
Cash and cash equivalents	16,900	16,900	-	-	-
Total	411,957	121,118	50,382	139,191	101,266

The assets above are analysed in accordance with the earliest possible redemption date of the instrument at the initiation of the Group. Where an instrument is transferable back to the issuer on demand, such as most unit trusts or similar types of investment vehicle, it is included in the 'On demand or within 1 year' column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date of issuance. Most of the Group's investments in equity securities and fixed maturity securities are market traded and therefore, if required, can be liquidated for cash at short notice.

57 - Risk management continued

(e) Life insurance risk

Life insurance risk in the Group arises through its exposure to mortality risk and exposure to worse than anticipated operating experience on factors such as persistency levels, exercising of policyholder options and management and administration expenses.

The Group chooses to take measured amounts of life insurance risk provided that the relevant business has the appropriate core skills to assess and price the risk and adequate returns are available. The Group's underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. Life insurance risk is managed primarily at business unit level with oversight at the Group level.

The overall impact of COVID-19 on the profile of our life insurance risks, primarily longevity, persistency, mortality, morbidity and expense risk, has been limited in 2021. In particular, increased protection claims as a result of COVID-19 have been materially offset by technical provision releases due to additional mortality in our annuity portfolio. In all of our markets, underwriting procedures on Individual Life Protection products limit our exposure to cohorts of the population at the highest risk of COVID-19. In UK Individual Protection we have also introduced a number of additional underwriting questions, adjusted pricing and have referred more cases to manual underwriting. In the future, as the expected mortality threat from the UK outbreak subsides, steps will be taken to relax these additional underwriting measures in a controlled way.

We have reinsurance in place across all our markets to reduce our net exposure to potential losses. In the UK we have extensive quota share reinsurance in place on Individual Protection business and for UK Group Life Protection we use surplus reinsurance for very large individual claims. While we have greater potential net exposure to COVID-19 through Group Life Protection, we have also taken pricing actions to limit, and appropriately cost for, our potential exposure from new business and existing business at renewal.

The Group's life insurance risk continues to be dominated by exposure from our UK business. As a result, and despite disposals in the year, the underlying risk profile of our life insurance risks, primarily longevity, persistency, mortality, morbidity and expense risk, has remained reasonably stable during 2021. COVID-19 has continued to present additional uncertainty to the risk profile of our life insurance risks and in the shorter term we are seeing some modest changes in morbidity, through changes in working patterns and increased NHS waiting lists. Mortality rates have also continued to run slightly higher than normal. However, the long-term impact of COVID-19 is not currently expected to be material. Longevity risk remains the Group's most significant life insurance risk due to the Group's annuity portfolio and is amplified by the current low level of interest rates.

We are exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities. We purchased reinsurance for longevity risk for our annuity business, including the bulk annuity buy-in transaction with the Aviva Staff Pension scheme (see note 49). Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal capital model and are subject to sensitivity and stress and scenario testing.

The assumption setting and management of life insurance risks is governed by the Group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life insurance risks are managed as follows:

• Mortality and morbidity risks are managed through comprehensive medical underwriting, input and advice from medical experts, as well as frequent monitoring and analysis of company experience. Reinsurance treaties are in place to provide further mitigation. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitors that the aggregation of risk ceded is within credit risk appetite.

• Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends. While individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity and continually monitors and evaluates emerging market solutions to mitigate this risk further.

• Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarking against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve the retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management.

• Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of expense levels.

57 - Risk management continued

Embedded derivatives

The Group is exposed to the risk of changes in policyholder behaviour due to the exercise of options, guarantees and other product features embedded in its long-term savings products. These product features offer policyholders varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in the exercise of options as well as market risk. The Group's exposures to low interest rates arising through its participating contracts has reduced in the year principally due to the divestment of Italy and France.

Examples of each type of embedded derivative affecting the Group are:

• Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for withdrawals free of market value adjustment, annuity options, and guaranteed insurability options.

• Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, guaranteed minimum rate of annuity payment and the 'no negative equity' associated with the Equity Release business; and

• Other: indexed interest or principal payments, maturity value, loyalty bonus.

The impact of these is reflected in the capital model and managed as part of the asset liability framework. Further disclosure on financial guarantees and options embedded in contracts and their inclusion in insurance and investment contract liabilities is provided in note 42.

(f) General insurance risk and health risk

The Group writes a balanced portfolio of general insurance risk (including personal motor; household; commercial motor; property and liability), as well as global exposure to corporate specialty risks. Although our geographical footprint has reduced following the divestment programme, we remain diversified through the different lines of business we write and our exposure to life insurance risk. This risk is taken on, in line with our underwriting and pricing expertise, to provide an appropriate level of return for an acceptable level of risk. Underwriting discipline and a robust governance process is at the core of the Group's underwriting strategy.

The Group's health insurance business (including private health insurance, critical illness cover, income protection and personal accident insurance, as well as a range of corporate healthcare products) exposes the Group to morbidity risk (the proportion of our customers falling sick) and medical expense inflation.

Provisions made for insurance liabilities are inherently uncertain. Due to this uncertainty, general and health insurance reserves are regularly reviewed by qualified and experienced actuaries at the business unit and Group level in accordance with the Group's reserving framework. These and other key risks, including the occurrence of unexpected claims from a single source or cause and inadequate reinsurance protection/risk transfer, are subject to an overarching risk management framework and various mechanisms to govern and control our risks and exposures. We recognise that the severity and frequency of weather-related events has the potential to adversely impact provisions for insurance liabilities and our earnings, with the result that there is some seasonality in our results from period to period. Large catastrophic (CAT) losses arising as a result of these events are explicitly considered in our economic capital modelling to ensure we are resilient to such CAT scenarios.

We continue to closely monitor the impact of COVID-19 on our General insurance and health business. Our exposures, together with mitigants, are:

• Business Interruption: For the significant majority of the Group's UK General Insurance commercial policies, where policy wordings are determined by the Company, cover is based on a specified list of diseases. These policies exclude business interruption due to new and emerging diseases, like COVID-19. Business interruption losses stemming from the COVID-19 outbreak are therefore not covered under the significant majority of policies. The FCA test case sought to provide legal clarity in terms of the events and the cover provided by a variety of policy wordings, including broker determined policy wordings where we are the lead or follow insurer. Following the judgement received on 15 September 2020 and the subsequent Supreme Court appeal on 15 January 2021, the legal uncertainty in the UK around gross losses has been significantly reduced. In order to provide clarity to policyholders and mitigate exposure to future events of a similar nature, exclusions were added to relevant policy wordings at renewal in our UK, Canadian and Irish businesses. In Canada, we are party to a number of litigation proceedings, including class actions that challenge coverage under our commercial property policies; however, we believe we have a strong argument that there is no pandemic coverage under these policies. In Ireland, the vast majority of commercial insurance products do not respond to business interruption losses arising from the COVID-19 pandemic. The Group purchases reinsurance protection on its property portfolio that includes coverage for business interruption and is collecting or seeking reinsurance recoveries of business interruption losses that are covered by reinsurance.

• Travel Insurance: We are potentially exposed to claims due to travel cancellation, disruption and sickness where this is insured by the Group, primarily in the UK. We are only exposed to losses after recoveries have been made from travel providers (e.g. tour operators or airlines) and agents. Travel disruption is not part of our Aviva UK Direct cover but is included as standard in the majority of the added value accounts with our banking partners. COVID-19 wording has been clarified to eliminate ambiguity, pricing adjusted to ensure risk is appropriately priced and further reinsurance cover has been purchased. These costs are offset by reduced claims frequency as a result of the current low levels of international travel, and are also partially mitigated through profit commission and future pricing agreements with distribution partners.

• Other: There have also been impacts in other product lines as a result of reduced economic activity, for example there was a reduction in claims frequency and a change in the severity of claims on motor insurance as a result of changes in customer behaviour in response to government restrictions, although claims frequency has increased during 2021 as restrictions have eased. The disruption to global supply chains as a result of COVID-19 has also led to upwards pressure on claims severity. Private health insurance claims have also continued to be lower than expected as a result of the disruption caused by the COVID-19 pandemic, and in the UK we provided a fair value pledge to policyholders to recognise the ongoing uncertainty around the ability to access treatment.

57 - Risk management continued

Reinsurance strategy

Significant reinsurance purchases are reviewed annually at both business unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by analysis of capital, earnings and capital volatility, cash flow and liquidity and the Group's franchise value.

Detailed actuarial analysis is used to calculate the Group's extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using our own internal probabilistic catastrophe model which is benchmarked against external catastrophe models widely used by the rest of the (re)insurance industry. Our reinsurance strategy purchases are consistent with our exposures across the globe and our Group divestment programme.

The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a Group-wide catastrophe reinsurance programme to protect against catastrophe losses up to a 1 in 250 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. The Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers' liability and public liability business written prior to 31 December 2000.

(g) Asset management risk

Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. Funds invested in illiquid assets such as commercial property are particularly exposed to liquidity risk. The risk profile is regularly monitored.

A client relationship team is in place to manage client retention risk, while all new asset management products undergo a review and approval process at each stage of the product development process, including approvals from legal, compliance and risk functions. Investment performance against client objectives relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further independent oversight and challenge by a specialist risk team, reporting directly to the Aviva Investors' Chief Risk Officer.

(h) Operational risk (including conduct risk)

Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment. We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible.

The Group continues to operate, validate and enhance its key operational controls and purchase insurance to minimise losses arising from inadequate or ineffective internal processes, people and systems or from external events. The Group maintains constructive relationships with its regulators around the world and responds appropriately to developments in relation to key regulatory changes. The Operational Risk Appetite framework enables management and the Board to assess the overall quality of the operational risk environment relative to risk appetite and, where a Business Unit (or the Group) are outside of appetite, require clear and robust plans to be put in place in order to return to appetite. We are also currently investing in a risk improvement programme which will further simplify and strengthen the risk management capabilities across the organisation, allowing us to operate a stronger control environment, better support the business to understand and embed risk accountabilities, reduce the complexity of how the business thinks about and manages risks and create greater collaboration across the first and second lines of defence to provide higher quality advice and challenge. Actions from the programme will be embedded throughout 2022.

Since the onset of the COVID-19 pandemic the Group has remained operationally resilient, with key activities such as cash payments and transaction processing being maintained, IT systems remaining operational, and employees including frontline customer facing staff being supported to ensure that we are there to support our customers when they need us most. Aviva has continued to strengthen its processes and controls to ensure that operational risks relating to continued extensive working from home remain at an acceptable level. While there continues to be high profile cyber security incidents for corporates in the UK and globally, Aviva has seen no material increase in the volume of cyber incidents/attacks as a result of the pandemic but has seen external threat actors exploit the global situation through COVID-19 inspired phishing emails, texts and phone calls.

In response to this Aviva has put in place a programme of communications to ensure Aviva employees are aware of such scams, published safe homeworking guides and run online training for its employees and their families.

Aviva completed the sale of a number of our businesses as part of the rationalisation of the Group. We agreed an approach that ensured all operational risks were managed effectively up until the point of completion and continue to track all transitional service agreements. We also carefully monitored and managed the risks associated with this divestment programme itself. These risks included:

• Execution risk including failure to achieve necessary regulatory approvals, other legal obligations and clean and appropriate separation of the business in the required time

• Data leakage or loss as a result of ongoing access to Aviva information by divested entities post-sale, or the security of email communications with divested markets and

• Impact on our ongoing operational risk profile including disruption to customer services, external reporting requirements, loss of key staff/expertise.

57 - Risk management continued

The importance of digital interaction with our customers, together with the conduct, data protection and financial crime agenda of the FCA and other regulators, as well as the increasing cyber security threat, as evidenced by continuing instances of high profile cyber security breaches for other corporates in the UK and elsewhere, mean the Group has inherent risk exposure to data theft, conduct regulatory breaches (including financial crime) and customer service interruption due to IT systems failure. Aviva has continued to monitor the threat environment and enhance its IT infrastructure and Cyber controls to identify, detect and prevent attacks. Aviva's Cyber defences are regularly tested using our own 'ethical hacking' team.

We have implemented measures to improve the Group's operational resilience and be ready for new PRA and FCA regulations on operational resilience and outsourcing and third-party risk management which take effect on 31 March 2022. This includes undertaking resilience and crisis response exercises to test our ability to deliver important business services within impact tolerances in severe but plausible scenarios.

We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory investigations, media speculation and negative publicity, disclosure of confidential client information, inadequate services, whether or not founded, could impact our brands or reputation. Any of our brands or our reputation could also be affected if products or services recommended by us (or any of our intermediaries) do not perform as expected (whether or not the expectations are founded) or customers' expectations of the product change.

We have designed our products and business processes to ensure we treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to treat our customers fairly could result in regulatory action and penalties and could also impact our brands or reputation.

If we do not manage the perception of our brands and reputation successfully, it could cause existing customers or agents to withdraw from our business and potential customers or agents to choose not to do business with us.

(I) Risk and capital management

(i) Sensitivity test analysis

The Group uses a number of sensitivity tests to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic and operating experience are regularly produced on the Group's key financial performance metrics to inform the Group's decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of its business units, and the Group as a whole, are exposed.

(ii) Life insurance and investment contracts

The nature of long-term business is such that a number of assumptions are made in compiling these financial statements. Assumptions are made about investment returns, expenses, mortality rates and persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business. A number of the key assumptions for the Group's central scenario are disclosed elsewhere in these statements.

(iii) General insurance and health business

General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques. These methods extrapolate the claims development for each accident year based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims.

(iv) Sensitivity test results

Illustrative results of sensitivity testing for long-term business, general insurance and health business and the fund management and non-insurance business are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged. Each test allows for any consequential impact on the asset and liability valuations.

Sensitivity factor	Description of sensitivity factor applied
Interest rate and investment return	The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities.
Credit spreads	The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets. The test allows for any consequential impact on liability valuations.
Equity/property market values	The impact of a change in equity/property market values by ± 10%.
Expenses	The impact of an increase in maintenance expenses by 10%.
Assurance mortality/morbidity (life insurance only)	The impact of an increase in mortality/morbidity rates for assurance contracts by 5%.
Annuitant mortality (long-term insurance only)	The impact of a reduction in mortality rates for annuity contracts by 5%.
Gross loss ratios (non-long-term insurance only)	The impact of an increase in gross loss ratios for general insurance and health business by 5%.

57 - Risk management continued

Long-term business sensitivities as at 31 December 2021

31 December 2021 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/property  +10%	Equity/property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(115)	135	(10)	(65)	40	(35)	10	(5)
Insurance non-participating	(1,175)	1,410	(640)	(155)	135	(220)	(145)	(900)
Investment participating	(50)	65	-	(25)	25	(40)	-	-
Investment non-participating	-	-	-	5	(10)	-	-	-
Assets backing life shareholders' funds	(50)	55	(45)	-	-	-	-	-
Total	(1,390)	1,665	(695)	(240)	190	(295)	(135)	(905)

31 December 2021 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(115)	135	(10)	(65)	40	(35)	10	(5)
Insurance non-participating	(1,175)	1,410	(640)	(155)	135	(220)	(145)	(900)
Investment participating	(50)	65	-	(25)	25	(40)	-	-
Investment non-participating	-	-	-	5	(10)	-	-	-
Assets backing life shareholders' funds	(40)	40	(30)	5	(5)	-	-	-
Total	(1,380)	1,650	(680)	(235)	185	(295)	(135)	(905)

Sensitivities as at 31 December 2020

31 December 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	10	(375)	(80)	(20)	(40)	(65)	20	(5)
Insurance non-participating	(965)	1,215	(735)	(115)	100	(215)	(155)	(1,020)
Investment participating	(60)	75	-	(20)	20	(50)	-	-
Investment non-participating	(5)	5	-	5	(10)	(5)	-	-
Assets backing life shareholders' funds	(145)	180	(45)	(25)	25	-	-	-
Total	(1,165)	1,100	(860)	(175)	95	(335)	(135)	(1,025)

31 December 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	10	(375)	(80)	(20)	(40)	(65)	20	(5)
Insurance non-participating	(965)	1,215	(735)	(115)	100	(215)	(155)	(1,020)
Investment participating	(60)	75	-	(20)	20	(50)	-	-
Investment non-participating	(5)	5	-	5	(10)	(5)	-	-
Assets backing life shareholders' funds	(195)	220	(50)	(25)	25	-	-	-
Total	(1,215)	1,140	(865)	(175)	95	(335)	(135)	(1,025)

Changes in sensitivities between 2021 and 2020 reflect underlying movements in the value of assets and liabilities, including the impact of disposals, the relative duration of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK.

General insurance and health business sensitivities as at 31 December 2021

31 December 2021 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(400)	480	(80)	105	(105)	(120)	(230)
Net of reinsurance	(415)	470	(80)	105	(105)	(120)	(225)

31 December 2021 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(400)	480	(80)	105	(105)	(20)	(230)
Net of reinsurance	(415)	470	(80)	105	(105)	(20)	(225)

57 - Risk management continued

Sensitivities as at 31 December 2020

31 December 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(380)	445	(110)	100	(100)	(145)	(325)
Net of reinsurance	(435)	490	(110)	100	(100)	(145)	(305)

31 December 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(380)	445	(110)	100	(100)	(25)	(325)
Net of reinsurance	(435)	490	(110)	100	(100)	(25)	(305)

For general insurance and health, changes in the sensitivities between 2020 and 2021 are impacted by the disposals. The impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision.

Fund management and non-insurance business sensitivities as at 31 December 2021

31 December 2021 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%
Total	-	-	35	-	-

31 December 2021 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%
Total	-	-	35	-	-

Sensitivities as at 31 December 2020

31 December 2020 Impact on profit before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%
Total	-	-	50	(10)	20

31 December 2020 Impact on shareholders' equity before tax £m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property  +10%	Equity/ property -10%
Total	-	-	50	(10)	15

Limitations of sensitivity analysis

The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analyses do not take into consideration that the Group's assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group's financial risk management strategy aims to manage the exposure to market fluctuations.

As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action.

For general insurance business, interest rate sensitivities impact the assets but only those liabilities where explicit assumptions are made regarding interest (discount) rates or future inflation.

Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group's view of possible near-term market changes that cannot be predicted with any certainty, and the assumption that all interest rates move in an identical fashion.

60 - Related party transactions

This note gives details of the transactions between Group companies and related parties which comprise our joint ventures, associates and staff pension schemes.

The Group undertakes transactions with related parties in the normal course of business. Loans to related parties are made on normal arm's-length commercial terms.

Services provided to, and by related parties

				2021				2020
	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m	Income earned in the year £m	Expenses incurred in the year £m	Payable at year end £m	Receivable at year end £m
Associates	36	-	-	9	12	(1)	-	6
Joint ventures	36	-	-	1	27	-	-	1
Employee pension schemes	12	-	-	6	11	-	-	6
	84	-	-	16	50	(1)	-	13

Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 18(a)(iii). The Group has equity interests in these joint ventures, together with the provision of administration services and financial management to many of them. Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance.

Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by group companies on equivalent terms to those available to all employees of the Group. In 2021, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.

Our UK fund management companies manage most of the assets held by the Group's main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Group-managed funds and insurance policies with other group companies, as explained in note 49(b)(ii). As at 31 December 2021, the Friends Provident Pension Scheme ('FPPS'), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £625 million (2020: £667 million) issued by a group company, which eliminates on consolidation.

The related parties' receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms.

During the year, the Aviva Staff Pension Scheme (ASPS) completed three (2020: one) bulk annuity buy-in transactions with Aviva Life & Pensions UK Limited (AVLAP). Total premiums of £2,456 million (2020: £873 million) were paid by the scheme to AVLAP, with AVLAP recognising total gross liabilities of £2,184 million (2020: £737 million). The difference between the premiums and the gross liabilities implies profit¹ of £272 million (2020: £136 million), which does not include costs incurred by the Group associated with the transactions, and is driven primarily by differences between the measurement bases used to calculate the premium and the accounting value of the associated gross liabilities. The ASPS recognised the total plan assets of £1,760 million (2020: £579 million), with the difference between the plan assets recognised and the premiums paid being recognised as an actuarial loss through Other Comprehensive Income. As at 31 December 2021, AVLAP recognised cumulative technical provisions of £4,264 million (2020: £2,147 million) in relation to buy-in transactions with the ASPS which have been included within the Group's gross liabilities, and the ASPS held a transferable plan asset of £3,543 million (2020: £1,858 million) which does not eliminate on consolidation.  

• The implied IFRS profit is not equivalent to the margin used in the calculation of our Alternative Performance Measure 'New business margin'. This is calculated as the Value of New Business on an adjusted Solvency II basis (VNB) divided by the Present Value of New Business Premiums (PVNBP) and expressed as a percentage. Please refer to the Other Information section for the definitions of VNB and PVNBP.

Key management compensation

The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows:

	2021 £m	2020 £m
Salary and other short-term benefits	9.0	10.7
Post-employment benefits	1.1	1.4
Equity compensation plans	14.9	12.8
Termination benefits	1.5	0.6
Total	26.5	25.5

Information concerning individual directors' emoluments, interests and transactions is given in the Directors' Remuneration Report.

Notes to editors :

· We are the UK's leading Insurance, Wealth & Retirement business and we operate across our core markets of the UK, Ireland and Canada. We also have international investments in Singapore, China and India.

· We help our 18.5 million customers (core markets) make the most out of life, plan for the future, and have the confidence that if things go wrong we'll be there to put it right.

· We have been taking care of people for 325 years, in line with our purpose of being 'with you today, for a better tomorrow'. In 2021, we paid £30.2 billion in claims and benefits to our customers.

· In 2021, we announced our plan to become a Net Zero carbon emissions company by 2040, the first major insurance company in the world to do so. This plan means Net Zero carbon emissions from our investments by 2040; setting out a clear pathway to get there with a cut of 25% in the carbon intensity of our investments by 2025 and of 60% by 2030; and Net Zero carbon emissions from our own operations and supply chain by 2030.  Find out more about our climate goals at  www.aviva.com/climate-goals  and our sustainability ambition and action at  www.aviva.com/sustainability

· Aviva is a Living Wage and Living Hours employer and provides market-leading benefits for our people, including flexible working, paid carers leave and equal parental leave. Find out more at https://www.aviva.com/about-us/our-people/

· At 31 December 2021, total Group assets under management at Aviva Group are £401 billion and our Solvency II shareholder capital surplus is £13.1 billion. Our shares are listed on the London Stock Exchange and we are a member of the FTSE 100 index.

· For more details on what we do, our business and how we help our customers, visit www.aviva.com/about-us  

· The Aviva newsroom at www.aviva.com/newsroom includes links to our spokespeople images,  podcasts, research reports and our news release archive. Sign up to get the latest news from Aviva by email.

· You can follow us on:

o  Twitter: www.twitter.com/avivaplc/  

o  LinkedIn: www.linkedin.com/company/aviva-plc  

o  Instagram: www.instagram.com/avivaplc  

· For the latest corporate films from around our business, subscribe to our YouTube channel: www.youtube.com/user/aviva  

 

END

 

 

ACSBKDBPBBKBANK