Annual Financial Report

Aviva PLC

Mar 09 2023 07:01 GMTSource: RNS

RNS Number : 3717S

Aviva PLC

09 March 2023

9 March 2023

Aviva plc

2022 Annual Report and Accounts

On 9 March 2023, Aviva plc (the "Company") released its 2022 Results Announcement for the year ended 31 December 2022. The Company announces that it has today issued the 2022 Annual Report and Accounts.

The 2022 Annual Report and Accounts was approved by the Board on 8 March 2023 and provides information about the Company as at 31 December 2022.

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 2022 Annual Report and Accounts will be mailed to shareholders on 29 March 2023 together with the Company's 2023 Notice of Annual General Meeting, in line with shareholder communication preferences.

The 2022 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 AvivaSHARES@computershare.co.uk, 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 +44 (0)2076 626646

Roy Tooley, Head of Secretariat - Corporate +44 (0)7800 699781

Information required under Disclosure & Transparency Rule 6.3

This announcement should be read in conjunction with the Company's results announcement issued on 9 March 2023. 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 2022 Annual Report and Accounts. Page references and note numbers in the text below refer to page and note numbers in the 2022 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. The directors are responsible for the maintenance and integrity of the company's website. Legislation in the UK 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 33
13	Shareholder waivers of future dividends	IFRS Financial Statements - note 33

By order of the Board on 8 March 2023.

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 58 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, 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 and risk intelligent culture, 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) and regulatory capital.

The key elements of our risk management framework comprise: our risk strategy and risk management forward plans; 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.

How we manage risk

Effective risk management is fundamental to the sustainable success of Aviva. Aviva's risk management framework (RMF) is critical in supporting the business to deliver on Aviva's purpose for our customers, our people and our shareholders, helping the business discover, predict, understand and manage our risks, thereby maintaining a safe, sustainable and competitive risk and control environment.

Our RMF is illustrated on the next page and comprises our systems of risk governance, risk and control management processes and risk appetite framework. It applies Group-wide, to embed a rigorous and consistent approach to risk management throughout the business.

Aviva's culture underpins all aspects of our RMF and makes sure different and balanced risk perspectives inform decision-making at Aviva. We monitor the effectiveness of our control consciousness and risk behaviours through feedback from our people throughout our businesses, regular assessment and industry benchmarking.

Our risk management framework

Our risk management framework (RMF) sets out our all-encompassing approach to risk management throughout Aviva. As illustrated on the figure to the left, our RMF is made up of several key components, including sub-frameworks for risk appetite and key risk categories, as well as our risk policy, governance, processes, procedures, systems and desired behaviours and attitudes for risk management.

Our risk appetite framework

Our risk appetite framework outlines the risks we select and manage in the pursuit of return, the risks we accept and retain at a moderate level as part of doing business and the risks we actively avoid or take action to mitigate as far as practical.

Our risk appetites express the level of risk our business is willing to accept, are set at an aggregate level (sometimes covering multiple risk types) and act as hard constraints. The Group has risk appetites for solvency, liquidity, climate, operational, conduct and reputational risk.

The risk appetites are supported by risk tolerances, preferences, triggers, and limits.

Our risk processes and systems

The processes and systems we use to identify, measure, manage, monitor and report risks, including the use of our risk models, Operational Risk and Control Management System (ORCM) 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 to 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.

Risk and capital management

The Group's Own Risk and Solvency Assessment (ORSA) comprises all processes and procedures employed to identify, measure, monitor, manage and report the short-term and long-term risks Aviva faces or may face. The ORSA underpins the consideration of risk and capital implications in key decisions and, in particular, in strategy setting and business planning.

For robust and reliable financial reporting throughout the Group, we have in place Group reporting manuals in relation to International Financial Reporting Standards (IFRS) and Solvency II reporting requirements and a Financial Reporting Control Framework (FRCF).

Our risk governance approach

Our governance approach includes risk policies and business standards, risk oversight committees (both Board and management) and clearly defined roles and responsibilities.

Our suite of risk policies sets out the Board's expectations for the management of risk throughout the Group. The Group's suite of business standards sets out Aviva's required control objectives and minimum control requirements for effective internal control throughout the Group.

These control objectives include:

· the business demonstrating a commitment to integrity and ethical behaviour and promotes Aviva's desired culture and values, including in relation to risk and control;

· reducing future losses and detriment to customers arising from failures in operational risk management and controls; and

· supporting reliable reporting on the operational risk and control environment at all levels of the business, to increase the confidence of the Board, Regulator and Customers in the effectiveness and efficiency of our operational processes.

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' risk governance model.

The roles and responsibilities of the Risk and Audit Committees in relation to the oversight of risk management and internal control are set out in the Governance section of this Report.

The Risk Committee engages with the Customer and Sustainability Committee on the Climate and wider Sustainability agenda. There are three Group-level management committees designed 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 Group Asset and Liability Committee; the Group Executive Risk Committee and the Group Disclosure Committee.

Oversight and challenge

The risk function is committed to enabling Aviva to grow profitably, responsibly and sustainably through oversight and challenging how the first line optimises our risk exposure safely with a key focus on protecting our customers and society for a better tomorrow. This is delivered through our risk leadership team specialising in financial risk, non-financial risk (including IT, cyber, climate and conduct), and consists of our Market CROs and risk directors. The risk function has been proactive on key initiatives around climate risk and the Consumer Duty Regulations in the year.

Integration of climate into our risk management framework

We consider climate change to be a significant risk to our strategy and business model and its impacts are already being felt. We are acting now through our Sustainability Ambition to mitigate and manage its impacts both today and in the future.

Through these actions, we continue to build resilience to climate-related transition, physical and liability risks. The principal risks impacted by climate change are credit risk, market risk, general insurance risk, life insurance risk and operational risk.

Our risk policies (including the risk management framework and ORSA) to explicitly cover climate and other sustainability risks and to integrate these risks in our risk and control management activities.

The Board has approved the climate business plan as well as the risk appetite which acts as an expression of the level. We use a variety of metrics to identify, measure, monitor and report alignment with global or national targets on climate change mitigation and the potential financial impact on our business.

We have a very low appetite for climate-related risks which could have a material negative impact upon our balance sheet and business model as well as our customers and wider society.

We actively seek to limit our exposure over time to the downside risks arising from the transition to a low carbon economy. We seek to identify and support solutions that will drive a transition to a low-carbon, climate resilient economy.

We seek to limit our net exposure to the more acute and chronic physical risks that will occur in the event the Paris Agreement target is not met. We actively avoid material exposure to climate litigation risks including greenwashing risk. We review and monitor our exposure to this risk taking into account rapidly evolving regulatory requirements.

For further details see our Climate-related Financial Disclosure 2022 report.

Principal risk types

The types of risk to which the Group is exposed have not changed significantly over the year. All of the inherent risks to our business described below, and in particular operational risks, may have an adverse impact on our brand and reputation. Our exposure to these risks and mitigating actions are set out in detail in note 58.

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). Specific actions we have taken to mitigate life insurance risk include use of reinsurance on longevity risk for our annuity business and the staff pension scheme.

General insurance risk arises from loss events (for example, fire, flooding, windstorms, accidents) 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. Specific actions we have taken to mitigate general insurance risk include use of reinsurance to reduce the financial impact of a catastrophe and manage earnings volatility.

Asset management risk is the risk of customers redeeming funds, not investing with us, or switching funds, resulting in reduced fee income. Specific actions we have taken to mitigate asset management risk include investment performance and risk management oversight and review process; and client relationship teams managing client retention risk.

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. Specific actions we have taken:

• credit limit framework imposes limits on credit concentration by issuer, sector and type of instrument;

• investment restrictions on certain sovereign and corporate exposures; and

• credit risk hedging programme and asset de-risking.

Liquidity risk is the risk of not being able to make payments when they become due because there are insufficient assets in cash form. In September 2022, we experienced one of the largest liquidity squeezes in recent times. Specific actions we have taken to mitigate this risk include:

• maintain borrowing facilities from banks, commercial paper issuance and contingency funding plans; and

• minimum liquidity buffers and intergroup funding helped enable us to meet collateral calls in the year because of the sharp interest rate rises.

Market risks result from fluctuations in asset values, including equity prices, property prices, foreign exchange, inflation and interest rates. Specific actions we have taken to mitigate this risk include:

• ongoing review of strategic asset allocations; and

• active asset management and hedging.

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, (including those outsourced to third parties), 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 and/or our regulatory relationships.

Specific actions we have taken to mitigate these risks include:

• implementation plans for new Consumer Duty Regulations;

• actively monitoring the cyber and data threat environment leading to actions enhancing the IT infrastructure and cyber controls to identify, detect and prevent attacks; and

• supplier oversight and continuity plans in case of third party supplier failure.

Principal emerging trends and causal factors

The following table sets out 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 and credit cycle - challenging prospects for future macroeconomic growth given cost of living pressures. Rising inflation, higher interest rates and Sterling weakness: • will likely impact our customers' savings behaviours; and • 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.	Increasing	Credit risk, Market/Investment 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 structured and ad-hoc processes to evaluate changing market conditions. Liquidity is managed through maintaining sufficient buffers and taking through asset sales or intergroup funding where required.	The current economic uncertainty continues to pose trading risks (for example, lower margins) to the business. Heightened volatility is expected to persist with elevated inflation, rising interest rates, sterling weakness and stagnating economic growth. In 2023 the potential deterioration in global credit and property markets caused by materially higher borrowing costs and reduced affordability may pose a risk to our investments. However, our solvency and group centre liquidity positions are expected to remain within appetite.
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, such as Canada, 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 third countries in respect of financial services has implications for our business models for our asset management and insurance businesses in the EU.	Increasing	Operational risk	We actively engage with governments and regulators in the development of public policy and regulation. We do this to understand how public policy may change and to help obtain 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 and Workplace pensions.	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 have now confirmed the new consumer duty rules, which come into effect in July 2023. In Ireland the regulator has expressed concerns over renewal pricing and have adopted 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 Financial Services and Markets Bill, which will set the post-Brexit regulatory and policy framework plus new objectives for the financial regulators, is progressing through Parliament. The UK has completed its review of Solvency II and agreed a broadly positive reform package. The reforms will now be implemented under the new regulatory framework, although government has reserved the right to set key aspects (including the Matching Adjustment) in legislation.
New technologies and data - failure to understand and react to the impact of new technology and its effect on customer behaviours 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.	Increasing	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. Aviva is continuing to modernise its data environment and tools to improve the management and governance of data and deliver improved value for our customers.	Data mastery and the effective use of 'Big Data' through artificial intelligence, cognitive 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 ambition is to align our business to the 1.5^oC Paris Agreement target and aspire to be a Net Zero carbon company by 2040. Our climate-related financial disclosure sets out how Aviva incorporates climate-related risks and opportunities into governance, strategy, risk management, metrics (for example, climate Value-at-Risk) and targets.	Aviva considers climate change to be a significant risk to our strategy and business model and its impacts are already being felt. Global average temperatures over the last five years have been the hottest on record. Despite the United Nations Framework Convention on Climate Change 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 2^oC and weather events (floods, droughts and windstorms) increasing in frequency and severity.
Cyber crime - criminals (including state sponsored activity) may attempt to access our IT systems to steal and/or utilise company and customer data, or plant malware viruses to access customer funds, company funds, and/or damage our reputation and brand.	Increasing	Operational risk	The threat environment has remained dynamic and in response Aviva has strengthened its perimeter controls and enhanced our ability to identify, detect and prevent such attacks. Aviva has measures in place to prevent and, where required, assess and respond to data breaches. The threat environment is actively monitored and our IT infrastructure and cyber controls are enhanced where necessary 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 continue to impact corporates globally driven by the use of destructive malware and ransomware and this is expected to persist in 2023. Aviva continuously monitors the external threat environment so that our cyber investment and the effectiveness of our controls remains appropriate to mitigate the continued and changing nature of cyber threats.
Longevity advancements (e.g. due to medical advances) - these contribute to an increase in life expectancy of our annuity customers and accordingly 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 and 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 top talent we have various internal talent development programmes, a broad variety of graduate and apprentice schemes and a range of diversity, equity and inclusion initiatives, including gender and sponsorship programmes. Our 'Aviva University' promotes life-long learning for colleagues supporting development of skills in key areas such as our customers, data and digital interactions. We have launched a new career compass to enable colleagues to have brilliant career conversations as well as a Data Academy. 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. Our voluntary attrition has remained consistent throughout 2022, tracking below the Financial Services industry average. Our latest colleague survey results are very positive with engagement rising to 86%, with 84% of colleagues saying they intend to stay with Aviva for at least the next 12 months. 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 recent 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 on the responsible use of antibiotics to reduce the risk that antimicrobial resistance negates the efficacy of medical treatment.	As COVID-19 becomes endemic its long-term impact on mortality and morbidity is uncertain and dependent on the extent natural immunity develops in the general population, the efficacy of new healthcare treatments and possible future strains that may emerge. This includes the long-term effects of Long-COVID. Legal uncertainty over the outcome of business interruption claims litigation arising from the COVID-pandemic is expected to persist for a number of years. 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 have largely reversed making the containment of future pandemics more challenging. While we expect the experience and learnings from the recent COVID-19 will improve the effectiveness of the public healthcare response to any future pandemics, this is likely to be offset by increasing strain on public healthcare from an ageing population and stretched public finances.

58 - Risk management

Risk Environment

During the year, the global economy has experienced elevated inflation, rising interest rates and stagnating economic growth. Expectations for 2023 are that interest rates will see further rises. The Bank of England expects the UK economy to be at risk to recession throughout 2023 and the first half 2024, with GDP expected to recover gradually thereafter. This will increase the risk of credit defaults and rating downgrades, which we are monitoring closely . Affordability remains a concern to trading because of the economic climate, and will impact all customers, including relatively affluent customers. Customer experience and retention will continue to require close monitoring. Continued heightened geo-political tensions, specifically over the conflict in Ukraine, and the potential for further disruption to energy supplies are an additional source of uncertainty for financial and commodity markets and as a trigger for inflation.

There remains uncertainty over the outcome from continuing COVID-19 business interruption claims litigation and the impact on the Group, as well as the long-term impact of the COVID-19 pandemic on mortality and morbidity, and consequential strains on UK public healthcare and customer demand for private medical insurance.

We expect continued and heightened regulatory change in 2023 and beyond. In 2023 the UK Government and PRA are expected to conclude their review of Solvency II impacting how much prudential capital the Group is required to hold and how the Group invests the funds backing its annuity business. By July 2023, the Group's UK business will be required to have implemented the FCA's Consumer Duty for open products and by July 2024 for closed products. The FCA Consumer Duty, combined with the cost of living crisis, is expected to increase regulatory scrutiny on the fair value of products provided by the insurance industry. August 2023 will see the first wave of large pension providers and schemes connecting to the UK pensions dashboard.

The Group continues to maintain strong solvency and liquidity positions through a range of scenarios and stress testing. Our capital and liquidity positions have been tested by recent market conditions and have been shown to be robust and resilient.

There has been an increased threat of malware and 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 Value at Risk (VaR) against Intergovernmental Panel on Climate Change (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. As part of our actions to mitigate climate risks, Aviva originates assets for their climate credentials. Aviva has defined an Investment in Sustainable assets metric, which is implemented with reference to external frameworks and is set out in our climate reporting policies in the Aviva plc Climate-related Financial Disclosure report 2022.

The Group is implementing IFRS 17 insurance contracts retrospectively from 1 January 2023. The adoption of IFRS 17 significantly impacts the measurement and presentation of the contracts in scope of the standard. IFRS 17 introduces the concept of a contractual service margin (CSM) liability that defers future unearned profit on insurance contracts. The recognition of a CSM for our life businesses is expected to result in a material reduction in the IFRS net asset value of the Group on transition to IFRS 17, with a stock of future profits held on the balance sheet as a liability and released over time. The cash flows and underlying capital generation of our businesses are unaffected by IFRS 17, and the standard will have no impact on our Solvency II performance metrics or the Group financial targets we have announced. Furthermore, we do not expect IFRS 17 to impact on the dividend policy and dividend guidance. Further information on IFRS 17, including the expected financial impacts on the Group net asset value at the transition date of 1 January 2022, is provided in note 62.

(a) Risk management framework (RMF)

Aviva's RMF is at the heart of every business decision and is key to a robust control environment and the Group's sustainable success. The key components of our RMF are 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 for 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 and 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/forward plan, appetite, framework, key controls, and minimum requirements for the Group's worldwide operations. The business unit's 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.

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 based on the Solvency Capital Requirement (SCR).

Roles and responsibilities for risk management in Aviva are based around the 'three lines of defence' risk governance model where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk ownership and management, including the implementation and embedding of the RMF. 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 RMF, as well as providing advisory support to the business on risk innovation. 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 and Sustainability 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 the 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.

In September 2022, we acquired an additional 25% stake in our joint venture in India, Aviva Life Insurance Company India Limited, increasing Aviva's shareholding to 74%. As a result of this transaction, we became the majority shareholder and have applied the Aviva RMF to this business.

The RMF of a small number of our joint ventures and strategic equity holdings differs from the Aviva RMF 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 RMF so not to unduly increase the overall risk exposure of the Group.

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 Aviva 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, because of 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 report and monitor their exposures against detailed 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.

The Group has minimal direct investment exposure to Russia and Ukraine, and no exposure to Belarus.

We did not experience a material increase in credit defaults in 2022. We continue to monitor closely any deterioration in the credit markets. Our capital position includes an allowance for the expected potential impacts from downgrades and defaults.

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 2022	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	18.0 %	37.6 %	21.9%	13.0%	3.8%	5.7%	103,776	-	103,776
Reinsurance assets	- %	66.5 %	30.3%	3.1%	- %	0.1%	13,056	-	13,056
Other investments	- %	- %	0.1%	- %	- %	99.9%	34,520	-	34,520
Loans	- %	9.0 %	1.0%	0.4%	- %	89.6%	29,647	-	29,647
Total							180,999	-	180,999

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

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 £3.6 billion (2021: £4.3 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 2022	AAA £m	AA £m	A £m	BBB £m	Not rated £m
Loans	-	2,663	250	-	814
Receivables	-	62	419	94	4,175
Accrued income & interest	-	-	-	-	163
Other investments	-	-	-	-	1
Total	-	2,725	669	94	5,153

As at 31 December 2021	AAA £m	AA £m	A £m	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

At the period end, the Group held cash and cash equivalents of £21,441 million (2021: £10,100 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 26), reinsurance assets (note 45), loans (note 23) and receivables (note 27). The collateral in place for these credit exposures is disclosed in note 60 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.

(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 Legal and General Group plc (including subsidiaries), representing approximately 1.7% 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.

(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 2022	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	7,832	-	-	-	-	-	7,832
Other investments	-	-	-	-	-	-	-
Loans	3,727	-	-	-	-	-	3,727
Receivables and other financial assets	5,778	133	71	26	35	-	6,043
		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

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: £97.3 billion of fixed maturity securities (2021: £113.4 billion), £34.5 billion of other investments
(2021: £30.8 billion), £25.9 billion of loans (2021: £30.0 billion) and £5.2 billion of reinsurance assets (2021: £5.1 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.

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 because of 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.

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 because of market movements.

In addition, where the Group's long-term savings businesses have written insurance and investment products where most investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, so to satisfy the policyholders' risk and reward objectives. 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.

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 IBOR 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. Significant progress has been made, with a substantive majority of Aviva's original IBOR exposure already resolved. Aviva's only remaining exposure to GBP LIBOR relates to a small number of currently fixed-rate public bonds that would revert to LIBOR-referencing floating rates in the event of a non-call by the issuer at the next call date. We continue to assess the likelihood of this event. Aviva has adhered to the ISDA Fallback Protocol for all its in-scope USD LIBOR exposures and we continue to work with borrowers on the transition of our remaining direct USD LIBOR loan exposures in advance of the discontinuation of these benchmarks after 30 June 2023. Aviva's exposure to CDOR relates to a small number of interest rate swaps whose transition will be planned prior to CDOR's termination after 28th June 2024. 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 30 December 2022, £506 million of non-derivative financial assets, £29 million of derivative financial assets and £30 million of derivative financial liabilities had yet to transition to an alternative risk-free rate.

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.

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

(ii) Property price risk

The Group is subject to property price risk directly because of 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 2022, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. We maintain a conservative loan-to-value on our commercial mortgage portfolio. 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 (h) 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 44.

We have limited appetite for interest rate risk as we do not believe it is adequately rewarded. We manage and hedge our interest rate exposure through setting risk tolerance levels on a Solvency II cover ratio basis. Exposure to interest rate risk is monitored through several measures that include duration, capital modelling, sensitivity testing and stress and scenario testing.

Increasing interest rates as a result of the monetary policy response to inflationary pressures will positively impact the Group's regulatory capital cover ratio. This could be offset by the negative impact of credit downgrades, counterparty defaults, claims and maintenance expenses and lapse rates if high inflation persists and the economy stagnates or falls. Conversely, rising credit spreads will adversely impact IFRS shareholders' equity, see section (h) sensitivity test analysis.

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.

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 are largely unaffected by low interest rates. Annual management fees could increase if there was a move towards low interest rates which increases the value of unit funds. 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. Details of material guarantees and options are given in note 44.

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
2020	1.88 %	15,024
2021	1.88 %	14,390
2022	2.33 %	13,082

• 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. If there are future falls in interest rates the investment yield would be expected to decrease in future periods.

Sensitivity to changes in interest rates is given in section (h) 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.

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 25% of the Group's gross written premium income from continuing operations arises in currencies other than sterling. 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 59(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 2022 and 2021, the Group's net assets by currency including assets held for sale was:

Sterling

£m

Euro

£m

CAD$

£m

Other

£m

Total

£m

Net Assets at 31 December 2022

12,806

(507)

584

12,895

Net Assets at 31 December 2021

19,300

(769)

222

701

19,454

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

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 2022

(51)

(1)

Net assets at 31 December 2021

(77)

(22)

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 2022

(6)

(1)

Impact on profit before tax 31 December 2021

206

(252)

(23)

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, and less liquid assets such as commercial mortgages and infrastructure loans. The Group seeks to maintain 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.

In the Group we use derivative contracts to manage interest rate, inflation and foreign-exchange risks. Following the sharp and rapid rise in interest rates at the end of Q3 2022 the value of these instruments moved significantly. This required sizeable collateral flows which we were able to meet due to the sufficient liquidity buffers and intergroup funding.

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 51 and 59, respectively. Contractual obligations under leases and capital commitments are given in note 21 and note 55.

(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 2022 and 2021 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 accordingly tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date.

As at 31 December 2022	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	74,790	6,158	19,972	30,507	18,153
Investment contracts - non-linked	15,138	2,526	4,517	6,492	1,603
Linked business	152,374	5,027	17,719	48,042	81,586
General insurance and health	16,382	6,785	7,330	2,017	250
Total contract liabilities	258,684	20,496	49,538	87,058	101,592

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

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 2022	Total £m	On demand or within 1 year £m	1-5 years £m	Over 5 years £m	No fixed term £m
Fixed maturity securities	103,776	18,961	33,075	51,740	-
Equity securities	85,790	-	-	-	85,790
Other investments	34,520	30,894	582	2,863	181
Loans	29,647	5,388	4,634	19,625	-
Cash and cash equivalents	22,505	22,505	-	-	-
Total	276,238	77,748	38,291	74,228	85,971

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	-	-	-
Total	316,070	95,706	32,312	92,528	95,524

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.

(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 assumptions of our life insurance risks, primarily longevity, persistency, mortality, morbidity and expense risk has been limited. The Group also tracks the potential longer-term impacts from the pandemic (e.g. morbidity impacts). Underwriting procedures on Individual Life Protection products limit our exposure to cohorts of the population at the highest risk of COVID-19.

We have reinsurance in place across all our businesses 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.

The Group's life insurance risk continues to be dominated by exposure from our UK business. COVID-19 has continued to present additional uncertainty, but we expect limited future impact to our business. We have seen heavier mortality throughout the summer months of 2022, which is in contrast to the historical trend of lighter experience over this period, with causes attributed to reduced NHS capacity and long-term health impairments prior to the pandemic.

Current persistency experience is not showing any significant deterioration in the short term, despite cost of living pressures, but there remains some uncertainty about the potential for future deterioration, which is being monitored closely. External factors that may impact future persistency experience include the continued increasing levels of inflation, increased stock-market volatility, changes in legislation and the growing threat of a prolonged recession in the markets in which we operate.

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 the majority of pensioner in-payment scheme liabilities in force at the time. We purchase reinsurance for some of the longevity risk relating to our annuity business, which includes a series of bulk annuity buy-in transactions with the Aviva Staff Pension scheme, where a further tranche was executed in 2022 (see note 50). The 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.

• Longevity risk is managed through monitoring and analysis of the Group's experience, as well as considering 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. Lapses and their associated financial impact are reduced through appropriate design of products to meet current and, where possible, future customer needs. Businesses also implement specific initiatives to improve the retention of policies which may otherwise lapse.

• Expense risk is primarily managed by the business units through robust cost controls and efficiency targets, together with frequent monitoring of expense levels.

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.

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 43.

(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. 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. The impact of actual weather-related losses compared to the expected losses based on the long-term average was 12% worse (2021: 5% worse) for UK and Ireland general insurance and 35% lower (2021: 16% lower) for Canada general insurance.

The removal of the majority of government restrictions related to COVID-19 across the Group's markets has led to claims frequency increasing to and stabilising at more normal levels, but there continues to be a significant degree of uncertainty in relation to business interruption claims arising from COVID-19.

On 17 October 2022, the High Court in the UK handed down its judgment on the preliminary issues trial of Stonegate Pub Co Ltd vs MS Amlin Corp Member Ltd (and others) and related cases. Aviva was not a party to the cases but will be affected by the final rulings. The Court ruled in favour of the parties on different issues, and all parties have appealed the majority of the decisions. The judgment has been carefully considered and the potential impact on claims related to business interruption policies assessed, noting that significant uncertainty remains due to the appeals made to the Court of Appeal.

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. 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.

The Group's general insurance business does not have material underwriting exposure to Russia and the Ukraine, and does not conduct operations in the affected region. All commercial underwriting lines with exposures above £1 million have been reviewed and all have clear war exclusions.

The conflict in Ukraine and ongoing disruption to global supply chains has resulted in heightened claims inflation during 2022 which is expected to persist into 2023 and has increased the uncertainty associated with the cost of settling general insurance claims. While the impacts of heightened claims inflation are being mitigated via new business pricing actions, our ability to price for inflation is dependent on market, competitor and customer behaviour. The time lag between premium earning and claims emergence means that some adverse impact on profitability is expected.

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.

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 (1 in 500 year return period in Canada). The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £200 million on a per occurrence basis and £350 million on an annual aggregate basis. The Group purchases a number of general insurance 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) 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. As part of our continual improvements of or risk management approach to keep pace with the business, increasing regulatory expectations, and the macroeconomic and geo-political environment, we have recently implemented risk improvements. Those improvements have strengthened and enhanced our risk management capabilities throughout the organisation and enabled us to operate a stronger control environment, improve understanding and accountabilities of risks, 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.

We have implemented measures to improve the Group's operational resilience in response to new PRA and FCA operational resilience regulations (including outsourcing and third-party risk management) which took effect on 31 March 2022. This includes a programme of resilience and crisis response testing to ensure the continued financial safety and soundness of Aviva's business and our ability to support approved operating tolerances for the most important business services that our customers rely upon. Operational resilience disciplines and assessments have been used in response to global events, including: changes to the geo-political environment; financial market instability; and the continuity of Winter power supplies.

We rely on several outsourcing providers for critical business processes, customer servicing, investment operations and IT support. To manage the risk of failure of a critical outsourcing provider, businesses are required to identify business critical outsourced functions (internal and external) and for each to have exit and termination plans, and business continuity and disaster recovery plans in place in the event of supplier failure, which are reviewed annually. We also carry out supplier financial stability reviews at least annually.

The Russia-Ukraine conflict and increasing geo-political tensions more generally have heightened the risk of cyber security attacks on the Group or its suppliers, with the potential to cause business service interruption and/or data or intellectual property theft. In response Aviva continues to actively 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 and we have engaged our suppliers to put in place all reasonable measures so that services to Aviva and our customers are protected.

The Group actively monitors social and other media in order to manage misinformation about our business, products, colleagues and customers should we be targeted by a hostile actor in the context of the situation in Ukraine or elsewhere, taking corrective media action if necessary.

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 so that 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 is counter to our purpose, values and culture and could result in regulatory action and penalties, as well as impact our brands and/or reputation. The FCA stated that by the end of October 2022, firms' boards (or equivalent management body) should agree Consumer Duty implementation plans. All implementation plans for Aviva in scope regulated entities have gone through the agreed governance process and have been signed off by the appropriate boards. Our Consumer Duty Framework, includes guidance on what represents a good customer outcome in the context of our products and services.

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) 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. See below for further details on the limitations of the sensitivity analysis. The sensitivity of the net IAS 19 surplus to interest rates is provided in note 50(b)(iii).

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%.

Long-term business sensitivities as at 31 December 2022

31 December 2022 Impact on profit/loss 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	(70)	100	(15)	(80)	55	(25)	-	-
Insurance non-participating	(705)	885	(570)	(85)	60	(175)	(120)	(540)
Investment participating	(40)	20	-	(30)	30	(35)	-	-
Investment non-participating	-	-	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(40)	40	(30)	5	(5)	-	-	-
Total	(855)	1,045	(615)	(185)	135	(240)	(120)	(540)

31 December 2022 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	(70)	100	(15)	(80)	55	(25)	-	-
Insurance non-participating	(705)	885	(570)	(85)	60	(175)	(120)	(540)
Investment participating	(40)	20	-	(30)	30	(35)	-	-
Investment non-participating	-	-	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(40)	40	(30)	5	(5)	-	-	-
Total	(855)	1,045	(615)	(185)	135	(240)	(120)	(540)

Sensitivities as at 31 December 2021

31 December 2021 Impact on profit/loss 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)

Changes in sensitivities between 2022 and 2021 reflect underlying movements in the value of assets and liabilities, including 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 2022

31 December 2022 Impact on profit/loss 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	(195)	220	(80)	105	(105)	(125)	(295)
Net of reinsurance	(225)	240	(80)	105	(105)	(125)	(270)
31 December 2022 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	(195)	220	(80)	105	(105)	(20)	(295)
Net of reinsurance	(225)	240	(80)	105	(105)	(20)	(270)

Sensitivities as at 31 December 2021

31 December 2021 Impact on profit/loss 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)

For general insurance and health, the increase in interest rates over the period and asset liability management actions have reduced the impact of interest rate sensitivities. The impact of the expense sensitivity on profit/loss 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 2022

31 December 2022 Impact on profit/loss before tax £m

Interest rates +1%

Interest rates

-1%

Credit spreads +0.5%

Equity/property +10%

Equity/property

-10%

Total

31 December 2022 Impact on shareholders' equity before tax £m

Interest rates +1%

Interest rates

-1%

Credit spreads +0.5%

Equity/property +10%

Equity/property

-10%

Total

Sensitivities as at 31 December 2021

31 December 2021 Impact on profit/loss before tax £m

Interest rates +1%

Interest rates

-1%

Credit spreads +0.5%

Equity/property

+10%

Equity/property

-10%

Total

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

Limitations of sensitivity analysis

The tables above demonstrate the effect of an instantaneous change in a key assumption while other assumptions remain unchanged. In reality, changes may occur over a period of time and 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 analysis does 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 allocations and taking other protective action.

Other limitations in the above sensitivity analysis include the use of hypothetical market movements to demonstrate potential risks 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 parameters move in an identical fashion. Specific examples:

a. The sensitivity analysis assumes a parallel shift in interest rates at all terms. These results should not be used to calculate the impact of non-parallel yield movements.

b. The sensitivity analysis assumes equivalent assumption changes across all markets i.e. UK and non-UK yield curves move by the same amounts, equity markets across the world rise or fall identically

Additionally, the movements observed by assets held by Aviva will not be identical to market indices so caution is required when applying the sensitivities to observed index movements.

61 - 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

				2022				2021
	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	39	-	-	9	36	-	-	9
Joint ventures¹	34	-	-	135	50	-	-	1
Employee pension schemes	10	-	-	5	12	-	-	6
	83	-	-	149	98	-	-	16

• Following a review of 2021, comparative amounts have been amended from those previously reported to include transactions between Aviva Investors Singapore and Aviva Singlife Holdings Pte. Limited. The effect of this change is £13 million in Income earned in the year.

Transactions with joint ventures in UK relate to the property management undertakings, the most material of which are listed in note 17(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 2022, 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 50(b)(ii). As at 31 December 2022, the Friends Provident Pension Scheme ('FPPS'), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £432 million (2021: £625 million) issued by a group company, which eliminates on consolidation. During the year, Aviva Group Holdings Limited provided a short term loan of £88 million to FPPS. As at 31 December 2022 £26 million remained outstanding, which is included within the Group's loan assets and as a deduction from FPPS plan assets, and does not eliminate 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 two (2021: three) bulk annuity buy-in transactions with Aviva Life & Pensions UK Limited (AVLAP). Total premiums of £1,324 million (2021: £2,456 million) were paid by the scheme to AVLAP, with AVLAP recognising total gross liabilities of £1,001 million (2021: £2,184 million). The difference between the premiums and the gross liabilities implies profit² of £323 million (2021: £272 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 £891 million (2021: £1,760 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 2022, AVLAP recognised cumulative technical provisions of £3,342 million (2021: £4,264 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 £2,875 million (2021: £3,543 million) which does not eliminate on consolidation.

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:

	2022 £m	2021 £m
Salary and other short-term benefits	8.3	9.0
Post-employment benefits	0.9	1.1
Equity compensation plans	18.9	14.9
Termination benefits	-	1.5
Total	28.1	26.5

In 2022, roles within the management structure were reviewed and certain positions were determined to no longer be persons with decision making responsibility. As a result, the number of individuals classified as key management personnel has reduced as at 31 December 2022. 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 in the UK, Ireland and Canada. We also have international investments in India, China and Singapore.

· We help our 18.7 million customers 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 more than 325 years, in line with our purpose of being 'with you today, for a better tomorrow'. In 2022, we paid £23.2 billion in claims and benefits to our customers.

· Aviva is a market leader in sustainability. 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

· While we are working towards our sustainability ambitions, we acknowledge that we have relationships with businesses and existing assets that may be associated with significant emissions. More information can be found at https://www.aviva.com/sustainability/climate/

· 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/

· As at 31 December 2022, total Group assets under management at Aviva Group were £352 billion and our Solvency II shareholder capital surplus is £8.7 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

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

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