Principal risk types

The types of risk to which the Group is exposed have not changed significantly over the year and are described in the table below. All of the risks below, and in particular operational risks, may have an adverse impact on our brand and reputation.

Risk type

Risk preference

Mitigation

Credit risk

� Credit spread¹

� Credit default

We take a balanced approach to credit and believe we have the expertise to manage it and the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities that enables us to earn superior investment returns.

� Risk appetites set to limit overall level of credit risk

� Credit limit framework imposes limits on credit concentration by issuer, sector and type of instrument

� Investment restrictions on certain sovereign and corporate exposures

� Credit risk hedging programme

� Specific asset de-risking

Market risk

� Equity price¹

� Property

� Interest rate

� Foreign exchange

� Inflation

We actively seek some market risks as part of our investment and product strategy. We have a limited appetite for interest rate and property risks as we do not believe that these are adequately rewarded.

� Risk appetites set to limit exposures to key market risks

� Active asset management and hedging in business units

� Scalable Group-level equity and foreign exchange hedging programme

� Pension fund active risk management

� Asset and liability duration matching limits impact of interest rate changes and actions taken to manage guarantee risk, through product design

Life and health insurance risk

� Longevity¹

� Persistency

� Mortality and morbidity

� Expenses

We take measured amounts of life insurance risk provided we have the appropriate core skills in underwriting and pricing.

� Risk selection and underwriting on acceptance of new business

� Longevity swaps covering pensioner-in-payment scheme liabilities

� Product design that ensures products and propositions meet customer needs

� Use of reinsurance on longevity risk for our annuity business, including the bulk annuity buy-in transaction with Aviva staff pension scheme.

General insurance risk

� Catastrophe

� Reserving (latent and non-latent)

� Underwriting

� Expenses

We take general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. We have a preference for those risks that we understand well, that are intrinsically well managed and where there is a spread of risks in the same category. General insurance risk diversifies well with our Life Insurance and other risks.

� Use of reinsurance to reduce the financial impact of a catastrophe and manage earnings volatility

� Application of robust and consistent reserving framework to derive best estimate with results subject to internal and external review, including independent reviews and audit reviews

� Extensive use of data, financial models and analysis to improve pricing and risk selection

� Underwriting appetite framework linked to delegations of authority that govern underwriting decisions and underwriting limits

� Product development and management framework that ensures products and propositions meet customer needs

� Formal and documented claims management procedures

Liquidity risk²

�

The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid, assets such as commercial mortgages.

� Maintaining committed borrowing facilities (�1.65�billion at 31 December 2019) from banks

� Asset liability matching methodology develops optimal asset portfolio maturity structures in our businesses to ensure cash flows are sufficient to meet liabilities

� Commercial paper issuance

� Use of our limit framework covering minimum liquidity cover ratio and minimum Group Centre liquidity

� Contingency funding plan in place to address liquidity funding requirements in a significant stress scenario

Asset management risk

� Fund liquidity

� Performance and margin

� Product

� Retention risks

Risks specific to asset management should generally be reduced to as low a level as is commercially sensible, on the basis that taking on these risks will rarely provide us with an upside.

� Product development and review process

� Investment performance and risk management oversight and review process

� Propositions based on customer needs

� Client relationship teams managing client retention risk

�

Risk type

Risk preference

Mitigation

Operational risk

� Conduct

� Legal & regulatory

� People

� Process

� Data security

� Technology

� Brand and Reputation

Operational risk should generally be reduced to as low a level as is commercially sensible.

Operational risk will rarely provide us with an upside.

� Application of enhanced business standards covering key processes

� Our Operational Risk & Control Management Framework which includes the tools, processes and standardised reporting necessary to identify, measure, manage, monitor and report on the operational risks and the controls in place to mitigate those risks within centrally set tolerances

� Enhanced scenario-based approach to determine appropriate level of capital to be held in respect of operational risks

� On-going investment in simplifying our technology estate to improve the resilience and reliability of our systems and in IT security to protect ours and our customers' data

� During 2019 we transitioned IT services to new data centres bringing disaster recovery risk back into tolerance

Principal emerging trends and causal factors

This table describes the emerging trends and causal factors impacting our inherent risks, their impact, future outlook and how we take action to manage these risks:

Key trends and movement		Risk management		Outlook
Economic & credit cycle - uncertainty over prospects for future macroeconomic growth, credit and current low interest rates, and the response of Central Banks, could adversely impact the valuation of our investments or credit default experience as well as the level of the returns we can offer to customers going forwards and our ability to profitably meet our promises of the past. Trend: Increasing Risks impacted: Credit risk, Market risk, Liquidity risk		Over the last few years we have taken significant steps to reduce the sensitivity of our balance sheet to investment risks. While interest rate exposures are complex, we aim to closely duration-match assets and liabilities and take additional measures to limit interest rate risk. We hold substantial capital against market risks, and we protect our capital with a variety of hedging strategies to reduce our sensitivity to shocks. We regularly monitor our exposures and employ both formal and ad hoc processes to evaluate changing market conditions. Other actions taken in the past include reducing sales of products with guarantees and shifting our sales towards protection and unit-linked products.		During 2019, interest rates reached record lows in many eurozone economies, requiring further management action in our businesses in France and Italy. We expect rates to remain at low levels for some time to come and we continue to manage our key exposures, specifically in Italy, France and Asia. While asset returns had a strong run, a number of economists have warned we are approaching the end of this credit cycle. In addition, there continues to be significant geopolitical risks that will have knock on impacts to economies and financial markets, including Brexit and the threat of both trade wars and actual wars.
UK-EU relations (Free Trade Agreement uncertainty) - there remains considerable uncertainty over the outcome of negotiations over the UK's future relationship with the EU, and the implications for our operations, economic growth and productivity and in the longer term for financial services regulation, including Solvency II. Trend: Stable Risks impacted: Credit risk, Market risk, Operational risk � � � � � � � � � � � � � � �		In preparing for the end of the transition period on 31 December 2020 under the UK-EU withdrawal agreement, we have already taken the operational measures necessary to ensure continuous service to our customers. This includes addressing the loss of our ability to passport business into the EU through insurance portfolio transfers to our business in Ireland and expansion of our business in Luxembourg to serve our EEA asset management clients and funds, and amending contractual terms for data sharing to allow continued uninterrupted flow of personal data between our EU businesses and the UK. We have contingency plans to restructure our businesses in case the UK is not considered Solvency II equivalent and restrictions to asset management delegation rights as a non-EU manager.		As 2020 progresses we expect greater clarity to emerge over the terms of any future UK-EU free trade agreement and other aspects of the future relationship and the extent, if at all, to which financial and other services are included. There is a risk that financial services are included in a way that leaves the UK as a "rule taker" of EU regulation, which would negatively impact on the ability for the UK to calibrate financial services rules for UK market needs. There is also a risk that negotiations fail to conclude by 31 December 2020, the end of the transition period under the withdrawal agreement, and without an extension to negotiations the UK may need to revert to trading on World Trade Organisation terms. Any agreement may require an implementation period after 2020. While the ultimate outcome remains uncertain, we expect UK financial markets to be volatile and macroeconomic growth subdued.
Changes in public policy - any change in public policy (government or regulatory) could influence the demand for, and profitability of, our products. In some markets there are (or could be in the future) restrictions and controls on premium rates, rating factors and charges. Trend: Volatile Risks impacted: 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 ensure better outcomes for our customers and the Company. The Group's multi-channel distribution and product strategy and geographic diversification 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.		Following the decisive general election victory, the new UK government has a clear mandate on Brexit, and a relatively pro-business stance more generally. We believe that a relatively hard Brexit with minimal alignment to the EU is likely by the end of 2020. Within the domestic agenda there are potential risks around tax, pensions legislation and increasing regulatory intervention (particularly on GI pricing). In the EU there is a review of Solvency II, the key regulatory regime for EU insurers. A new EU Commission has an ambitious agenda for climate change and Artificial Intelligence/data regulation which may bring regulatory changes directly impacting on our businesses in the EU and in a post Brexit UK indirectly.
New technologies & data - failure to understand and react to the impact of new technology and its effect on customer behaviour and how we distribute products could potentially result in our business model becoming obsolete. Failure to keep pace with the use of data to price more accurately and to detect insurance fraud could lead to loss of competitive advantage and underwriting losses. Trend: Increasing Risks impacted: Operational risk		Our data science capabilities facilitate market leading innovation in the use of data analytics to significantly improve the customer journey, improve our understanding of how customers interact with us, and improve underwriting margins. Our Data Charter sets out our public commitment to use data responsibly and securely. Considerable work is going into modernising our legacy infrastructure.		Data creation is likely to continue to grow, while effective use of "Big data" through artificial intelligence and advanced analytics will increasingly become a critical driver of competitive advantage for insurers, and subject to increasing regulatory scrutiny. The competitive threat to traditional insurers is likely to increase with the potential for big technology companies and low cost innovative digital start-ups to enter 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) and inaccurate pricing of general insurance risk, as well as adversely impacting economic growth and investment markets. Trend: Increasing Risks impacted: General insurance risk, Credit risk, Market risk	We are actively engaged in public policy debate on the risks and impacts of climate change to our business and customers. We use reinsurance to reduce the financial impact of catastrophic weather events. In the UK, our flood mapping analytics helps us identify properties most at risk and improve our risk selection. Our responsible investment strategy ensures climate change, as well as other environmental and social issues are integrated into our investment decisions. You can read more about the physical, transition and liability risks we face as an asset owner, insurer and asset manager in our 'Climate-related financial disclosure'.		Global average temperatures over the last five years have been the hottest on record. Despite the UNFCCC Paris agreement, the current trend of increasing CO₂e 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, windstorms) increasing in frequency and severity. Disclosure of potential impacts against various climate scenarios and time horizons will become increasingly common for all companies.		�
Cyber crime - criminals may attempt to access our IT systems to steal or utilise company and customer data, or plant malware viruses, in order to access customer or company funds, and/or damage our reputation and brand. Trend: Increasing Risks impacted: Operational risk	Aviva has invested significantly in Cyber security introducing additional automated controls to protect our data and critical IT services. This investment has enhanced our ability to identify, detect and prevent Cyber-attacks and we regularly test ourselves through our own 'white hat' hackers to test our Cyber defences and crisis management protocols. Aviva encourages a Cyber aware culture by regularly undertaking activities such as employee phishing exercises, computer-based training and more regular communications about specific Cyber threats.		In 2019 there continued to be high profile cyber security incidents for corporates in the UK and elsewhere and Cyber threat is expected to persist in 2020 from multiple sources, including cyber criminals and rogue states, with increasing levels of sophistication and industrialisation anticipated. Aviva continuously monitors the external threat environment to ensure that our Cyber investment remains appropriate to mitigate the continued and changing nature of the cyber threat.		�
Medical advances and healthier lifestyles - these contribute to an increase in life expectancy of our annuity customers and thus future payments over their lifetime may be higher than we currently expect. Trend: Stable Risks impacted: 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. Despite continued medical advances emerging, dietary changes, increasing obesity and strains on public health services have begun to slow this trend, leading in the UK to some significant industry-wide longevity reserve releases in recent years. In the longer term this may even result in a reversal in the trend of increasing life expectancy. Although the latest analysis of population data indicates much lighter mortality in 2019 compared to 2018, which is a marked change to the experience seen during the past decade.		�
Changes in customer behaviour - will impact how customers wish to interact with us and the product offering they expect, including the exercise of options embedded in contracts already sold by us. Trend: Stable Risks impacted: Operational risk	We listen to our customers to ensure we meet their savings, retirement and insurance needs. We also seek to improve the way we serve our customers by simplifying our interactions with them, resolving queries at their first point of contact where appropriate and enhancing our digital capabilities.		We expect customers will be much more in control, expecting to self-service and self-solve. They will want to access data and insight and use it to guide their own decisions. However, we also expect regulatory scrutiny to increase to ensure we continue to serve and treat our existing customers fairly particularly those who are vulnerable and less digitally aware.		�
Outsourcing - we rely on a number of outsourcing providers for business processes, customer servicing, investment operations and IT support. The failure of a critical outsourcing provider could disrupt our operations. Trend: Stable Risks impacted: Operational risk	Our 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.		We expect regulatory scrutiny of outsourcing arrangements to remain following financial difficulties faced by some providers, as well as customer service issues following the migration of our third party provided IT platform in the UK.		�
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. Trend: Increasing Risk impacted: Market, Credit, Life Insurance risk (mortality, longevity, morbidity), General Insurance (business interruption, travel) and Operational risk.	We have taken significant steps to reduce the sensitivity of our balance sheet to market/credit risks and 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. We reinsure much of the mortality risk arising from our Life Protection business and hold capital to cover the risk of a 1-in-200 year pandemic event. We model extreme pandemic scenarios such as a repeat of the 1918 Spanish Influenza pandemic. In the Group and commercial insurance business we limit our potential exposure through our policy wordings. As an investment manager and investor, we engage with companies to ensure the responsible use of antibiotics to reduce the risk that antimicrobial resistance negate the efficacy of medical treatment.		2020 has begun with the outbreak of a new strain of the Coronavirus in China. With confirmed cases in more than 50 countries including all of those in which Aviva has material businesses. There is a risk of a significant global pandemic and economic disruption. We have imposed travel restrictions on staff and a work-from-home self-quarantine regime for staff who have recently visited infected regions. In addition we have reviewed the exposure of our balance sheet, and are taking actions to further reduce our sensitivity to economic shocks. Notwithstanding our robust capital and liquidity position and the operational and financial actions that we are taking, a deterioration in the situation, and the consequent impacts on financial markets, our insurance exposures and our operations, would have adverse implications for our businesses. Going forward, increasing migration and international travel is expected to make the containment of future pandemics more challenging.		�
�	�	�	�	�	�

�

60 - Risk management

This note sets out the major risks our businesses and our shareholders face and describes the Group's approach to managing these. It also gives sensitivity analysis around the major economic and non-economic assumptions that can cause volatility in the Group's earnings and capital position.

(a)� Risk management framework

The risk management framework in Aviva forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing.

For the purposes of risk identification and measurement, and aligned to Aviva's risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance (including long-term health), general insurance (including short-term health), asset management and operational risk. Risks falling within these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation or as conduct risk.

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

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 on the basis of the SCR.

�

60 - Risk management continued

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

Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Customer, Conduct and Reputation Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital and liquidity at Group and in the business units.

Risk appetites, requiring management action if breached, are also set for interest rate and foreign exchange risk (calculated on the basis of the SCR), and liquidity risk (based on stressing forecast central liquid assets and cash inflows and outflows over a specified time horizon). For other risk types the Group sets Solvency II capital tolerances. The Group's position against risk appetite and capital tolerances is monitored and reported to the Board on a regular basis. Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva has a risk preference that we will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee, which focuses on business and financial risks, and the Operational Risk Committee which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.

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

Further information on the types and management of specific risk types is given in sections (b) to (h) below.

(b)� Credit risk

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

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

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

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 2019	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	10.7%	34.1%	19.7%	23.0%	8.0%	4.5%	199,481	(649)	198,832
Reinsurance assets	3.3%	75.8%	9.2%	7.8%	-	3.9%	12,431	(75)	12,356
Other investments	0.2%	-	0.3%	0.1%	-	99.4%	51,935	(6,919)	45,016
Loans	18.3%	3.8%	0.1%	-	-	77.8%	38,580	(1)	38,579
Total	�	�	�	�	�	�	302,427	(7,644)	294,783

�

Restated¹ as at 31 December 2018	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 securities²	10.0%	36.6%	18.1%	23.9%	5.9%	5.5%	192,072	(397)	191,675
Reinsurance assets	-	83.1%	10.0%	2.7%	-	4.2%	11,800	(45)	11,755
Other investments²	0.2%	0.1%	0.4%	0.1%	-	99.2%	46,567	(6,644)	39,923
Loans	17.4%	7.5%	-	-	-	75.1%	36,184	-	36,184
Total	�	�	�	�	�	�	286,623	(7,086)	279,537

1�� Following a review of the Group's presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as loans and fixed maturity securities in the table above. The restatement has had no impact on the profit for the period or equity. See note 1(a) for further information.

2�� Following a review of the classification of financial assets, comparative amounts have been amended from those previously reported. The effect of this change is to reclassify �2,201 million of assets from fixed maturity securities to other investments.

�

60 - Risk management continued

The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include �4,095 million�(2018: �3,640 million) 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 2019	AAA �m	AA �m	A �m	BBB �m	Below BBB �m	Not rated �m
Loans	7,065	1,443	-	-	-	1,071
Receivables	-	144	338	259	4	5,044
Accrued income and interest	-	-	-	-	-	265
Other financial assets	-	-	5	-	-	-
Total	7,065	1,587	343	259	4	6,380

�

Restated¹ as at 31 December 2018	AAA �m	AA �m	A �m	BBB �m	Below BBB �m	Not rated �m
Loans	6,299	2,720	-	-	-	894
Receivables	6	213	294	214	-	4,882
Accrued income and interest	-	-	18	-	-	175
Other financial assets	-	-	10	-	-	-
Total	6,305	2,933	322	214	-	5,951

1�� Following a review of the Group's presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents that are now presented as loans in the table above. The restatement has had no impact on the profit for the period or equity. See note 1(a) for further information.

At the period end, the Group held cash and cash equivalents of �15,344 million (2018 restated: �11,249 million) that met the SPPI criteria, of which �15,322 million (2018 restated: �11,234 million) 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 28), reinsurance assets (note 47), loans (note 25) and receivables (note 29). The collateral in place for these credit exposures is disclosed in note 62 Financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar agreements.

(ii)� Other investments

Other investments (including assets of operations classified as held for sale) 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 Swiss Reinsurance Company Ltd (including subsidiaries), representing approximately 2.4% of the total shareholder assets.

60 - Risk management continued

(v)� Reinsurance credit exposures

The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group Capital and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.

The Group's largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2019, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was �3,097 million (2018: �2,835 million).�

(vi)�� Securities finance

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

(vii)�� Derivative credit exposures

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

(viii) Unit-linked business

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

(ix)�� Impairment of financial assets

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

�	Financial assets that are past due but not impaired					�	�
As at 31 December 2019	Neither past due nor impaired ��m	0-3 months �m	3-6 months �m	6 months- 1 year ��m	Greater than 1 year �m	Financial assets that have been impaired �m	Carrying value �m
Fixed maturity securities	1,455	-	-	6	-	-	1,461
Reinsurance assets	8,361	-	-	-	-	-	8,361
Other investments	2	-	-	-	-	-	2
Loans	10,260	-	-	-	-	-	10,260
Receivables and other financial assets	8,911	51	14	10	9	-	8,995

�

�	�	Financial assets that are past due but not impaired				�	�
Restated¹ as at 31 December 2018	Neither past due nor impaired ��m	0-3 months ��m	3-6 months ��m	6 months- 1 year �m	Greater than 1 year �m	Financial assets that have been impaired �m	Carrying value �m
Fixed maturity securities	1,675	-	-	5	-	-	1,680
Reinsurance assets	7,791	-	-	-	-	-	7,791
Other investments	1	-	-	-	-	-	1
Loans	10,658	-	-	-	-	-	10,658
Receivables and other financial assets	8,536	74	16	11	2	-	8,639

1�� Following a review of the Group's presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents that are now presented as loans in the table above. The restatement has had no impact on the profit for the period or equity. See note 1(a) for further information.

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: �198,020 million of debt securities (2018 restated: �190,392 million), �44,836 million of other investments
(2018 restated: �41,209 million), �28,319 million of loans (2018: �25,526 million) and �4,006 million of reinsurance assets (2018: �4,006 million).

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.

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60 - Risk management continued

(c)� Market risk

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

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

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

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

(i)�� Equity price risk

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

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

Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. An equity hedging strategy remains in place to help control the Group's overall direct and indirect exposure to equities. At 31 December 2019 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.

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

(ii)� Property price risk

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

As at 31 December 2019, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Exposure to property risk on equity release mortgages from sustained underperformance in the UK House Price Index (HPI) is mitigated by capping loan to value on origination at low levels and regularly monitoring the performance of the mortgage portfolio.

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

(iii)�� Interest rate risk

Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group's interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options are given in note 46.

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

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.

Some of the Group's products, 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). Markets where Aviva is primarily exposed to this risk are the UK, France, Italy and some other Asian business units.

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60 - Risk management continued

The low interest rate environment in a number of markets around the world has resulted in our current investment yields being lower than the overall current portfolio yield, primarily in our investments in fixed income securities. We anticipate that interest rates may remain below historical averages for an extended period of time and that financial markets may continue to have periods of high volatility. Investing activity will continue to decrease the portfolio yield as long as market yields remain below the current portfolio level. We expect the decline in portfolio yield will result in lower net investment income in future periods.

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

The UK participating business includes contracts with features such as guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. These liabilities are managed through duration matching of assets and liabilities and the use of derivatives, including swaptions. As a result, the Group's exposure to sustained low interest rates on this portfolio is not material. The Group's key exposure to low interest rates arises through its other participating contracts, principally in Italy and France. Some of these contracts also include features such as guaranteed minimum bonuses, guaranteed investment returns and guaranteed surrender values. In a low interest rate environment there is a risk that the yield on assets might not be sufficient to cover these obligations. For certain of its participating contracts the Group is able to amend guaranteed crediting rates. Our ability to lower crediting rates may be limited by competition, bonus mechanisms and contractual arrangements.

Details of material guarantees and options are given in note 46. In addition, the following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2019 for our Italian and French participating contracts, where the Group's key exposure to sustained low interest rates arises.

�	Weighted average minimum guaranteed crediting rate	Weighted average book value yield on assets	Participating contract liabilities ��m
France	0.67%	2.47%	69,057
Italy	0.29%	3.50%	20,660
Other¹	N/A	N/A	50,389
Total	N/A	N/A	140,106

1�� 'Other' includes UK participating business

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
2017	2.07%	14,770
2018	2.28%	14,651
2019	2.21%	14,350

1�� Before realised and unrealised gains and losses and investment expenses

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

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

(iv)�� Inflation risk

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

(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.

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60 - Risk management continued

The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 58% of the Group's premium income arises in currencies other than sterling and 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 61(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 2019 and 2018, the Group's total equity deployment by currency including assets 'held for sale' was:

�	Sterling �m	Euro �m	CAD$ ��m	Other ��m	Total �m
Capital 31 December 2019	16,036	819	397	1,433	18,685
Capital 31 December 2018	15,720	611	311	1,813	18,455

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

�	10% increase in sterling / euro rate ��m	10% decrease in sterling / euro rate ��m	10% increase in sterling / CAD$ rate �m	10% decrease in sterling / CAD$ rate ��m
Net assets at 31 December 2019	(82)	82	(40)	40
Net assets at 31 December 2018	(61)	77	(31)	31

A 10% change in sterling to euro/CAD$ 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 2019	(67)	82	(18)	22
Impact on profit before tax 31 December 2018	(60)	85	8	(9)

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

(vi)�� Derivatives risk

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

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

(vii) Correlation risk

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

(d)� Liquidity risk

Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages and infrastructure loans. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (�1,650 million) from a range of leading international banks to further mitigate this risk.

Maturity analyses

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 53 and 61, respectively. Contractual obligations under leases and capital commitments are given in note 23 and note 57.

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60 - Risk management continued

(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 2019 and 2018 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts.

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

As at 31 December 2019	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	111,731	8,811	27,184	41,728	34,008
Investment contracts - non-linked	74,641	5,978	19,532	28,313	20,818
Linked business	177,448	16,226	26,002	58,601	76,619
General insurance and health	16,656	7,136	6,665	2,258	597
Total contract liabilities	380,476	38,151	79,383	130,900	132,042

�

As at 31 December 2018	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	106,622	8,421	25,940	40,548	31,713
Investment contracts - non-linked	75,158	5,547	19,199	28,572	21,840
Linked business	156,859	15,559	23,901	52,656	64,743
General insurance and health	16,368	6,859	6,758	2,217	534
Total contract liabilities	355,007	36,386	75,798	123,993	118,830

(ii)� Analysis of maturity of financial assets

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 2019	Total ��m	On demand or within 1 year �m	1-5 years �m	Over 5 years �m	No fixed term (perpetual) �m
Fixed maturity securities	198,832	42,644	47,983	106,981	1,224
Equity securities	99,570	-	-	-	99,570
Other investments	45,016	38,817	25	5,365	809
Loans	38,579	9,641	4,643	24,293	2
Cash and cash equivalents	19,524	19,524	-	-	-
Total	401,521	110,626	52,651	136,639	101,605

�

Restated¹ as at 31 December 2018	Total �m	On demand or within 1 year �m	1-5 years �m	Over 5 years �m	No fixed term (perpetual) �m
Fixed maturity securities²	191,675	42,764	47,936	99,670	1,305
Equity securities	88,227	-	-	-	88,227
Other investments²	39,923	34,782	77	4,301	763
Loans	36,184	9,488	4,236	22,457	3
Cash and cash equivalents	15,926	15,926	-	-	-
Total	371,935	102,960	52,249	126,428	90,298

1�� Following a review of the Group's presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as loans, fixed maturity securities and equity securities in the table above. The restatement has had no impact on the profit for the period or equity. See note 1(a) for further information.

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.

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60 - Risk management continued

(e)� Life and health 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'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. The Group chooses to take measured amounts of life and health 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 underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2019. We are also exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering approximately �5 billion of pensioner in payment scheme liabilities. Longevity risk remains the Group's most significant life insurance risk, while persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. We purchased reinsurance for longevity risk for our annuity business, including the bulk annuity buy-in transaction with the Aviva Staff Pension scheme (see note 52). 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 subject to sensitivity and stress and scenario testing.

The assumption and management of life and health 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 and health insurance risks are managed as follows:

� Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitors that the aggregation of risk ceded is within credit risk appetite.

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

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

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

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, and guaranteed minimum rate of annuity payment; 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 45.

(f)�� General insurance risk

Types of risk

General insurance risk in the Group arises from:

� Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;

� Unexpected claims arising from a single source or cause;

� Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and

� Inadequate reinsurance protection or other risk transfer techniques.

The majority of the general insurance business underwritten by the Group continues to be short tail in nature such as motor, household and commercial property insurances. The Group's underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. General insurance risk is managed primarily at business unit level with oversight at the Group level. Claims reserving is undertaken by local actuaries in the various general insurance businesses and is also subject to periodic external reviews. Reserving processes are further detailed in note 43.

The vast majority of the Group's general insurance business is managed and priced in the same country as the domicile of the customer.
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60 - Risk management continued

Management of general insurance risks

Significant insurance risks will be reported under the risk management framework. Additionally, the capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements.

Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits.

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 exceeding a 1 in 200 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately �150 million on a per occurrence basis and �175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 200 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers' liability and public liability business written prior to
31 December 2000.

(g)� Asset management risk

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

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

(h)� Operational risk

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.

Our business units are primarily responsible for identifying and managing operational risks within their businesses, within the Group-wide operational risk framework including the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning.

The importance of digital interaction with our customers and advanced data analytics, the conduct, data protection and financial crime agenda of the European institutions, the FCA and other regulators, as well as the increasing cyber security threat, as evidenced by continuing instances of high profile cyber security breaches for other corporates in the UK and elsewhere, mean the Group has inherent risk exposure to data theft, conduct regulatory breaches (including financial crime) and customer service interruption due to IT systems failure. During 2019 we have continued to take action to reduce our residual exposure to these risks and improve our operational resilience through our conduct risk management framework, financial crime risk mitigation programme and significant investment in upgrading our IT infrastructure and security.

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 for the product change. We seek to reduce this risk to as low a level as commercially sensible.

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60 - Risk management continued

The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation.

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

(i)�� Risk and capital management

(i)�� Sensitivity test analysis

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

(ii)� Life insurance and investment contracts

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

(iii)�� General insurance and health business

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

(iv)�� Sensitivity test results

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

Sensitivity factor	Description of sensitivity factor applied
Interest rate and investment return	The impact of a change in market interest rates by a 1% increase or decrease. The test allows consistently for similar changes to investment returns and movements in the market value of backing fixed interest securities.
Credit spreads	The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets.
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 2019

31 December 2019 Impact on profit before tax �m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	-	5	(10)	(65)	60	(50)	10	(5)
Insurance non-participating	(985)	1,265	(800)	(120)	105	(240)	(145)	(955)
Investment participating	(85)	55	(5)	(5)	5	(25)	-	-
Investment non-participating	-	5	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(150)	170	(35)	(35)	30	-	-	-
Total	(1,220)	1,500	(850)	(220)	195	(320)	(135)	(960)

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31 December 2019 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	-	5	(10)	(65)	60	(50)	10	(5)
Insurance non-participating	(985)	1,265	(800)	(120)	105	(240)	(145)	(955)
Investment participating	(85)	55	(5)	(5)	5	(25)	-	-
Investment non-participating	-	5	-	5	(5)	(5)	-	-
Assets backing life shareholders' funds	(190)	205	(30)	(30)	30	-	-	-
Total	(1,260)	1,535	(845)	(215)	195	(320)	(135)	(960)

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60 - Risk management continued

Sensitivities as at 31 December 2018

31 December 2018 Impact on profit before tax �m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Assurance mortality +5%	Annuitant mortality -5%
Insurance participating	(75)	35	(15)	(105)	70	(20)	(5)	(5)
Insurance non-participating	(975)	1,130	(695)	(125)	105	(210)	(115)	(865)
Investment participating	(40)	40	(10)	(15)	(15)	(15)	-	-
Investment non-participating	-	-	-	10	(25)	(20)	-	-
Assets backing life shareholders' funds	(95)	105	(25)	20	(20)	-	-	-
Total	(1,185)	1,310	(745)	(215)	115	(265)	(120)	(870)

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31 December 2018 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	(75)	35	(15)	(105)	70	(20)	(5)	(5)
Insurance non-participating	(975)	1,130	(695)	(125)	105	(210)	(115)	(865)
Investment participating	(40)	40	(10)	(15)	(15)	(15)	-	-
Investment non-participating	-	-	-	10	(25)	(20)	-	-
Assets backing life shareholders' funds	(145)	150	(25)	25	(25)	-	-	-
Total	(1,235)	1,355	(745)	(210)	110	(265)	(120)	(870)

Changes in sensitivities between 2019 and 2018 reflect underlying movements in the value of assets and liabilities, 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 2019

31 December 2019 Impact on profit before tax �m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(210)	165	(115)	185	(175)	(140)	(315)
Net of reinsurance	(270)	215	(115)	185	(175)	(140)	(300)

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31 December 2019 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	(210)	165	(115)	185	(175)	(25)	(315)
Net of reinsurance	(270)	215	(115)	185	(175)	(25)	(300)

Sensitivities as at 31 December 2018

31 December 2018 Impact on profit before tax �m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%	Expenses +10%	Gross loss ratios +5%
Gross of reinsurance	(240)	235	(115)	165	(165)	(120)	(325)
Net of reinsurance	(305)	295	(115)	165	(165)	(120)	(315)

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31 December 2018 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	(240)	235	(115)	170	(170)	(25)	(325)
Net of reinsurance	(305)	295	(115)	170	(170)	(25)	(315)

For general insurance and health, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision.
�

60 - Risk management continued

Fund management and non-insurance business sensitivities as at 31 December 2019

31 December 2019 Impact on profit before tax �m	Interest rates +1%	Interest rates �-1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(20)	15	40	(10)	15

�

31 December 2019 Impact on shareholders' equity before tax �m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(15)	15	40	(10)	15

Sensitivities as at 31 December 2018

31 December 2018 Impact on profit before tax �m	Interest rates +1%	Interest rates -1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(25)	20	30	(20)	35

�

31 December 2018 Impact on shareholders' equity before tax �m	Interest rates +1%	Interest rates �-1%	Credit spreads +0.5%	Equity/ property +10%	Equity/ property -10%
Total	(20)	15	30	(20)	30

Limitations of sensitivity analysis

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

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

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

A number of the business units use passive assumptions to calculate their long-term business liabilities. Consequently, a change in the underlying assumptions may not have any impact on the liabilities, whereas assets held at market value in the statement of financial position will be affected. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Similarly, for general insurance liabilities, the interest rate sensitivities only affect profit and equity where explicit assumptions are made regarding interest (discount) rates or future inflation.

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

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63 - 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

�	�	�	�	2019	�	�	�	2018
�	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	1	-	-	4	1	-	-	2
Joint ventures	54	-	-	4	49	-	(1)	2
Employee pension schemes	9	-	-	6	10	-	-	7
�	64	-	-	14	60	-	(1)	11

Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 19(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 2019, 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 52(b)(ii). As at 31 December 2019, the Friends Provident Pension Scheme ('FPPS'), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of �646 million (2018: �620 million) issued by a group company, which eliminates on consolidation.

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

During the period, the ASPS completed a bulk annuity buy-in transaction with Aviva Life & Pensions UK Limited (AVLAP), a Group company. At inception, the buy-in insured approximately 4,300 deferred and 1,500 current pensioner liabilities. A premium of �1,665 million was paid by the scheme to AVLAP, with AVLAP recognising gross insurance liabilities of �1,334 million. The difference between the premium and the gross liabilities implies a profit of �331 million, which does not include costs incurred by the Group associated with the transaction, 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 a plan asset of �1,126 million, with the difference between the plan asset recognised and the premium paid being recognised as an actuarial loss through Other Comprehensive Income. As at 31 December 2019, AVLAP recognised technical provisions of �1,243 million in relation to the buy-in which have been included within the Group's gross insurance liabilities, and the ASPS held a transferable plan asset of �1,144�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:

�	2019 �m	2018 �m
Salary and other short-term benefits	12.3	7.9
Other long-term benefits	3.2	8.6
Post-employment benefits	1.3	1.5
Equity compensation plans	12.7	10.5
Termination benefits	1.0	-
Total	30.5	28.5

�

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

Section in LR 9.8.4C R	Topic	Location in the Annual report and accounts
12	Shareholder waivers of dividends	IFRS Financial Statements - note 35
13	Shareholder waivers of future dividends	IFRS Financial Statements - note 35