Regulatory and Financial Threats Faced by Aviva plc

This document discusses the regulatory and financial threats faced by Aviva plc, a leading insurance company. It explores the compliance risk and interest rate risk that the company encounters and how these risks impact its operations. The document also delves into the use of war games as a strategic planning tool to manage and mitigate these risks.

Coursework assignment 2 answer template990Coursework submission rules and important notes
Before you start your assignment, it is essential that you familiarise yourself with the
Coursework assessment guidelines and instructions available on RevisionMate.
This includes the following information:
 Important rules relating to referencing all sources including the study text, regulations and
citing statute and case law.
 Penalties for contravention of the rules relating to plagiarism and collaboration.
 Coursework marking criteria applied by markers to submitted answers.
 Deadlines for submission of coursework answers.
 There are 80 marks available per coursework assignment. You must obtain a minimum of 40
marks (50%) per coursework assignment to achieve a pass.
 Your answer must be submitted on the correct answer template in Arial font, size 11.
 Your answer must include a brief context, at the start of your answer, and should be referred
to throughout your answer.
 Each assignment submission should be a maximum of 3,200 words.
 Do not include your name or CII PIN anywhere in your answer.
Top tips for answering coursework assignments
 Read the 990 Specimen coursework assignment and answer, available on RevisionMate.
 Read the assignments carefully and ensure you answer all parts of the assignments.
 You are encouraged to choose a context that is based on a real organisation or a division of
an organisation.
 For assignments relating to regulation and law, knowledge of the UK regulatory framework is
appropriate. However, marks can be awarded for non-UK examples if they are more relevant
to your context.
 There is no minimum word requirement, but an answer with fewer than 2,800 words may be
insufficiently comprehensive.
To be completed before submission:
Word count: 2,766
Start typing your answer here:
Introduction
An insurance organisation1 established to minimize or cancel the loss caused by the
consequences occurs due to uncertainties. As the unforeseen misfortune gives the adverse
effects on society, these insurance companies incorporated to reduce the risk to the society.
These insurance companies also have to face different kinds of threats due to the changing
1 Anand M. Agrawal, Krishn A. Goyal Emerging Trends in Banking, Finance & Insurance Industry
(Atlantic Publishers and Distributors, 2009)
1
January 2019

990Coursework assignment 2 answer template
environment of society, like other businesses. Hence, every insurance organisation has its
own plans and strategies to solve these problems.
Aviva plc is one of leading insurance companies who provide their customers a variety of
insurance products and services. Aviva plc also faced some the threats, which had solved by
plans and strategies of the company. In the followed paragraph, there is an explanation of
the various threats faced by the insurance organisation2, Aviva plc.
Aviva plc
Aviva plc3 is the holding company of Aviva groups, incorporated under the ‘Laws of England
and Wales’. This insurance company deals with customer for different kinds of products and
services, such as general & health insurance, long term insurance & saving and fund
managements. The focus of this company is to help their customers in uncertain times.
Aviva Plc is the insurance company having millions of customers and investors. Hence,
ample numbers of financial and regulatory threats arise in the firm. These threats might
hamper the financial and regulatory position of the organisation in the market. To get more
know more about these threats, first understanding of financial and regulatory authorities is
must and their threats detail explanation given below-
Aviva plc Regulatory Authorities
The government enacted a wide range of reforms for insurance companies in 2013. The
insurance companies are the part of financial service sector regulated by financial service
authority which later on replaced by two regulatory bodies enacted under the act names as
Financial Services and Market Act 20004, which are as follows:-
a) The Prudential Regulatory Authority5: It is a part of the Bank of England. Its
work is to promote the soundness and safety of insurers. In addition, provide
protection to policyholders.
b) The Financial Conduct Authority6: It governs the firm behaviour and regulates
the integrity of financial markets in the UK.
2 Henry A. Odeyinka ‘An evaluation of the use of insurance in managing construction risks,
Construction’ (2000) 18 MAE 519
3 Aviva plc ‘Aviva’ (Aviva plc, 2019) <https://www.aviva.com/ > accessed 25th
April 2019
4 Andrew Henderson ‘Judicial Review and the Financial Services and Markets Act 2000’ (2001) 6 JR
255
5 Bank of England ‘Prudential Regulation’ (Bank of England, 2019)
<https://www.bankofengland.co.uk/prudential-regulation> accessed 25thApril 2019
6 FCA ‘Financial conduct Authority’ (FCA, 2019) <https://www.fca.org.uk/>
accessed 25thApril 2019
2
January 2019

990Coursework assignment 2 answer template
Aviva plc7 is authorised by ‘The Prudential Regulatory Authority’ and regulated by the
Prudential Regulations and the Financial Conduct authorities. The functions of these
authorities specified under Financial Services and Market Act 2000. It is the act created by
the Financial Service Authority as the regulator of the insurance industry.
Regulatory Threat to Aviva plc
Regulatory threat is the threats occur due to the violation or change in the rules and
regulations of law on insurance. The external and internal affairs are responsible for these
violations and changes. This might affects the business environment of the company. In
addition, these changes and violations make a new framework of the company.
If Aviva plc not regulates according to Prudential Regulatory and the Financial Conduct
authorities, it is the offence and for this offence company, either has to pay penalties or
punished by law. This creates Compliance Risk in the organisation, which is the regulatory
threat to insurance organisations to organisation.
Compliance Risk
Compliance Risk8 generates penalties, material loss and financial forfeiture for the
organisation, when organisation fails to act according to the insurance industry laws and
regulations. If Aviva plc did not follow the internal policies and regulations under this act,
then compliance risk arises in the organisation. Hence, it is the regulatory threat to an
insurance organisation.
Aviva plc Finance Department
Finance department of an insurance company has to manage the financial decisions of the
company. The function of this department is to provide proper planning, organizing,
accounting, controlling and auditing of finance. In addition, this department has the
responsibility to produce the financial statement of the company.
In Aviva plc also there is a financial department because of which, Aviva plc has a strong
financial position in the market and the cash flow and growth of the company is depending
on the financial position. Therefore, Aviva plc has the ability to fulfil the commitments of their
customers and investors.
Financial Threat to Aviva plc
The financial threat9 is the threats occur due to the external and internal factors that
influence the financial performance of the organisation. There are different types of financial
7 Aviva plc ‘Aviva Company Details’ (Aviva plc, 2019)
<https://www.aviva.co.uk/services-and-support/about-our-business/about-us/aviva-company-details/>
accessed 25th April 2019
8 Atlas Magazine ‘The compliance function in the insurance industry’ (Atlas Magazine, 2014)
<https://www.atlas-mag.net/en/article/the-compliance-function> accessed 25thApril 2019
9 Marieke de Goede ‘Repoliticizing financial risk’ (2004) 33 EAS 19
3
January 2019

990Coursework assignment 2 answer template
threats are cybercrimes, operational risk, investment market risk, competitions, weak work
force and economic instability. Like other companies, Aviva plc also has to face some
financial threats of which one of them explained below.
Interest Rate Risk
The interest rate risk10 defined as the change in the interest rate of the fixed income
securities in which the company invested. This can cause a huge loss to the company
because of unexpected changes in the interest rate. In addition, it may indirectly affect the
value of bonds.
Interest rate risk for Aviva plc is an important factor in determining the profitability of the
company. The interest rate change11 can affect the assets and liabilities of Aviva plc. If the
interest rate drops, Aviva plc liabilities will decrease its obligations to policyholders in the
future. In addition, lower interest rates can also make the product less attractive. As a result,
the company will have lower sales and income in the form of premiums. Less interest rate
can also create difficulties in meeting the future financial obligations. Hence, there is lower
equity investment leads to the lower levels of assets in the company for the insurer.
Strategic Planning Tool: War Games
There are different types of strategic planning tool in the organisations, War games12 is one
of them. It makes the insurance companies to think out of the box, which helps the
companies by guiding them, how to act in accordance with the specific market conditions. In
additions, it gives guidelines for how to react to the others also. These guidelines generate
greater awareness in the organisation for the competitive firms. Also, gives stronger ability to
predict the behaviour of the competitive firms. The War Games tool is the significant and
useful tool for developing strategies.
In Military war-games strategy13 is use to simulate the conditions of battlefield. In the same
manner, War games strategy for company stimulates the conditions and challenges of
business and helps the company to execute the successful planning strategies, which are
capable to evolve according to the changing nature of the business environment. It gives an
ideal way to the organisation by testing new strategies and making assumptions about their
business. In addition, it helps the organisation to identify opportunity, strength, weakness
and threats occurred due to different reasons in business environment, which helps in
improving the company planning strategies, and made them work positively in this dynamic
environment. In the following paragraph, there is an analysis with reference to War games
as the strategic planning tool.
10 Emanuele Bajo, Massimiliano Barbi, David Hillier Interest rate risk estimation: a new duration-based
approach (2013) 45 AE 2697
11 Bryan D. MacGregor, Nanda Nanthakumaran, Allison M. Orr ‘The sensitivity of UK commercial
property values to interest rate changes’ (2012) 29 JPR 123
12 Makarenko Business Games (1997) 39 RES 84
13 Treat J., Thibault G., Asin A. ‘Dynamic Competitive Simulation: Wargaming as a Strategic Tool’
(Strategy Business, 1996) <https://www.strategybusiness.com/article/15052?gko=6098f> accessed
25thApril 2019
4
January 2019

990Coursework assignment 2 answer template
Impact of Compliance Risk and Interest Rate Risk on Aviva plc
Compliance risk14 of an organisation is the change in procedures, policies, rules, regulations
and laws. Aviva plc is one of the highly regulated firms in the insurance industry. As a result,
this company faces the greater compliance risk. Either internal or external policies or
procedures are responsible for compliance risk in Aviva plc.
Interest rate risk15 of an organisation arises from the fluctuations happen with interest rates.
In the market, change of interest rates affects the profitability of the company. In addition, it
involves multiple numbers of calculations.
Therefore, to manage compliance risk and interest rate risk in the organisation, it becomes
necessary to adopt some kind of strategy, which helps the company to control or reduce the
negative impact of both the risks.
In this situation, war-games strategic planning tool will be used to analyse the impact of both
risks in the organisation. This tool helps the organisation in analysing the changes in
insurance regulations16 and interest rate. In additions, it is useful when there is the
requirement of new strategies developed as per the changing situations. Impact of
compliance risk and interest rate risk on the organisation with reference to war game as a
strategic planning tool, explained in below points:
 Involvement of huge cost
Compliance Risk: As per the war games strategic planning tool, Aviva plc has to appoint
number of expertise to generate new strategies, to reduce or resolve the effects of
compliance risk to the organisation and it involves huge cost.
Interest Rate Risk: In the same way, if the company wants the security at the time of change
in interest rate. Aviva plc has to appoint the experts to calculate the interest rate. In addition,
experts can create the ideas to escape from the effects of interest rate risk and it involves
the huge expenditure.
 Reduce the negative effects
Compliance Risk: War games strategic planning tool helps Aviva plc to generate new
policies and strategies. These plans and strategies resolve or reduce the effects of
compliance risk to the organisation.
Interest Rate Risk: War games strategic planning tool helps Aviva plc to generate ideas to
reduce the impact of interest rate fluctuations.
 Time-consuming process
14 Leah Hamilton ‘5 Keys to Effective Compliance Risk Management’ (Cutimes, 2016)
<https://www.cutimes.com/2016/09/20/5-keys-to-effective-compliance-risk-management/?
slreturn=20190325231226> accessed 25thApril 2019
15 CFI ‘Interest Rate Risk’ (CFI, 2019)
<https://corporatefinanceinstitute.com/resources/knowledge/finance/interest-rate-risk/> accessed
25thApril 2019
16 Eamonn M. McAlea, Martin Mullins, Finbarr Murphy and others ‘Engineered nanomaterials: risk
perception, regulation and insurance ‘(2016) 19 JRR 444
5
January 2019

990Coursework assignment 2 answer template
Compliance Risk: War games strategic planning tool includes lots of analysis of competitive
market as well as analysis of change in the behaviour of business environment. Hence, the
company needs time to analysis the whole perspective. Therefore, this tool includes time-
consuming activities taken by a company to formulate the policies as per the requirement.
Interest Rate Risk: War games strategic planning tool includes lots of analysis of the
different investment ideas, which involves many calculations. Hence, it is a time consuming
process.
 Wrong predictions
Compliance Risk: In war games strategy, the company predicts the behaviour of the market
and if the wrong predictions made by the company, then the company might suffer a huge
loss.
Interest Rate Risk: In war games strategy, the company might suffer from huge losses if the
company prediction is wrong at the time of investment on the security, as if the security’s
interest rate fluctuate, it will cause huge losses in the organisation.
 Minimise the risk to company:
Compliance Risk: In war games strategic planning tool, Aviva plc able to analyse the impact
of compliance risk and this helps in minimising the risk to the company.
Interest Rate Risk: In war games strategic planning tool, Aviva plc able to calculate the risk
of fluctuation in interest rate of security and this helps in minimising the risk, as the company
will invest on the security accordingly.
 Develop the deeper understanding:
Compliance Risk: The war games strategy helps Aviva plc in developing the deeper
understanding of the impact from compliance risk to the organisation. This tool helps in
improving the framework of the company. In addition, it will improve the coordination, efforts
and knowledge sharing among the employees of the company.
Interest Rate Risk: The war games strategy helps Aviva plc in developing a deeper
understanding of the impact of interest rate risk on the organisation. This tool helps the
company at the time of investments on securities to generate premiums. In additions, it
might increase the profitability of the firm.
With the reference of war games as the strategic planning tool, the above points contain the
analyses of the impacts of both compliance risk and interest rate risk on the organisation.
Recommendations to manage Compliance Risk
On the bases of the above analysis, some recommendations suggested which help in
managing the compliance risk in the organisation. These recommendations are as follows:
I. Optimizing the monitoring activities: To control these risks, a company must have
to monitor on all the changes in the regulation activities internally or externally.
6
January 2019

990Coursework assignment 2 answer template
II. Efficiently control and management of the information system: The Company
should have the efficient control and management of the information system17 so that
only the important information used at the time of compliance risk.
III. Focus on important matters: There should be a proper teamwork on the
compliance risk and this is only possible when the focus of the team is on the
important matters related to compliance risk.
IV. Appointment of experts: To reduce or resolve compliance risk, company must
appoint some experts. These experts help the company to generate some important
strategies and plans, which protects the company at the time of compliance risk.
These recommendations might help the insurance organisation to manage the matters
related change in the insurance regulations. In addition, it also helps to manage the
compliance risk of the organisation.
Recommendations to manage Interest rate Risk
On the bases of the above analysis, some recommendations suggested which help in
managing the interest rate risk in the organisation. These recommendations are as follows:
I. Purchase Interest rate futures: The insurance company can buy futures contracts
of government securities or bonds. These bonds also known as interest rate
futures18.These purchases secures the company as the interest rates of these
securities does not fluctuate
II. Not purchase the long-term bonds: The insurance company must not purchase
long-term bonds19 as interest rate risk might arise.
17 Steven L. Alter ‘How Effective Managers Use Information Systems’ (Harvard Business Review,
2019) <https://hbr.org/1976/11/how-effective-managers-use-information-systems> accessed 25thApril
2019
18 NSE ‘Interest Rate Futures’ (NSE, 2019)
<https://www.nseindia.com/products/content/derivatives/irf/irf.htm> accessed 25thApril 2019
19 CNN Money ‘Should I buy short-term or long-term bonds?’ (CNN Money, 2019)
<https://money.cnn.com/retirement/guide/investing_bonds.moneymag/index9.htm> accessed 25thApril
2019
7
January 2019

990Coursework assignment 2 answer template
III. Buy high yield bonds: The insurance company must purchase the high yield
bonds20, as it is a short-term investment, which includes less possibilities of
fluctuation in interest rate.
IV. Appointment of Experts: To reduce and resolve these types of risk, the company
has to appoint some experts. These experts help the company to generate some
important strategies and plans, which protects the company at the time of interest
rate fluctuations.
These recommendations might help the insurance organisation to manage the matters
related change in the Interest rate. In addition, it also helps to manage the interest rate risk
of the organisation.
Conclusion
From the above discussion, it can be concluded that Aviva plc, which is one of the leading
insurance company in the UK, has an efficient and effective regulatory and financial position.
There is the detailed explanation of these departments mentioned in the above paragraphs.
Just like the other firms, Aviva plc also has some financial and regulatory threats and to
analyse these threats, understanding of regulatory and financial position of the insurance
organisation is must. Among all the financial and regulatory threats of an insurance
organisation, the significant financial threat is Interest rate risk and the regulatory threat is
compliance risk. In addition, Aviva plc adapts necessary policies and strategies for the
protection from these regulatory and the financial threats. With the reference of war-games
strategic planning tool, the company able to analyse the impacts of each threats on the
organisations. This strategy has both negative and positive aspects explained in the above
paragraphs. In additions, there are some recommendations based on analyses, which helps
the company to manage more effectively the impact of each threat to the insurance
organisation. The insurance companies have to implement some of the necessary policies
and strategies to reduce and resolve the regulatory and financial threats.
20 The Street ‘What Are High-Yield Bonds?’ (The Street, 2019)
<https://www.thestreet.com/topic/46503/high-yield-bond.html> accessed 25thApril 2019
8
January 2019

990Coursework assignment 2 answer template
Referencing must be completed before submission
All sources must be referenced in the body of your answer as well as in your reference list. See
the 990 Specimen coursework assignment and answer for examples of how to reference
correctly in text and in your reference list.
References
Bibliography
Books
Anand M. Agrawal, Krishn A. Goyal Emerging Trends in Banking, Finance & Insurance
Industry (Atlantic Publishers and Distributors, 2009)
Articles
Bajo E., Barbi M, Hillier D ‘Interest rate risk estimation: a new duration-based approach’
(2013) 45 AE 2697
Goede M. ‘Repoliticizing financial risk’ (2004) 33 EAS 19
Henderson A. ‘Judicial Review and the Financial Services and Markets Act 2000’ (2001) 6
JR 255
MacGregor B., Nanthakumaran N., Orr A. ‘The sensitivity of UK commercial property values
to interest rate changes’ (2012) 29 JPR 123
Makarenko ‘Business Games’ (1997) 39 RES 84
McAlea E., Mullins M., Murphy F. and others ‘Engineered nanomaterials: risk perception,
regulation and insurance’ (2016) 19 JRR 444
Odeyinka H. ‘An evaluation of the use of insurance in managing construction
risks,Construction’ (2000) 18 MAE 519
Peters G. ‘Risk analysis’ (1997) 2 TLI 97
Website
Atlas Magazine ‘The compliance function in the insurance industry’ (Atlas Magazine, 2014)
<https://www.atlas-mag.net/en/article/the-compliance-function> accessed 25thApril 2019
Aviva plc ‘Aviva Company Details’ (Aviva plc, 2019) accessed
<https://www.aviva.co.uk/services-and-support/about-our-business/about-us/aviva-company-
details/>25thApril 2019
Aviva plc ‘Aviva’ (Aviva plc, 2019) <https://www.aviva.com/> accessed 25th April 2019
9
January 2019

990Coursework assignment 2 answer template
Bank of England ‘Prudential Regulation’ (Bank of England, 2019)
<https://www.bankofengland.co.uk/prudential-regulation> accessed 25thApril 2019
CFI ‘Interest Rate Risk’ (CFI, 2019)
<https://corporatefinanceinstitute.com/resources/knowledge/finance/interest-rate-risk/>
accessed 25thApril 2019
CNN Money ‘Should I buy short-term or long-term bonds?’ (CNN Money, 2019)
<https://money.cnn.com/retirement/guide/investing_bonds.moneymag/index9.htm>
accessed 25thApril 2019
FCA ‘Financial conduct Authority’ (FCA, 2019) <https://www.fca.org.uk/> accessed 25thApril
2019
Leah Hamilton ‘5 Keys to Effective Compliance Risk Management’ (Cutimes, 2016)
<https://www.cutimes.com/2016/09/20/5-keys-to-effective-compliance-risk management/?
slreturn=20190325231226> accessed 25thApril 2019
NSE ‘Interest Rate Futures’ (NSE, 2019)
<https://www.nseindia.com/products/content/derivatives/irf/irf.htm> accessed 25thApril 2019
Steven L. Alter ‘How Effective Managers Use Information Systems’ (Harvard Business
Review, 2019) <https://hbr.org/1976/11/how-effective-managers-use-information-systems>
accessed 25thApril 2019
The Street ‘What Are High-Yield Bonds?’ (The Street, 2019)
<https://www.thestreet.com/topic/46503/high-yield-bond.html> accessed 25thApril 2019
Treat J., Thibault G., Asin A. ‘Dynamic Competitive Simulation: Wargaming as a Strategic
Tool’ (Strategy Business, 1996) <https://www.strategybusiness.com/article/15052?
gko=6098f> accessed 25thApril 2019
10
January 2019

990Coursework assignment 2 answer template
Glossary of key words
Analyse
Find the relevant facts and examine these in depth. Examine the relationship between
various facts and make conclusions or recommendations.
Construct
To build or make something; construct a table.
Describe
Give an account in words (someone or something) including all relevant characteristics,
qualities or events.
Devise
To plan or create a method, procedure or system.
Discuss
To consider something in detail; examining the different ideas and opinions about
something, for example to weigh up alternative views.
Explain
To make something clear and easy to understand with reasoning and/or justification.
Identify
Recognise and name.
Justify
Support an argument or conclusion. Prove or show grounds for a decision.
Outline
Give a general description briefly showing the essential features.
Recommend with reasons
Provide reasons in favour.
State
Express main points in brief, clear form.
11
January 2019