Regulatory and Financial Threats Faced by Aviva plc

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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)
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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
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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
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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
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