In Conversation: Aviva’s Lister on Hedging Economic Capital, Bank Deleveraging Opportunities
John Lister is group chief capital and risk officer at Aviva Plc. He tells Bloomberg’s Nicholas Dunbar about an actuary’s risk and capital perspective, hedging and Solvency II
Q: You’ve worked for Aviva for 25 years and pioneered your company’s efforts to hedge interest rate risk using swaptions. How did your background as an actuary help you reach those kinds of decisions?
A: Back in 1995 when we bought a subsidiary with guaranteed annuity liabilities, we were exposed to interest rates as a result, and we did hedge quite early. As an actuary, I think about things in terms of economic capital that you need to hold against risks. As you move away from the old Solvency 1 regulatory environment, which is very much a deterministic approach, towards a more stochastic scenario-based approach, you need to manage your business in terms of understanding the range of outcomes that you might have, and your exposure to single factor risks such as interest rates, credit risk, equity volatility and a huge variety of insurance risks like longevity, and operational risk. Am I happy or not to run those risks? Do I get value from that risk? Do I understand the risk? If it gives you a good return, then it’s worth deploying your capital. If you don’t think you can make money out of it – and I’ve had that view about interest rate risk since 1995 – then you manage your balance sheet such that you don’t run that risk.