Risk Management in 2011
Sampo considers that a high quality risk management process is a prerequisite for business operations. The key objectives of risk management are:
- to ensure that risks affecting our profitability and other material risks are identified, assessed and analyzed;
- to ensure that capitalization – in the form of capital and foreseeable profitability of businesses – is adequate in terms of current risks inherent in business activities and existing business environment;
- to ensure that risk bearing capacity is allocated into different business areas according to chosen strategies and that risks are properly priced;
- to limit and mitigate fluctuations in the economic values of group companies; and
- to ensure the overall efficiency, security and continuity of operations.
As a diverse financial institution, Sampo Group is exposed to a variety of different risks, both financial and non-financial. The major risks associated with Sampo Group’s activities during 2011 were insurance risks arising from P&C and Life insurance business areas, as well as market, credit and liquidity risks emanating from the Group's investment portfolios and the debt financing of Sampo plc.
During 2011, Sampo Group’s insurance risk profile remained relatively stable. In Mandatum Life longevity risk is still the most material biometric risk and most of it arises from the group pension portfolio. In If P&C the most material insurance risk is reserve risk, which to a large extent is driven by long-tailed business such as workers’ compensation and motor third party liability.
The main market risks of Sampo Group during 2011 were equity risk, interest rate risk and credit risk. Equity risk arises from the Group’s equity portfolio amounting to EUR 2.6 billion (3.4). Interest rate risk is related to the Group’s fixed income investments and insurance liabilities. In the short run, rising interest rates would decrease the valuation of fixed income assets. However, over a long period the risk that interest rates fall and remain at a low level is economically more significant, because Group´s liabilities have as an average longer duration than assets. Fixed income investments also expose the Group to credit risks. The amount of the Group's fixed income investments decreased to EUR 14.1 billion (14.2) during 2011.
Currency risk is the risk that Sampo Group will incur losses due to changes in foreign currency exchange rates. If P&C and Mandatum Life are mainly exposed to currency risk via their net currency exposures stemming from business activities. In Sampo plc transaction risk relates mainly to dividends paid by If P&C. At Group level changes in foreign currency exchange rates can change group equity mainly through ‘Other comprehensive income’.
Operational risks, such as failures in internal processes and systems are inherent throughout all business areas. General business risks, related to changes in the economic environment or business cycle, have increased significantly during 2011, because of the sovereign debt crisis.
A more detailed description of Sampo Group’s risk management organization and activities is available in the Risk Management section of the 2011 Annual Report.