Risk and Capital Management
In Sampo Group, risk and capital management is about ensuring the adequacy of the available capital in relation to risks arising from the company’s activities and business environment. Risk and capital management activities are conducted continuously in various parts of the organization. Figure 'Illustrative figure of risk and capital management process in Sampo Group' depicts the risk and capital management actions in Sampo Group on a general level.
Capital Adequacy Assessment
In addition to the statutory financial statements and solvency figures, Sampo Group also uses internal performance, risk and capital measures, which are based on fair values of assets and liabilities. Also the risk and capitalization opinions published by rating agencies are followed closely by Sampo Group.
Sampo Group considers that there is a need to assess capitalization internally because regulatory and rating agency models have to fit for all and hence cannot take the specific features of different companies accurately enough into account.
Capital adequacy is assessed internally by comparing the amount of available capital (adjusted solvency capital) to the amount of capital needed. The capital adequacy assessment has three phases. First, economic capital methodology is used to define the capital needed for current activities. Second, the less quantifiable, low probability and high impact risks as well as uncertainties related to the business environment are considered and this may affect Sampo Group's understanding of the capital needed. Third, when defining the capital available, expected profitability is taken into account, in addition to other capital components, because earnings are seen as the first buffer against potential losses.
What is economic capital in Sampo Group?
Sampo Group uses economic capital as an internal measure of capital required for risks the Group is exposed to. Sampo Group defines economic capital as the amount of capital required to protect the solvency over a one year time horizon with a probability of 99.5 per cent.
Economic capital accounts for market, credit, insurance and operational risks, as well as the diversification effect between these risks. Economic capital is calculated using a set of calculation methods, which have been developed for the specific needs of each business area. When assessing the economic capital need arising from Nordea, Sampo plc uses the economic capital calculated by Nordea multiplied by the proportion of Sampo plc’s share in Nordea (21.28 per cent at year end).
In Sampo Group, economic capital is considered to be a good estimate of the capital required to cover risks that can be measured in a reliable way and within a normal business environment. In the assessment of the adequacy of capital the effects of potential changes in the business environment as well as the effects of low probability risks are taken into account.
The economic capital and adjusted solvency capital as well as the regulatory capital measures are disclosed quarterly.
What is adjusted solvency capital in Sampo Group?
Different stakeholders have different views when assessing the available capital. Regulators have defined which items can be included into the solvency capital and rating agencies have their own definitions for capital. As an internal measure of available capital, Sampo Group uses adjusted solvency capital. The basis for adjusted solvency capital is capital items included in regulatory solvency capital. On top of those, other risk absorbing items such as the difference between the book value and market value (including a risk margin) of technical provisions are added.
Risk and Capital Planning
When assessing the future capital requirement, the views of the management and different stakeholders – regulators and supervisors, rating agencies, debt investors, policyholders and shareholders – are considered. Management's views and plans regarding the future development of the business and investment activities are used when analyzing the future capital requirement. Within the planning process it is considered how changes either in business volumes and business mix or changes in existing risk factors may affect profitability, risks and capital needs. The results of these considerations are reflected in risk management and capitalization recommendations to the business management and the Board of Directors. The recommendations are also affected by the external stakeholders’ views on the capitalization of Sampo Group.
Risk and Capital Management Actions
A prudent assessment of capital adequacy and a careful risk and capital planning are important phases when creating an understanding of the actions that maintain a proper balance between capital and risks. In Sampo Group, the proactive management of risks and capitalization is seen as the most important phase in the risk and capital management process. Risk limits and decision making authorizations are set up in a way that they, together with profitability targets, facilitate business and investment units to take well-considered risks. The limits reflect the capital adequacy targets and risk appetite in general.