The Group, in the course of its business activities, is exposed to Insurance, Market, Credit, Liquidity, and Operational risks. Overall responsibility for the management of these risks is vested in the Group Board. To support it in this role, a risk framework is in place comprising formal committees, risk assessment processes and risk review functions. The framework provides assurance that risks are being appropriately identified and managed and that an independent assessment of risks is being performed.
Risk Assessment Processes
A continuous Groupwide process is in place formally identifying, evaluating and managing the significant risks to the achievement of the Group’s objectives. A standard approach is used to assess risks. Senior management and the Risk Review Functions (see below) review the output of the assessments. A Groupwide risk assessment process is used to determine the key risks within the Group reported to the GRCC.
Risk Review Functions
Group and firm level Risk Review Functions provide oversight of the risk management processes within the Group. A central risk function is responsible for setting the risk management framework and standards. Risk Review Functions in each of the business operating units manage the framework in line with these standards. Their responsibilities include the evaluation of changes in the business operating environment and business processes, the assessment of these changes on risks to business and the monitoring of the mitigating actions. The Risk Review Functions also ensure that risk committees are provided with meaningful risk reports and that there is appropriate information to assess risk issues.
Details of the categories of risk to the Group, and high-level management processes, are summarised below. More detailed analysis may be found in Principal Risks and Uncertainties and Note 49. The Group has defined policies for the management of its key risks, the operation of which are supported by Risk Review Functions and are independently confirmed by Group Internal Audit. The GRCC reviews and approves these policies.
Insurance Risk
Insurance risk is the risk arising from higher claims being experienced than was anticipated.
Insurance risk is implicit in the Group’s insurance business and arises as a consequence of the type and volume of new business written and the concentration of risk, in particular, policies, or groups of policies, subject to the same risks.
The Group controls its insurance exposures through policies and delegated authorities for underwriting, pricing and reinsurance. Pricing is based on assumptions, such as mortality and persistency, which have regard to past experience and to trends. Insurance exposures are further limited through reinsurance.
Market Risk
Market risk is the risk arising from fluctuations in interest and exchange rates, share prices and other relevant market prices. The investment policies for long term and other businesses have due regard to the nature of liabilities and guarantees and other embedded options given to policyholders. The interest rate risk of such liabilities is normally managed by investing in assets of similar duration, where possible. It is further managed by maintaining capital sufficient to cover the consequences of mismatch under a number of adverse scenarios and by the use of derivatives.
The Group is also potentially exposed to loss as a result of fluctuations in the value of, or income from, assets denominated in foreign currencies. Balance sheet foreign exchange translation exposure in respect of the Group’s international subsidiaries is actively managed in accordance with a policy, agreed by the Group Board, which allows net foreign currency assets to be hedged.
Credit Risk
Credit risk is the risk that the Group is exposed to loss if another party fails to perform its financial obligations to the Group.
Credit risk is not sought in its own right. However, the investment of shareholders’ and policyholders’ monies requires credit risks to be taken. Exposure to credit risk also arises in the reinsurance of insurance contracts. Credit risk is managed through the setting and regular review of detailed counterparty credit and concentration limits. Compliance with these limits for investment and treasury transactions is monitored daily.
Liquidity Risk
Liquidity risk is the risk that the Group, though solvent, either does not have sufficient financial resources available to enable it to meet its obligations as they fall due, or can secure them only at excessive cost.
A degree of liquidity risk is implicit in the Group’s businesses. Liquidity risk arises as a consequence of the uncertainty surrounding the value and timing of cash flows. The Group’s Treasury function manages liquidity to ensure the Group maintains sufficient liquid assets and standby facilities to meet a prudent estimate of its net cash outflows.
Operational Risk
Operational risk is the risk arising from inadequate or failed internal processes, people and systems, or from external events.
The Group identifies and assesses operational risk as part of its continuous risk assessment processes. RCCs ensure that appropriate policies and procedures are in place for these risks and that they are properly controlled. There are detailed procedures covering specific areas of operational risk.
Contagion Risk
The occurrence of a risk in one part of the Group may result in contagion risk elsewhere in the Group. Such matters are assessed and monitored by the GRCC.
Prudential Regulation of Insurance Business
Most of the activities of the Group relate to the businesses which are subject to prudential regulation and require management to operate in a sound and prudent manner. In the UK, the Financial Services and Markets Act 2000 (the Act) established the Financial Services Authority (FSA) as the regulator for most Group operations. The Act, in particular, requires long term insurance business to be written within long term insurance funds, for which the actuaries appointed under the Act have certain legal accountabilities. These actuaries are subject to the disciplines of professional conduct and guidance and have a reporting relationship to the directors of the relevant insurance company and to the FSA. The actuaries have access to their boards and must report fully and impartially on the financial condition of the funds, annually quantifying and confirming each fund’s liabilities and solvency position. The FSA receives a copy of these reports, which are also subject to audit and overall peer review.
Going Concern
The directors have prepared the financial statements on the going concern basis consistent with their view, formed after making appropriate enquiries, that the Group is operationally and financially robust.
Compliance with the Code
For the year ended 31 December 2007, the Company believes it has complied with the principles and provisions of the Code to the extent that they apply to Legal & General Group Plc.
