There is an ongoing process for identifying, evaluating and managing significant risks which is comprehensive and systematic. Our governance structure for risk is outlined in Fig 1 on this page.
A significant part of the Group’s business involves the acceptance and management of risk. A detailed review of the Group’s inherent exposures to market, credit, insurance, liquidity and operational risks, together with the framework for their management and control, is set out at Note 49 to the Financial Statements. An overview of the Group’s risk management framework is given as part of the review of Corporate Governance – Management of Risk.
Whilst, at present, the Board considers that there are no immediate risks likely to have a significant impact on the short or long term value of the Group, principal risks and uncertainties may be categorised as follows:
- Legislation and Regulation
- Confidence in the UK Financial Services Sector
- Market and Economic Conditions
- Mortality and Catastrophe Risks
- Future Savings Market
- Resources
Legislation and Regulation
The financial services markets in which the Group operates are highly regulated, with regulation defining the overall framework for the design, marketing and distribution of products; the acceptance and administration of business; and the prudential capital that regulated companies should hold.
Government fiscal policy may also influence the design of products distributed by the Group and the mechanisms for reserving for future liabilities. Additionally, there is a continuing growing international dimension and the volume of regulatory and legislative change is increasing.
The Group’s activities and strategies are based upon prevailing legislation and regulation, with continuous monitoring to ensure that the Group meets its regulatory obligations. The potential for change is continuously identified and analysed. Sudden, unanticipated changes in legislation, or the differing interpretation and application of regulation over time, may have a detrimental effect on the Group’s strategy and profitability both in terms of the generation of new business and the retention of in-force books.
Confidence in the UK Financial Services Sector
The Group has followed a strategy of offering value-for-money products to its customers and continually improving customers’ overall experience of doing business with Legal & General. Whilst this enables the Group to differentiate itself from its competitors, earnings and profitability are also influenced by the confidence of the retail investor in the financial services sector as a whole, a number of drivers of which are beyond the Group’s control. Such factors include the adverse performance of investment markets, actions by regulators within the sector and shock events such as significant market failures, although the Group seeks wherever practicable to mitigate the effects of these contagion risks.
Market and Economic Conditions
Legal & General is a significant provider of term assurance and critical illness products. These products are typically purchased as part of the house buying event or when a property is being remortgaged. The Group also provides household and buildings insurance. Whilst the Group is structured to enable resources to be redirected to other product lines, a downturn in the housing market could impact product volumes and short term earnings.
Legal & General is also a leading provider of index-tracking funds to both pension schemes and retail customers. The fees for managing these funds are directly linked to the value of funds under management. As such, significant falls in the value of tracker funds would impact earnings for these businesses.
The Group utilises a range of investments to meet obligations arising from insurance business which it has written. The majority of investment assets are in securities traded on recognised exchanges and property. Controlled use is also made of financial instruments utilising strongly rated counterparties. Whilst the Group holds capital and performs stress tests for falls in asset values, extreme events in other markets over which the Group has no direct influence, or a failure in market infrastructure may impact asset values or the ability to value assets fairly, which in turn may impact profitability.
Mortality and Catastrophe Risks
The Group writes significant levels of immediate and deferred annuity business. The Group uses its pricing capability for longevity risks to ensure that an appropriate risk premium is applied to the business, taking account of all known risk factors. However, significant unforeseen medical advances may result in the requirement to increase reserves for these lines of business. With regard to the Group’s significant portfolio of protection business, whilst the risk of adverse claims experience is fully assessed and reserved for, an event causing widespread mortality or morbidity, coupled with a reinsurer default, may impact the capital available to the Group. Similarly, a series of extreme weather events coupled with reinsurer default may impact earnings to the Group from its general insurance business.
Future Savings Market
A number of Legal & General’s businesses are focused on the long term savings and retirement product markets. The reasons customers save and make provision for old age are influenced by a number of factors including government policy, social conditions and the general economic environment. The Group seeks to participate actively in debate to highlight those matters which are key to encouraging consumers to save and make adequate provision for old age. However, consumer uncertainty in any of the above factors may have a detrimental effect on these markets.
Resources
Legal & General has market leading expertise in a number of the fields in which it operates. The Group actively focuses on retaining the best personnel, and ensures that key dependencies do not arise, through employee training and development programmes, remuneration strategies and succession planning. However, the sudden unanticipated loss of teams of expertise may, in the short term, impact certain segments of Legal & General’s businesses.
