In general, market risks refer to fluctuations in the financial results and capital caused by changes in market values of financial assets and liabilities as well as economic value of insurance liabilities.
Market risks related to financial assets in investment portfolios are mostly straightforward to analyze. The realization of risks is transparently reflected in financial accounts, because Sampo Group is applying mark-to-market procedures to its investments and only seldom there are instruments requiring mark-to-model procedures.
When changes in different market risk variables (e.g. interest rates, inflation, foreign exchange rates and equity prices) cause a change in the value of investment assets that is of different size than the respective change in the economic value of insurance liabilities, the company is exposed to Asset and Liability Management (ALM) risk. ALM risk is not fully reflected in financial results, because insurance liabilities are not discounted with market rates for financial accounting purposes. In order to have a comprehensive, economic view on risks and capitalization, insurance liabilities are discounted with market rates and the so called discounting effect is taken into account in Sampo Group’s economic capital model. In Sampo Group Asset and Liability Management (ALM) covers the management of economical risks arising from differences in assets and liabilities mainly related to interest rate sensitivity, currencies and inflation.