The risk assessment and management approach applied in Sampo Group companies for ALM and investment portfolio risks is illustrated in figure Asset and liability management approach in Sampo Group.
Asset and Liability Management Approach in Sampo Group
Insurance liabilities are the starting point for investments. Insurance liabilities are modeled and analyzed to form an understanding of their expected future cash flows and their sensitivities to changes in factors such as inflation, interest rates and currencies.
Solvency position and risk appetite are defining general capacity and willingness for risk taking. Stronger the solvency position and higher the risk appetite, more the investment portfolio can differentiate from a portfolio replicating cash flows of insurance liabilities.
Rating targets and regulatory requirements are major external factors affecting risk taking in general and ALM and investment portfolio risk management procedures in specific.
In companies’ Investment Policies the asset class allocations, risk limits by risk types, the risk governance of investment activities and the decision making authorizations are set in a way that maintain the balance between earnings potential, risks and capitalization.
Investments are managed according to the Investment Policies which are approved by the Boards of Directors of respective companies.
In Sampo Group, insurance liabilities are analyzed regularly and these analyses together with actual capitalization, risk appetite, regulatory requirements and rating targets are carefully taken into account when defining the Group companies’ Investment Policies. The operative management of investment portfolios and the whole balance sheet is taken care of in accordance with the Investment Policies.
Sampo Group companies If P&C and Mandatum Life are following the above mentioned approach, but they apply it by taking into account the specific characteristics of their own businesses.
Asset and Liability Management in If P&C
The ALM risk in If P&C is managed in accordance with the Sampo Group principles. ALM is taken into account through the risk appetite framework and is governed by the If P&C Investment Policy.
The value of the technical provisions is sensitive to, from an ALM perspective, future inflation and interest rates as well as currency rates for provisions in non-base currencies. A major part of the technical provisions are nominal, whereas a still significant part, being the annuity and so called annuity IBNR reserves, are discounted with interest rates in accordance with regulatory rules. Thereby If P&C is mainly exposed to changes in inflation and the regulatory discount rates from an accounting perspective. From an economic perspective, in which the technical provisions are discounted with prevailing interest rates, If P&C is exposed to changes both in inflation and nominal interest rates.
The objectives of If P&C’s currency risk management are to keep the foreign currency exposure arising from If P&C's normal business activities and investment decisions close to zero and to achieve the highest possible return from an active currency management within limits set by the investment policy.
To maintain the ALM risk within the overall risk appetite, the technical provisions may be matched through investments in fixed income instruments denominated in the same currency as the corresponding liability or by using currency derivatives. The Foreign Currency Risk Policy sets limits for the allowed FX positions.
Asset and Liability Management in Mandatum Life
The Board of Mandatum Life approves annually the Investment Policy, which sets principles and limits for investment portfolio activities. The Investment Policy also includes control levels for maximum acceptable risk for the whole balance sheet and respective measures to manage the risk. These measures and control levels are based on both Solvency I and Solvency II type of approaches.
In the Solvency I type of approach, control levels are set above the Solvency I requirement that is insensitive to market risks, using a VaR-analysis of the investment assets. In the Solvency II type of approach, control levels are set also based on other confidence levels in addition to the 99.5 per cent level used in Sampo Group. The general objective of these control levels and respective guidelines is to maintain the required solvency and to ensure that investments are sufficient and eligible for covering technical provisions.
When above mentioned control levels are breached, ALCO reports to the Board which then takes the responsibility on the decisions related to the capitalization and the market risks in the balance sheet.
In regards to insurance liabilities, the cash flows of Mandatum Life’s with-profit technical provisions are relatively well predictable, because in most of the company’s with-profit products, surrenders and premiums are restricted. The company’s claims costs do not contain significant inflation risk element and thus the inflation risk in Mandatum Life is mainly related to administrative expenses.
The long-term target for investments is to provide sufficient return to cover the guaranteed interest rate plus bonuses based on principle of fairness as well as the shareholder’s return requirement with acceptable level of risk. In the long run the most significant risk is that fixed income investments will not generate adequate return compared to the guaranteed rate. In addition to investment and capitalization decisions, Mandatum Life is prepared for low interest rates on the liability side by e.g. reducing the minimum guaranteed interest rate in new contracts and by supplementing the technical provisions by applying a lower discount rate.