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RISK MANAGEMENT

 

Andrew Birrell

Group Risk Director, Group Chief Actuary

"My ambition is for an integrated global approach to risk management, embedded in everyone's role and purpose, and demonstrated by the quality of strategic, capital allocation and day-to-day business decisions"

Approach to Risk Management

Old Mutual is committed to the objective of increasing shareholder value by operating in a manner consistent with our risk appetite. Risk management is not limited solely to consideration of downside impacts or risk avoidance, but also encompasses taking risk knowingly for competitive advantage.

Responsibility for risk management resides at all levels within the Group, from the Board of Directors and Group Chief Executive, to Business Unit Chief Executives through to business managers via a Scheme of Delegated Authority.

Risk governance

The Group's risk governance framework is based on the three lines of defence model. This model distinguishes between:

  • functions owning and managing risk
  • functions overseeing the management of risk; and
  • functions providing independent assurance.

The Board is responsible for setting the Group's risk appetite and for approving the strategy for managing risk.

Risk Governance Framework

Risk categorisation

During 2008, Old Mutual refined and implemented an updated risk categorisation model which Business Units have aligned to. Using a common risk language across the Group will enable meaningful comparisons to be made between Business Units and we consider the risk categorisation model a fundamental building block to achieve this. Risk events are categorised as shown in the table above, with more detailed sub-categories used for reporting and analysing.

RISK CATEGORISATION MODEL
Risk Category Definition
Market risk The risk of loss as a result of adverse changes in the market value of assets and liabilities.
Credit risk The risk of loss as a result of an asset against a counterparty not being repaid at the due and stipulated time.
Liquidity risk The risk that available liquid assets will be insufficient to meet changing market conditions, liabilities, funding of asset purchases, or an increase in client demands for cash.
Underwriting risk The risk of loss caused by events that result in predetermined exposures being exceeded.
Operational risk The risk of loss due to failure of people, process, system and / or external events.
Compliance risk The risk that laws, regulations and policies will be breached. Although technically a sub-category of operational risk, compliance risk has been elevated to its own category for reporting purposes due to the focus on and importance of this area.
Human Resources risk The risk that the firm will not have the human capital to sustain business performance.
Business risk The risk that business performance will be below projections as a result of negative variances in new business volumes, margin, lapse experience and expenses.
Strategic risk The risk that strategic decisions will adversely affect future sustainable growth.
Risk appetite metrics: CAPITAL AT RISK The reduction in Net Asset Value ("capital") ver a one-year forward-looking time horizon that should only be exceeded 1-in-10 years. This category has both a regulatory and economic capital dimension. EARNING AT RISK The 1-in-10 negative deviation from expected (accounting) earnings over a one-year time horizon that should only be exceeded 1-in-10 years. CASHFLOW AT RISK The reduction in the best estimate of operational cash remitted to plc by Business Units, in a 1-in-10 downside outcome. OPERATIONAL RISK The negative deviation of Economic Value driven by operational loss events over a one-year forward-looking time horizon that should only be exceeded 1-in-10 years.

Risk appetite

The risk appetite framework provides a basis for formally reviewing and controlling business activities to ensure that they are aligned to stakeholder expectations and are of an appropriate scale (relative to the risk and reward of the underlying activities). Once fully embedded, the framework will give the Group clearer sight and better control over risk-taking throughout the organisation.

The Group's risk appetite defines the Group's willingness to balance risk exposures with reward, and the management and monitoring of these exposures. During 2008, a Group-wide risk appetite programme was implemented to enable consistent calculation of risk exposure against appetite using a variety of metrics. We are continuing to refine our framework and set limits at increasing levels of granularity. We expect to see significant embedding of the use of risk appetite during 2009.

Risk management processes

The Group conducts a number of activities as part of the risk management framework. The principal elements are shown below.

Risk management processes

For more information abour risk management at Old Mutual, please view our Annual Report and Accounts 2008.