Financial Management Risk
The primary source of financial risk to an insurer arises from its investment exposures and investment activities. Thus, the investment portfolios maintain a prudent approach in its investment strategy and investment exposures to ensure that investment returns are optimized on a risk adjusted basis and to ensure the Company operates within its defined risk appetite.
Risk appetite statements communicate the parameters and boundaries within which the business unit has opted to operate in relation to the identified financial risks. In the Company, the risk appetite framework has expressed the business unit's appetite as regards capital risk, liquidity risk, credit risk and market risk. The exposures and management information pertaining to these four risk aspects are within the scope of identified governance committees of the business based on the required technical expertise to provide effective oversight. Management information is submitted periodically to review and monitor these risks at these governance committees that convene as per their defined frequency of review.
Management of financial risks falls under the purview of the Committee, which monitors the overall exposure of the Company to financial risks. Total investments of the Company are managed separately through segregated funds with due consideration to their respective risk profiles, stakeholders and objectives. The Company keeps investment exposures within pre-determined strategic asset allocation limits, which are defined in order to generate superior investment returns without excessive exposure to high risk assets.
Liquidity Risk
Liquidity risk is the uncertainty, emanating from business operations, investments or financing activities, whether a company will have the ability to meet payment obligations in a full and timely manner under current or stressed conditions. Liquidity adequacy is a measure or assessment of the ability of a company to meet payment obligations in a full and timely manner within a defined time horizon. It is a function of its sources of liquidity relative to its liquidity needs. Liquidity sources can be internal and external, available immediately or within the defined time horizon, and includes all funds, assets and arrangements that allow an insurer to meet its liquidity needs. Liquidity needs include all current and expected payment obligations within the defined time horizon. The Company has determined that an appropriate time horizon within which it must be able to meet its liquidity needs is twelve months, being generally.
Controls in place to mitigate liquidity risk Management of liquidity risk is governed by the Liquidity Risk Management Policy which is a component of the Company's risk management framework and is incorporated in the Investment Mandates of the business. The Company defines liquidity risk appetite in terms of Liquidity Coverage Ratio which is defined for each core portfolio of the business.
The liquidity adequacy is reviewed quarterly by the Financial Risk Committee to ensure that the Company will be able to meet its obligations in both current and stressed conditions for the next twelve months.
The Company maintains a cash flow maturity profile within the investment portfolios of the Company in tandem with the risk appetite of each portfolio and cash flow needs.
Minimum liquidity levels are incorporated into the Investment Mandate of each portfolio and are monitored on a daily basis.
Credit Risk
Credit risk is the risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default, rating transition and credit spread movements. Credit risk categories include default risk, spread risk and rating migration risk, each of which is defined below.
Spread risk
The risk of an adverse financial outcome arising from changes in the level or volatility of third party credit spreads. Credit spread moves can be caused by credit concerns (improving or worsening) on the issuer or from market factors (such as risk appetite and liquidity within the market.
Default risk
The risk of an adverse financial outcome arising from one or more third party default events. A default event includes a delay in repayments or interest payments, restructuring of borrower repayments / interest schedule, bankruptcy and repudiation / moratorium (for example, for sovereign counterparties).
Rating migration risk
The risk of an adverse financial outcome arising from a change in third party credit standing. As well as having a potential knock-on effect on spreads, rating movements can trigger solvency and accounting impacts and can drive management actions and the realization of losses.
Controls in place to mitigate credit risk
- The management of credit risk is governed by the Credit Risk Management Policy which is embedded within the Investment Policy and incorporated in the Investment Mandates of the business.
- Single counterparty exposures are monitored based on the counterparty exposure in comparison to the net assets of the counterparty.
- All investments are denominated in Nepalese Rupees and the Company does not maintain any investment exposures to assets held overseas.
Minimum investment grade rating criteria been implemented for determining investment decisions.
The Company maintains a predominant exposure to Government securities and bonds and also investment in Category A Commercial banks within Nepal thus prudently managing credit default risk from these investments.
Market Risk
Market risk is the risk of adverse financial impact resulting from fluctuations in the level or volatility of prices of financial instruments and other market factors including interest rates, inflation and foreign exchange rates. Market risk categories include interest rate risk, equity risk, foreign exchange risk, inflation risk, property risk, commodity risk and other risks. The Company's primary source of market risks are interest rate risk and equity risk.
Although credit and liquidity risks are defined and managed as separate risks, the assessment of market risk does consider the interdependence between market risk and credit and liquidity risks (for example market losses caused by illiquidity issues, sovereign default or a default of a systemically important counterparty) and also the capital risk arising from market risk.
Risk oversight
Evaluating the impact of market risk, credit risk and liquidity risk are inbuilt into the investment decision making process. The market risk, credit risk and liquidity risk of the investment portfolios are monitored every month by a dedicated Committee, a management level governance oversight committee responsible to oversee investments.
The Board of Directors level governance oversight committee responsible to oversee investments is the Investment Committee which is a sub-committee of the Board of Directors. The Investment Committee monitors the market risk, credit risk and liquidity risk of the investment portfolios every quarter.
The capital risk of the Company is monitored by the Investment, Risk Management and Solvency Committee that convenes on atleast a monthly basis. The Committee also reviews the liquidity risk, credit risk and market risk of the investment portfolios.
Equity Risk
Equity risk is the risk of adverse financial impact due to equity market dynamics (for example, individual spot price moves, index moves, volatility and correlation changes etc.). The equity price risk exposures relates to financial assets and financial liabilities which values will fluctuate as a result of changes in market prices, principally investments securities are held for the account of the investment linked business.