Consolidated Statement of Cash Flows
37. RISk MANAGEMENT (continued) Insurance risk (continued)
Pricing and underwriting risk(continued)
In certain circumstances, such as when entering a new line of business, products or markets for which insufficient experience data is available the Group makes use of reinsurance to obtain product pricing expertise.
In pricing insurance products the Group allows for an appropriate level of expenses that reflects a realistic medium to long term view of the underlying cost structure. A disciplined expense budgeting and management process is followed that controls expenses within product pricing allowances over the medium to long term.
Lapse risk
Lapse risk refers to the possibility of actual lapse experience that diverges from the anticipated experience assumed when products were priced. It includes the potential financial loss due to early termination of contracts where the acquisition cost incurred may not be recoverable from future revenue.
The Group carries out regular reviews of persistency experience. The results are assimilated into new and in-force business management. Target pay back periods that form part of the product pricing controls enable monitoring of the Group’s exposure to lapse risk. In addition, many of the Group’s products include surrender charges that entitle the Group to additional fees on early termination by the policyholder, thereby reducing exposure to lapse risk.
Claims volatility risk
Claims volatility risk refers to the possibility that the frequency or severity of claims arising from insurance contracts exceeds the level assumed when the products were priced.
For insurance contracts where death and diagnosis of critical illness are the insured risk, the most significant factors that could increase the overall frequency of claims are epidemics (such as AIDS, SARS or other communicable conditions) or widespread changes in lifestyle resulting in earlier or more claims than expected. Other factors affecting the frequency and severity of claims include the following:
• insurance risk under disability contracts is dependent on economic conditions. Recession and unemployment tend to increase the number of claims for disability benefits as well as reduce the rate of recovery from disability;
• insurance risk under hospitalisation contracts is dependent on medical costs and medical technology; and
• insurance risk under accident contracts is more random and dependent on occupation.
The Group seeks to mitigate claims volatility risk by conducting regular experience studies, including reviews of mortality and morbidity experience, reviewing internal and external data, and considering the impact of these on product design, pricing and reinsurance needs. As a result of the Group’s history and scale, a substantial volume of experience data has been accumulated which assists in evaluation and pricing of insurance risk.
Mortality and morbidity risk in excess of the respective retention limits are ceded to reduce volatility in claims experience for the Group. The Group’s capital position combined with its profitable product portfolio and diversified geographical presence are factors in management’s decision to retain (rather than reinsure) a high proportion of its written insurance risks.
Concentration of insurance risk can be a cause of elevated claims volatility risk and refers to the possibility of significant financial losses arising from a lack of diversification, either geographical or by product type, of the Group’s portfolio. Certain events, such as viral pandemics, may give rise to higher levels of mortality or morbidity experience and exhibit geographical concentrations.
37. RISk MANAGEMENT
(continued) Insurance risk(continued)Claims volatility risk(continued)
The breadth of the Group’s geographical spread and product portfolio creates natural diversification and reduces the extent to which concentrations of insurance risk arise. The Group has a broad geographical footprint across Asia and its results are not substantially dependent upon any one of these individual markets. This breadth provides a natural diversification of geographic concentrations of insurance and other risks (such as political risks). However, given the Group’s exposure to Asia, it may be relatively more exposed to pandemics localised in Asia than insurance groups with a world-wide presence.
Although long-term insurance and investment business are the Group’s primary operations, the Group has a range of product offerings, such as term life, accident and health, participating, annuity and investment-linked, which vary in the extent and nature of risk coverage and thereby reduce exposures to concentrations of mortality or morbidity risk.
Concentrations of risk are managed within each market through the monitoring of product sales and size of the in- force book by product group. The Group mitigates this risk by adhering to the underwriting and claims management policies and procedures that have been developed based on extensive historical experience. Lastly, reinsurance solutions are also used to help reduce concentration risk.
Credit risk
Credit risk arises from the possibility of financial loss arising from default by borrowers and transactional
counterparties and the decrease in the value of financial instruments due to deterioration in credit quality. The key areas where the Group is exposed to credit risk include repayment risk in respect of:
• cash and cash equivalents;
• investments in debt securities;
• loans and receivables (including insurance receivables); and
• reinsurance receivables.
The geographical concentration of the Group’s government bonds is disclosed in note 21.
The Group has in place a credit analysis process that accounts for diverse factors, including market conditions, industry specific conditions, company cash flows and quality of collateral. The Group also has a monitoring
programme in place whereby the Group’s credit analysis teams review the status of the obligor on a regular basis to anticipate any credit issues.
Cross-border investment exposures are controlled through the assignment of individual country counterparty risk limits by the Credit Risk Management Committee.
The Group monitors its credit exposures to any single unrelated external reinsurer or group.
The maximum exposure to credit risk for loans and receivables, debt securities and cash and cash equivalents is the carrying value (net of allowances) in the consolidated statement of financial position.
OVERVIEW
FINANCIAL AND OPERATING REVIEW
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION