175 / 203
PPS
INTEGRATED REPORT 2018
174
NOTES TO THE
CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
for the year ended 31 December 2018
• Non-guaranteed rates allows the Group to change its rates should the experience worsen significantly
or be anticipated to worsen significantly.
• The thorough testing of proposed products upfront, including testing expected expenses and
volumes of business, provides a sense of the expected parameters within which the product pricing
will remain appropriate. If expenses or volumes are significantly different from the business plan
then the overall offering and position will be revisited and consideration given to making appropriate
changes to remedy worsening positions.
• Valuation – the annual valuation provides valuable information about changing parameters (such
as mortality, morbidity, long term investment returns, yields, etc).
Expense risk
There is a risk that the Group may suffer a loss from actual expenses being higher than those assumed
when pricing or valuing contracts. This may be caused by factors increasing the expense charge in
running the business, higher than expected expense inflation, or by an in force policy book smaller
than expected. Alternatively, lower than expected volumes of new business or higher than expected
contract terminations may result in higher than expected unit costs per policy.
Expense investigations are performed annually and valuation expense assumptions are set based on
the results of this investigation, taking cognisance of the budgeted expenses per policy for the next
financial year. Actual expenses are compared against budgeted expenses on a monthly basis. Due to
the mutual nature of the Group, expense savings or expenses losses compared to expected expenses
will respectively result in a higher or lower profit allocation to the policyholders.
Business volume risk
There is a risk that the Group may not cover the costs of acquisition and distribution if insufficient
volumes of new business are sold. A mitigating factor is that a substantial portion of these costs are
variable costs. Actual sales volumes are compared against budgeted and annual targeted sales on
a monthly basis. This enables management to determine whether there are any factors that could
impact the delivery of the targeted volumes. Where these are identified, an investigation occurs and
the appropriate corrective action is taken.
Data and model risk
There is a risk that the Group may suffer a loss if the model used to calculate the insurance liabilities does
not project the expected cash flows on the contracts accurately. This risk is mitigated by comparing the
actual cash flows with the expected cash flows on a product basis at least annually. All new contract
designs are also incorporated into the model. Detailed investigations are performed annually to ensure
the integrity of the data used in the valuation process. Automated systems have been implemented to
flag any anomalous transactions on an ongoing basis.
Capital management
Long-Term Insurance
The Group’s capital management objectives are:
• To comply with the insurance regulatory capital requirements in the countries in which the
Group operates.
• To safeguard the entity’s ability to continue as a going concern.
• To continue to provide acceptable returns for policyholders and members, and benefits for
other stakeholders.
35. MANAGEMENT OF RISKS
(continued)
35.3
Financial risk management
(continued)