talanx group annual report 2011 en

108
The Talanx Group Strategy Enterprise
management
The default risk at policyholders is countered first and foremost
by means of an effective collection procedure and the reduction
of outstandings. Agents are subject to credit checks. In addition,
adequate general bad debt provisions are established to allow for
the default risk.
Talanx Group. Annual Report 2011
Research and
development
Material risks associated with financial instruments
The risks associated with financial instruments must be seen in the
context of investment policy. Within the Talanx Group, the investment
policy of the individual companies is governed, within the
applicable supervisory framework, by a Group investment guideline
and in-house investment guidelines.
In the interests of policyholders and with a view to accommodating
the future requirements of the capital market, our investment
policy is essentially guided by the following maxims:
optimising the return on investments while at the same time
preserving a high level of security
ensuring liquidity requirements are satisfied at all times
( solvency)
risk diversification (mix and spread)
An essential component of risk management is the principle of
separation of functions – i.e. maintaining a distinction between
Portfolio Management, Settlement and Risk Controlling. Risk Controlling
is organisationally and functionally separate from Portfolio
Management and is responsible primarily for monitoring all risk
limits and evaluating financial products. In this respect the management
and control mechanisms are geared closely to the standards
adopted by the Federal Financial Supervisory Authority (BaFin) and
the respective local regulators.
Within the scope of the Group guidelines, detailed investment
guidelines are in force for individual companies, compliance with
which is constantly monitored. These investment guidelines define
the framework for the investment strategy and are guided by the
principles set out in § 54 of the Insurance Supervision Act (VAG) so
as to achieve the greatest possible level of security and profitability
while ensuring liquidity at all times and preserving an appropriate
mix and spread within the portfolio. Compliance with the quotas
and limits set out in these guidelines is monitored by Group Risk
Management, the local risk managers and the Chief Financial Officer
of each company. Any significant modification of the investment
guidelines and/or investment policy requires the approval of
the Board of Management of the company concerned and must be
brought to the attention of its Supervisory Board.
Markets and
general conditions
Business
development
Assets and
financial position
The risks associated with financial instruments consist most notably
of market price, creditworthiness and liquidity risks. With regard
to the scope and extent of these risks, please see our comments in
the Notes under “Nature of risks associated with insurance contracts
and financial instruments,” pages 186 et seqq.
Market price risks
Market price risks derive from the potential loss due to adverse
changes in market prices and may be attributable to changes in
interest rates, equity prices and currency exchange rates. These can
lead to impairments or result in losses being realised upon disposal
of financial assets.
Our portfolio of fixed-income securities is exposed to the interest
rate risk. Declining market yields lead to increases and rising market
yields to decreases in the fair value of the fixed-income securities
portfolio. The credit spread risk should also be mentioned. The credit
spread refers to the interest rate differential between a risk-entailing
bond and risk-free bond of the same quality. Changes in the risk
premiums, which are observable on the market, result – analogously
to changes in pure market yields – in changes in the fair values of
the corresponding securities. A fall in the level of interest rates can
also lead to lower investment income. The Group reduces the resulting
interest guarantee risk in life insurance primarily by means of
interest rate hedges (see under “Material underwriting risks”).
Equity price risks derive from unfavourable changes in the value of
equities, equity derivatives or equity index derivatives held in the
portfolio. We spread these risks through systematic diversification
over various sectors and regions. The equity portfolio is also extensively
hedged against price losses through stop loss mechanisms.
Currency risks result from exchange rate fluctuations – especially if
there is a currency imbalance between the technical liabilities and
the assets. When it comes to managing the currency risk, we check
that matching currency cover is maintained at all times. The risk is
limited by investing capital wherever possible in those currencies
in which the obligations under our insurance contracts are to be
fulfilled.
Investments in alternative asset classes such as private equity and
hedge funds are limited and regularly monitored using a conservative
control mechanism. The hedge funds are entirely transparent
for the individual companies and are reviewed daily with an eye to
liquidity, leverage and exposure.