My first Publication ocbc_ar17_fullreport_english | Page 244

NOTES TO THE FINANCIAL STATEMENTS
For the financial year ended 31 December 2017
39. RISK MANAGEMENT (continued)
39.5 INSURANCE-RELATED RISK MANAGEMENT (continued)
Insurance risk (continued)
The sensitivity analysis below shows the impact of changes in key assumptions on gross and net liabilities, profit before tax and equity.
Impact on
Change in
assumptions Gross
liabilities Net
liabilities 2017
Provision for adverse deviation margin
Loss ratio (1)
Claims handling expenses +20%
+20%
+20% 5
75
1 3
43
4 (3)
(43)
(4) (2)
(33)
(3)
2016
Provision for adverse deviation margin
Loss ratio (1)
Claims handling expenses +20%
+20%
+20% 3
59
1 2
38
3 (2)
(38)
(3) (1)
(30)
(2)
$ million
(1)
Profit
before tax
Equity
Best estimate reserves and current accident year payments.
The method used and significant assumptions made for deriving sensitivity information above did not change from the previous year.
Market and credit risk
Market risk arises when the market value of assets and liabilities do not move consistently as financial markets change. Changes in
interest rates, foreign exchange rates, equity prices and alternative investment prices can impact present and future earnings of the
insurance operations as well as shareholders’ equity.
GEH Group is exposed to market risk in the investments of the Shareholders’ Fund as well as in the mismatch risk between the assets
and liabilities of the Insurance Funds. In the case of the funds managed by its asset management subsidiary, Lion Global Investors
Limited, investment risks are borne by investors and GEH Group does not assume any liability in the event of occurrence of loss or
write-down in market valuation.
GEH Group ALC and local ALCs actively manage market risks through setting of investment policy and asset allocation, approving portfolio
construction and risk measurement methodologies, approving hedging and alternative risk transfer strategies. Investment limits are
monitored at various levels to ensure that all investment activities are conducted within GEH Group’s risk appetite and in line with
GEH Group’s management principles and philosophies. Compliance with established limits forms an integral part of the risk governance
and financial reporting framework. The approach adopted by GEH Group in managing the various types of risk, including interest rate risk,
foreign exchange risk, equity price risk, credit risk, alternative investment risk and liquidity risk, is briefly described below.
(a) Interest rate risk (including asset liability mismatch)
GEH Group is exposed to interest rate risk through (i) investments in fixed income instruments in both the Shareholders’ Fund as well
as the Insurance Funds and (ii) policy liabilities in the Insurance Funds. Since the Shareholders’ Fund has exposure to investments in
fixed income instruments but no exposure to insurance policy liabilities, it will incur an economic loss when interest rates rise. Given
the long duration of policy liabilities and the uncertainty of the cash flows of the Insurance Funds, it is not possible to hold assets
that will perfectly match the policy liabilities. This results in a net interest rate risk or asset liability mismatch risk which is managed
and monitored by GEH Group ALC and local ALCs. The Insurance Funds will incur an economic loss when interest rates drop since the
duration of policy liabilities is generally longer than the duration of the fixed income assets.
Under Singapore regulations governed by the MAS, the liability cash flows with durations less than 20 years are discounted using zero-
coupon spot yield of SGS while liability cash flows with duration more than 20 years for Singapore funds are discounted using the Long
Term Risk Free Discount Rate (“LTRFDR”). As a result, the Singapore Non Participating funds could have negative earnings impact when
the LTRFDR decreases.
Under Malaysia regulations governed by BNM, the liability cash flows with durations less than 15 years are discounted using zero-
coupon spot yield of MGS with matching duration while the liability cash flows with durations of 15 years or more are discounted using
zero-coupon spot yield of MGS with 15 years term to maturity. As a result, the Malaysia non-participating fund could have negative
earnings impact when the zero-coupon spot yield of MGS decreases.
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