AIA Singapore’s Enterprise Risk Management (ERM) framework is a structured and disciplined approach aligning strategy, processes, people and systems to evaluate and manage the uncertainties theCompany faces as it creates value. It has a comprehensive and integrated set of components that support the achievement of the corporate objectives, and provides the strategic, operational and foundational layers to govern, embed, implement, monitor and continually improve risk management in the Company.
The ERM framework outlines the approach to decisions regarding risk management, the roles of all relevant parties, as well as the governance structure, policies and processes to enable risk management to be embedded as a component in all critical decisions. It also sets out the various factors to consider, the broad steps to assess, treat, monitor and communicate risks, and the necessary ingredients and foundation for ERM to be successful.
Risk Management Philosophy
The core of the Company’s business is accepting, pooling and managing risk for the benefit of both policyholders and stakeholders. Effective risk management is thus vital in the insurance business where risk is a key driver of value. AIA Singapore’s risk management philosophy is not on seeking to eliminate all risks, but to identify, understand and manage effectively the risks arising from our businesses. It can be characterized as follows:
- Protecting policyholders’ interests by ensuring the ability to meet future obligations;
- Maintaining adequate financial strength to compete and continue to conduct business in all but the most extreme market conditions.
- Facilitating financial flexibility for liquidity and capital management purposes;
- Seeking earnings consistency in order to maximize long term shareholder value; and
- Enhancing value through effective understanding, quantification and mitigation of risk.
The Company’s Risk Appetite statement is as follows:
“The amount of risk taken by AIA Singapore in the ordinary course of its business will be sufficient to meet our customers’ reasonable requirements for protection and benefits while ensuring that the level and volatility of returns are in line with a broadly-based risk profile appropriate to a Singapore-focused life insurance company."
The Company supports this statement with three risk principles, – regulatory capital, financial strength and liquidity. Each risk principle is supported by a risk tolerance which defines a measurable benchmark that enables the Company to validate each of these principles such that assurance can be provided to the Board that the Company is operating within its risk appetite.
Risk Governance Structure
The Company has a Risk Management Committee (RMC) to ensure that a robust, comprehensive and effective system for risk management to identify, measure, monitor, control and report risk is in place. The RMC has established the Financial Risk SubCommittee (FRSC) and Operational Risk Sub-Committee (ORSC) to mitigate financial risks and operational risks respectively, and ensure that relevant risk policies and programs are implemented appropriately and consistently.
AIA Group’s oversight on risks takes the form of FRSC and ORSC providing reports to the Group Financial Risk Committee and Operational Risk Committee respectively on a regular basis.
This risk governance is built around the “Three Lines of Defence”, consisting of all business functions (1st LoD), the oversight parties (2nd LoD) and assurance (3rd LoD).
The Company takes into consideration all reasonably foreseeable and relevant material risks it is exposed to, when assessing the various issues affecting the Company. One of the main areas of risks relates to business and strategic risks, which to some extent may have some implications to other risks that the Company faces. The other core areas to pay particular attention to are credit risk, market risk, liquidity risk, operational risk and insurance risk. The other risks that the Company may face include group risk, fraud risk, legal risk, compliance risk and any risk that may emerge from time to time. The risks that may cut across the various risks are reputational risk (as it may be caused by other risks) and risk interdependencies, i.e. risks that may correlate with one another and cause a greater impact than the sum of the component risks.
Own Risk and Solvency Assessment (ORSA)
The Company performs its ORSA at least annually, to assess the adequacy of its risk management and current/projected solvency position with a time horizon consistent with the business and strategy plans. The Board and RMC take responsibility for the ORSA, and the Company documents the rationale, calculations and action plans arising from this assessment.
The ORSA report will be compiled and discussed at the FRSC, and tabled to RMC for endorsement, and finally to the Board for approval.
Asset-Liability Management (ALM) is a vital element within the Company’s ERM framework. The ALM framework focuses on all risks requiring coordination of the Company’s assets and liabilities. The Company implements an ALM strategy intended to permeate all aspects of ALM risk exposures by adopting strategic investment management and product development and pricing functions to achieve the Company’s financial objectives, given its risk tolerances and other constraints. The Company manages its assets and liabilities in compliance with AIA Group and AIA Singapore policies and guidelines. The investment risks and risks arising from interest rate sensitivity and foreign currency mismatch between assets and liabilities are held as Component 2 (C2) risk requirement in the regulatory reporting. This is calculated separately for both assets and liabilities: the asset risk charges are calculated by applying fixed percentages to the market value of the assets, and liability risk charges in accordance with the accounting standards and sound actuarial principles, where the percentages and rules are as prescribed in MAS’ Insurance (Valuation and Capital) Regulations. As of 31 December 2014, the Company sets aside a total of S$2.6 billion in capital to cover investment risks and risks arising from interest rate sensitivity and foreign currency mismatch between assets and liabilities, under the C2 risk requirements.