2022 AVBOB Integrated Annual Report - FINANCIALS

CHAPTER 8 | FINANCIAL STATEMENTS 108 INTEGRATED ANNUAL REPORT 2022 AVBOB MUTUAL ASSURANCE SOCIETY AND ITS SUBSIDIARIES NOTES TO THE SUMMARISED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2022 5. Management of insurance and financial risk 5.1 Insurance and financial risk 5.2 Capital management The Society and the Group are exposed to financial risk through their financial assets, financial liabilities, reinsurance contracts and insurance liabilities. In essence, the financial risk is the possibility that adverse changes in the market will result in the Society not being able to meet its obligations. The most important elements of financial risk include market risk (equity risk, interest rate risk and currency risk), credit and counterparty risk and liquidity risk. Asset-liability modelling investigations are performed periodically by the Head of Actuarial Function (HAF). The outcome is used to determine whether the asset distribution guidelines unduly expose the Society to insolvency risk based on the nature of the liabilities (guaranteed and discretionary liabilities). An asset-liability modelling investigation was performed during the 2022 financial year and did not lead to any material changes to the asset distribution guidelines. The Society manages financial assets using an asset distribution analysis approach that was developed to maximise long-term investment yield, while taking into consideration the nature of its liabilities. The Society outsources the management of its balanced portfolio investments to six leading asset managers. These asset managers are expected to manage their portfolio in accordance with agreed-upon mandates. In addition, the total asset distribution of the Society is managed in accordance with the guidelines set by the PA. The Society has adequate capital cover on the SCR on the basis of the Insurance Act as at 30 June 2022. The summarised financial statements do not include all financial risk management information and disclosures required in the annual financial statements and should be read in conjunction with the annual financial statements for the year ended 30 June 2022. The Group manages capital by targeting a SCR cover of 2.6 times by own funds and by ensuring that sufficient liquid assets are available if required and that the available investments are of a suitable quality. The Society's SCR was covered 2.6 times by own funds as at 30 June 2022 and 30 June 2021 and was within the risk appetite. The Society did not experience an event which negatively impacted its SCR cover ratio. The SCR is the minimum amount by which the value of own funds (excess assets) must exceed the value of the policyholder liabilities as required by the Prudential Authority (PA). As a mutual society, the Society does not have access to capital markets and consequently aims to keep excess assets at a multiple of the SCR required by the PA. If the ratio decreases (for instance following a market value shock or other catastrophe), the Board of Directors has approved planned management actions that allow the Society to return to the targeted coverage ratio within risk appetite. The Group’s objectives when managing capital is to safeguard the Society’s ability to continue as a going concern to provide policyholder and member benefits. The Group issues contracts that contain either insurance or financial risks, or both. Insurance risk is the risk that claims and expenses exceed the value placed on insurance liabilities. The Group’s activities expose it to a variety of financial risks: market risk (including equity risk, currency risk and interest rate risk), credit and counterparty risk, liquidity risk and contractual risk. (continued)