NTUC Income AR 2018

Notes to the Financial Statements For the Financial Year Ended 31 December 2018 4. Management of insurance and financial risks (continued) (c) Financial risk (continued) (i) Market risk Market risk is the risk of loss arising from uncertainty concerning movements in market prices and rates, including observable variables such as interest rates, exchange rates, and others that may be only indirectly observable such as volatilities and correlations. Market risk includes such factors as changes in economic environment, consumption pattern and investor’s expectation etc., which may have significant impact on the value of the investments. The Group’s investments are substantially dependent on changes in interest rates and equity prices. The Group regularly monitors its exposure to different asset classes to satisfy itself that its exposure to equities, debt securities, and other risk assets are within the Group’s self-imposed risk tolerance limits. The Group distinguishes market risk as follows: (a) Equity price risk (b) Interest rate risk (c) Foreign exchange risk (a) Equity price risk The Group is exposed to equity price risk arising from listed investments held which are classified as fair value through profit or loss and available-for-sale. The Group monitors equity exposure against a benchmark set and agreed by the Investment Committee, and has a process in place to manage the exposure. This process includes monitoring the country, sector, single security exposure of the portfolio against the limits set. The Group also formulates equity risk management strategy taking into account the full range of the Group’s equity holdings. The Group’s investments in equities are substantially in Asia. The statistical risk analytic tools used by the Group to monitor price risk exposures are the volatility of the benchmark and beta of the portfolio. In this analysis, equity and index exposures are grouped by appropriate market indices, as determined by the Group, and the net beta adjusted exposures to each market index are calculated. The Group has chosen the Morgan Stanley Capital International Index (“MSCI”) Singapore, MSCI Asia Ex-Japan and MSCI Global indices as representative market indices for all the equities held at the reporting date. In addition, the Group makes adjustments or assumptions where it determines this to be necessary or appropriate. Historical statistics used in the model may not accurately estimate future changes particularly in periods of market turmoil. Actual results may differ substantially from these estimates. 74 HAND IN HAND