NTUC Income AR 2019

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019 4. MANAGEMENT OF INSURANCE AND FINANCIAL RISKS (CONTINUED) (c) Financial risk (continued) The Group’s investment objective is to ensure that it is able to meet future liabilities associated with the insurance products that it underwrites and produce stable and sustainable medium to long term returns on investments, while at the same time, preserving the solvency of the Group. Disciplined risk control is an integral part of the Group’s investment process. Well established and liquid market indices are employed as the benchmarks to ensure diversification across geography, sector, industry and security. In addition, the Group makes use of limits and guidelines to control the risks in the areas of country, sector, duration, currency, credit quality and single security exposure. Investment-Linked Fund’s liabilities are fully matched by the assets held in the respective investment- linked policies sub-funds. Financial risk is wholly borne by the policyholders. (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. ANNUAL REPORT 2019 79