The Group KD Group and KD Group dd

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The Group KD Group Annual Report 2009 Notes to Consolidated Financial Statements as at and for the year ended 31 December 2009 2007 2007 reported restatement- restated correction of (in EUR) past years Total assets 956,047,402 232,165 956,279,567 Income tax receivables 2,870,170 232,165 3,102,335 Equity 340,264,367 (1,698,091) 338,566,276 Retained earnings 58,565,835 (1,698,091) 56,867,744 Liabilites 615,783,035 1,930,256 617,713,291 Insurance contracts 255,943,534 2,085,339 258,028,873 Gross non-current insurance contracts with DPF 62,547,906 2,085,339 64,633,245 Gross non current insurance contracts with DPF-math.prov.-guaranteed element 61,340,938 261,323 61,602,261 Gross non-current insurance contracts with DPF-math.prov.-DPF element 1,206,968 1,824,016 3,030,984 Investment contracts 15,604,274 64,144 15,668,418 Investment contract with DPF 15,512,160 64,144 15,576,304 Investment contracts with DPF-non-current-DPF element 614,823 64,144 678,967 Deferred tax 2,527,886 (219,227) 2,308,659 Total equity and liabilities 487,989,498 232,165 488,221,663 5. Risk management The Group’s activities expose it to a variety of risks: strategic risks, insurance and financial risks, operating risks and general business risks. Since the insurance represents a substantial part of the Group's activities, the management of insurance risks is crucial for the Group. Strategic risks refer to the Group’s long-term development as much as to each of its subsidiaries. The management of the Group manages these risks, defining its vision and strategy and monitoring their appropriateness on a regular basis. According to the diversity of the Group’s activities, appropriate long-term investment decisions are the key factor when managing strategic risks. The corporate governance of the Group helps it to pursue long-term business development and growth to achieve the required rate of return. The Group is exposed to financial risks through its financial assets and liabilities, reinsurance receivables and insurance liabilities. The principal financial risk is the possibility that the inflows from financial investments will not be sufficient to cover the outflows arising from insurance contracts. The most significant components of this risk are the risk of changes in interest rates and the prices of securities, currency risk and credit risk. The primary purpose of the financial risk management process is to maintain the stability of operations and reduce the exposure to individual risks to an acceptable level. Because of its highly diversified activities, the Group is mainly faced with insurance and financial risks. Risk management is a continuous cyclical process, which can be divided into three stages. In the first stage, potential risks are identified. In the second stage, individual risks are modelled and measured. These models serve as a basis for measuring the level of exposure of individual companies in the Group and the Group itself to individual risks. On the basis of identification and measurement of risks in the Group, the management adopts adequate measures for reducing or controlling these risks (stage three). Measures used by the management vary and depend on the level of exposure and the type of risk. The management of the Group manages risks present in individual companies in the Group and at the level of the entire Group. It thereby sets guidelines concerning the balance between the risks, returns and capital, performs periodic controls, and sets guidelines for implementation of business policies and strategy for individual companies in the Group. Individual companies in the Group have established a system of reporting for the needs of the management that enables regular monitoring of risks to which they are exposed. The insurance companies in the Group have set up investment and liquidity committees, which take care of the ALM function. 110
The Group KD Group Annual Report 2009 Notes to Consolidated Financial Statements as at and for the year ended 31 December 2009 Types of risks 5.1 Insurance risk Risk related to the insurance policy represents the possibility that the event insured against actually occurs and uncertainty in relation to the amount of the sum insured or indemnity. It is the nature of insurance contracts that insurance risks are incidental and unpredictable; however, the main risk for the insurer is the possibility that claims and benefits exceed the amount of insurance liabilities (technical provisions) created for a portfolio of insurance contracts using statistical methods. This may happen because of a change in the frequency of claims or their amount, which can be higher than expected. Insured events are incidental, which means that their number and amount vary in individual years and in relation to statistically established averages. Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability of the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected by a change in any subset of the portfolio. Insurance companies in the Group have developed their own policy of concluding insurance contracts with the aim of spreading the assumed risks and achieve, within each individual category, a sufficient amount of risk population to reduce the variability of expected results. The principal means for reducing insurance risks is reinsurance, i.e. the transfer of risks that exceed a predetermined amount to a reinsurance company. When developing a new insurance product, it is very important that the parameters defining the insurance premium are assessed adequately. The risk accepted by the Group at the inception of an insurance contract is reflected in the price, i.e. the insurance premium. If the parameters defining the insurance premium are not assessed adequately when developing a new insurance product, this is a risk for the Group to which it is exposed during the entire life cycle of the insurance product. In the context of insurance risk, the Group is exposed to underwriting process risk, product design risk, pricing risk, economic environment risk, policyholder behaviour risk, reserve risk and claims risk. Insurance risks are also managed with reinsurance protection. 5.1.1 Description of risks Insurance activities are based on managing insurance risks. Insurance risks apply to risks accepted by the insurer from the policyholder. Insurance risks are random and unpredictable. At the signing of an insurance contract, the insurer accepts the risk to repay the insured the agreed contractual amount if an insured event occurs or if the contract expires, whereas when the insured event will occur is uncertain. Insurance cases are random; their number and amounts vary from year to year and deviate from statistical averages. The Group is therefore engaged in diversifying and increasing its portfolio. This allows it to disperse the risk and lower the variability of expected events. An important instrument to lower insurance risks is reinsurance, i.e. the transfer of risks which exceed a predetermined amount to a reinsurer. The Group further manages insurance risks through the effective performance of internal controls, internal audits and forming appropriate insurance technical provisions to cover potential future liabilities stemming from existing insurance contracts. In the management’s opinion, the important risks faced by the Group in its operations are the following: - Underwriting process risk, the danger of misevaluation of accepted risk. This risk involves mistaken decisions to underwrite a risk regardless of the risk exposure of the insured, insurance on the basis of inaccurate and incomplete information on the insured, incorrect information about the amount of maximum potential claims, or potential inappropriate acquisition of reinsurance coverage by the reinsurer. The Group manages the aforementioned risk through providing guidelines for accepting insurance risks, using software for accepting insurance risks, and strict criteria and procedures for accepting insurance risks, especially for large insured sums and coverage. Also, the Group has concluded an obligatory reinsurance contract with its reinsurer, by which the reinsured risks over a certain contractually agreed insured sum are automatically reinsured. The Group also monitors claims outcome and analyses any worsening thereof. - The risk of inadequate assessment of liabilities stemming from insurance contracts (reserve risk) is the risk that these reserves will not be adequate to cover the liabilities stemming from accepted risks, or the risk that future claims payments will exceed the evaluated amount of liabilities. 111
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