The Group KD Group and KD Group dd

The Group KD Group Annual Report 2009
Notes to Consolidated Financial Statements as at and for the year ended 31 December 2009
5.2.1 Liquidity risk
Liquidity risk is the risk that cash may not be available to pay obligations due at a reasonable cost.
The Group is exposed to liquidity risk in particular with regards to the insurance liabilities (claims) and the contractual
obligations pertaining to the acquisition of financial instruments (notably the acquisitions of companies) and the servicing of
current liabilities from financial instruments.
The liquidity requirements in the field of financial intermediation are specifically regulated by the law, where the most
important area for the Group is insurance where it strives to maintain the volume of liquidity in accordance with the regulatory
requirements.
Exposure to liquidity risk is reflected in the acceptance of insurance risk and the Group’s ability to meet its contractual
obligations from existing insurance contracts and liabilities related to the insurer’s day-to-day operations.
Liquidity risk stems from an imbalance in inflows and outflows and manifests itself in the potential that the Group, despite
having adequate financial assets, would find itself in the position of having to cash in its investments under less favourable
conditions (e.g. lower price, higher transaction costs) in order to meet its contractual obligations, which would result in a lower
return on investments.
The Group manages its liquidity risk through:
• maintaining a suitable structure of investments;
• diversifying the investment portfolio;
• planning future cash flows, ensuring a suitable volume of cash flows from operating and investing activities (payout of
interest and principal) to cover future foreseeable liabilities;
• providing an adequate volume of high liquidity investments which are readily convertible without loss in order to cover
future unforeseeable liabilities.
The Group is exposed to interest rate risk via financial assets and liabilities, reinsured receivables and insured liabilities. Due
to the nature of its investments and liabilities, the Group particularly faces the risk of changed interest rates.
The overview of liquidity risk management is presented below, showing maturity of assets according to contractual cash flows,
which are compared with the expected cash flows of insurance and financial contracts.
Contractual cash flows for debt securities are calculated using the data of the issuers. The amortisation schedule and coupon
rate at the date of calculation is used. For each time interval, the future cash flows (principal and coupon rate) are considered
according to the situation of the debt securities portfolio.
For the purpose of presenting cash flows of life insurance contracts with DPF and unit-linked life insurance, all the cash flows
of future payments of claims and costs arising from life insurance contracts effective at 31 December 2009 were generated.
For the purpose of presenting cash flows of financial contracts, all the cash flows of future payments of claims and costs
arising from financial contracts effective at 31 December 2009 were generated..
Expected cash flows of property insurance and health insurance represent an assessment of payments for claims (which
have already been incurred), including costs and the release of liability from unearned premiums and provisions.
Own assets of the Group are not intended for covering liabilities from insurance and financial contracts, and this is the reason
the mean duration of assets is not presented.
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