The Group KD Group and KD Group dd

The KD Group Annual Report 2009
managed by using quantitative methods of risk assessment compared to the selected returns criteria. In accordance with the
Insurance Act, insurance companies are obliged to match long-term business fund investments with their liabilities arising
from insurance contracts, the amount of which depends on changes in exchange rates, interest rates and securities prices.
The method of managing these risks and exposure thereto are presented in detail in the financial section of the consolidated
Annual Report.
Operational risk
Operational risk (including legal risk) is the risk of loss arising primarily due to inadequate or incorrect implementation of
internal controls, other inappropriate conduct by personnel involved in the company's internal operations, inadequate or
incorrect functioning of systems that relate to the company's internal operations, and external events or acts. Operational risk
also includes IT risk, which is the risk of data loss resulting from inadequate information technology and processing,
particularly in terms of manageability, access, integrity, supervision and continuity. Operational risk is managed by
companies by identifying opportunities and threats in their respective areas and by managing business processes. The
management of these risks is subordinate to the strategic and business objectives of individual segments and companies.
In all larger KD Group companies, we manage operational risk by introducing ISO standards (at companies where this
makes sense due to the complexity of processes) and using standard software for accounting and investments. Risks are
also mitigated by a standardised system of annual planning and monthly reporting that provide the parent company with
information about the operations of subsidiaries in a timely manner. In this regard, the new planning model facilitates flexible
planning and contributes to the monitoring of established objectives and the timely adoption of measure in the context of a
change in assumptions.
The internal audit department has been particularly diligent with regard to signs of fraud in all previously performed internal
audits. In this respect, the internal audit department assesses the probability of fraud arising. Any deviations are reported in
the scope of individual internal audit reports. Risks of improper conduct of people, in the context of increased pressures on
employees as a "by-product" of the current turmoil, may also be seen as the increased risk of fraud, common in the
international environment. Therefore, time has been reserved in the proposed plans of the internal audit department for
2010 to raise the awareness of our employees. Plans include training on the subject of recognising indicators or signs of
fraud.
Insurance risks
Within the framework of insurance risk, the operations of insurance companies are exposed to underwriting process risk,
product design risk, pricing risk, economic environment risk, policyholder behaviour risk, reserving risk and claims risk.
In view of the above, and the nature of insurance contracts, where insurance risks are random and unpredictable, insurance
companies in the Group have developed their own policies for concluding insurance contracts in order to diversify the
assumed risks. Measures taken in order to manage insurance risks are as follows:
– risks that exceed a predetermined amount are transferred to a reinsurance company;
– diversification of assumed risks and achieving sufficient number of risks in individual categories to reduce
variability of anticipated results (diversification and portfolio increase),
– parameters defining the insurance premium are assessed adequately when new insurance products are
developed;
– effective implementation of internal controls,
– creation of appropriate amount of provisions,
– monitoring and analysing changes to ensure timely and proactive measures.
Details regarding the distribution of maximum loss (maximum insured sum) by the sectors in which policyholders operate and
the diversification of the insurance portfolio (exposure to the largest policyholders) are disclosed in the financial section of the
Annual Report.
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