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CIC INSURANCE GROUP LIMITEDNotes to the Financial Statements continuedFor the year ended 31 December 201146 RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)Financial risk (Continued)(a)Market risk(i)Interest rate riskInterest rate risk arises primarily from investments in fixed interest securities. The sensitivity analysis for interestrate risk illustrates how changes in the fair value or future cash flows of a financial instrument will fluctuatebecause of changes in market interest rates at the reporting date. For financial instruments and insurancecontracts described in this note, the sensitivity is solely associated with the former, as the carrying amounts ofthe latter are not directly affected by changes in market risks.The group’s management monitors the sensitivity of reported interest rate movements on a monthly basis byassessing the expected changes in the different portfolios due to a parallel movement of plus 10 basis pointsin all yield curves of financial assets and financial liabilities. These particular exposures illustrate the group’soverall exposure to interest rate sensitivities included in the group’s ALM framework and its impact in thegroup’s profit or loss by business.An increase/decrease of 5 % in interest yields would result in an increase/decrease of the profit for the year andequity by Sh 17,087,500 (2010: Sh 11,768,000).(ii)Equity price riskThe group is exposed to equity securities price risk as a result of its holdings in equity investments, classifiedas financial assets at fair value through profit or loss. Exposure to equity shares in aggregate are monitoredin order to ensure compliance with the relevant regulatory limits for solvency purposes. Investments held arelisted and traded on the Nairobi Securities Exchange.The group has a defined investment policy which sets limits on the group’s exposure to equities both inaggregate terms and by industry. This policy of diversification is used to manage the group’s price risk arisingfrom its investments in equity securities.Investment management meetings are held monthly. At these meetings, senior managers meet to discussinvestment return and concentration of the equity investments.Listed equity securities represent 89% (2010: 96%) of total equity investments. If equity market indices hadincreased/ decreased by 5%, with all other variables held constant, and all the group’s equity investmentsmoving according to the historical correlation with the index, the profit for the year would increase/decrease bySh 7,507,850 (2010: Sh 9,286,478) and equity would increase/decrease by Sh 8,284,439 (2010: Sh 10,491,028).(iii)Currency riskForeign currency exchange risk arises when future commercial transactions or recognised assets and liabilitiesare denominated in a currency that is not the entity’s functional currency. The group primarily transacts inKenya shilling and its assets and liabilities are denominated in the same currency. The group is therefore notexposed to currency risk.PAGE 762011 ANNUAL REPORT & FINANCIAL STATEMENTS