major risk factors and their management within the ... - Euler Hermes

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4 Risk MAJOR RISK FACTORS AND THEIR MANAGEMENT WITHIN THE GROUP factors 4.1.4 RISK FACTORS STEMMING FROM THE COMPETITIVE OR REGULATORY ENVIRONMENT A highly competitive environment Euler Hermes operates in a highly competitive market, in which other players are sometimes subject to different regulations, sometimes use multiple distribution channels and sometimes offer more competitive prices than those of the Group. In addition, several products offer an alternative to credit insurance and increase customers’ possibilities in respect of cover. In view of this competitive pressure, Euler Hermes may need to adjust the prices of some of its products and services or its policy for underwriting risks, which could affect its ability to maintain or improve profitability and adversely affect its net income and financial position. Reinforcement of and change in regulations at the local, European and international levels The credit insurance business is subject to specific regulations in different countries. Changes to the laws and regulations governing the insurance business could significantly affect the conduct of operations and Euler Hermes’ offer of insurance products. The implementation of the Solvency II directive To implement the Solvency II directive, Euler Hermes has developed a project structure under the authority of the Group’s Chief Financial Officer and Chief Risk Officer. As part of this project, Euler Hermes has decided to implement an internal model in conjunction with its reference shareholder in order to model all of its individual risks, bearing in mind that the standard formula does not adequately represent the Group’s risk profile, especially in respect of credit insurance. At the time of writing, Euler Hermes could not be assured that its internal model would obtain approval from the regulators supervising the Group. In the event of its internal model failing to be approved, the application of the standard formula laid down under Solvency II might take the Euler Hermes’ solvency margin below the level consistent with its risk profile, thereby requiring the Group to carry out a capital increase and possibly resulting in reputational risk. Moreover, as the implementing legislation has not yet been finalized, a number of choices have been made in preparation for implementing the directive. There is uncertainty as to the validity of these choices, potentially resulting in additional costs when implementing the final version of the directive and its implementing legislation, or regulatory sanctions if Euler Hermes is late in implementing the said texts. 98 EULER HERMES I 2011 Registration Document Change in tax laws and regulations at the local, European or international levels Changes in tax legislation in the countries in which Euler Hermes operates could have an adverse effect on the Group’s operations, cash flows and net income. Furthermore, such changes in tax laws and regulations, or lower-thanexpected or poorly timed operating performances, could cause significant change to the Group’s deferred tax assets, leading to a reduction in the value of some tax assets or preventing their use. This situation could have a material adverse impact on Euler Hermes’ net income and financial position. Potential change to international accounting standards Euler Hermes’ consolidated financial statements are drawn up in accordance with the international accounting standards as adopted by the European Union. International accounting standards comprise IFRS (International Financial Reporting Standards) and IAS (International Accounting Standards), together with their interpretative texts. Cf. Note 2 “IFRS accounting and valuation rules” in the notes to the consolidated financial statements. Plans to amend existing standards are being considered by the International Accounting Standards Board (IASB), some of which may have a significant impact on the financial statements of insurance companies and financial institutions. These potential changes could concern both the recognition of the Group’s assets and liabilities, as well as its income and expenses in the consolidated income statement. The impact of such changes is difficult to assess at this stage, but would be liable to affect Euler Hermes’ net income and financial position. The variety of legal systems in the countries in which the Group operates In recent years, Euler Hermes has accelerated its international expansion in countries in which judicial dispute resolution systems can differ in terms of maturity from those that existing in Europe or the United States. As such, Euler Hermes may find it difficult to take legal action or enforce rulings. In such a situation, the possible legal implications could affect the Group’s operations and net income.
4 MAJOR RISK FACTORS AND THEIR MANAGEMENT WITHIN THE GROUP Quantitative and qualitative appendices relating to risk factors 4.2 Quantitative and qualitative appendices relating to risk factors 4.2.1 THE RISK MANAGEMENT ORGANIZATION The Risk Management function The responsibilities of the Risk Management function are as follows: ■ identify, measure and take part in the management of financial, insurance and operational risks; ■ define and monitor appetite for these risks – reinforcement of the riskreporting process, limits and the decision-making processes – in four dimensions: revenue, value, capital, liquidities; ■ calculate the economic capital related to operations. Economic capital is calculated using an internal model, responsibility for the development of which is shared between the Group, for the risks associated with the insurance business, and the reference shareholder for all other risks; ■ carry out the approval process with supervisors in preparation for Solvency 2 and the Swiss Solvency Test; ■ build a favorable environment in terms of models/indicators/standards, but also in respect of culture for the different business lines, in order to ensure that risks are consistent with the risk appetite validated locally by the Group; ■ more broadly, take all action necessary to provide an effective “second line of defense” on all risks. To fulfill these missions, the team is fully independent. While it has no operational function, it is closely associated with the Group’s management and decision-making processes. It relies on other Group functions, at both the Group and local levels, and in particular the commercial, underwriting limits, claims management and financial resources functions. All activities and the results of risk analysis are subject to regular reporting. The organization of the Risk Management function Risk Management is organized around three pillars: 1) Euler Hermes’ senior management: − defines and implements the business strategy under delegation from the Supervisory Board and/or the Group Management Board, − defines and develops internal controls and the framework of the Risk Management function, − ensures that activity is consistent with the defined risk appetite. The senior management relies on various committees to carry out its tasks, including: − the Risk Committee, − the Investment Committee, − the Reinsurance Committee, − the Sales Committees, − the Risk Underwriting Committees; 2) Risk Management, which is tasked with: − defining and implementing the Risk Management system within the organization, particularly the risk governance rules, − ensuring that all the legal entities of the Group comply with these rules. The Risk Management function is led by a Chief Risk Officer, who reports to the Chief Financial Officer. The Chief Risk Officer and his/her team act independently and have no operational responsibilities. The Risk Management function works closely with the “Ethics” function and the Actuarial department; 3) the internal audit function: − independently and objectively verifies that all processes implemented as part of Risk Management are properly defined and implemented, and suggests improvements. The local Risk Management function Risk Management in the various legal entities has the same tasks and is organized in the same way as at Group level. In particular, each legal entity defines a local risk appetite, in line with the Group risk appetite, and manages its activity on the basis of a local risk appetite. EULER HERMES I 2011 Registration Document 99
Page 1 and 2: 4.1 RISK FACTORS 94 4.1.1 Risk fact
Page 3 and 4: As such, during the period of insur
Page 5: Due to the different risk factors d
Page 9 and 10: Key elements of this risk business
Page 11 and 12: CLAIMS/PREMIUMS RATIO 4 MAJOR RISK
Page 13 and 14: B) THE DEVELOPMENT OF PAID CLAIMS P
Page 15 and 16: Equity market risk Equity market ri
Page 17 and 18: 4.2.4 COUNTERPARTY RISK Counterpart
Page 19 and 20: Tax risks Tax teams at both Group a

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