Major investment risks
Investment risks should be considered in the context of the investment policy. Based on Group investment guidelines, the investment policy at the individual companies is regulated within the Talanx Group by the supervisory framework applicable to each particular company and by internal investment guidelines.
Particularly in the interests of policyholders as well as with a view to accommodating the future requirements of the capital market, the investment policy adopted by Talanx – building upon the basic legal parameters – is guided by the following maxims:
- optimizing the return on investments while at the same time preserving a high level of security
- ensuring liquidity requirements are satisfied at all times (solvency)
- risk diversification (mix and spread)
An essential component of risk management is the principle of separation of functions – i.e. keeping a distinction between Portfolio Management, Settlement and Risk Controlling. Risk Controlling – which is organizationally and functionally separate from Portfolio Management – bears responsibility for monitoring all risk limits and evaluating financial products. In this respect our management and control mechanisms are geared particularly closely to the standards adopted by the Federal Financial Supervisory Authority (BaFin) and the respective local supervisory authorities.
Detailed investment guidelines are in force for the individual companies, compliance with which is constantly monitored. These investment guidelines serve to define the framework of the investment strategy and are therefore guided by the principles set out in § 54 of the Insurance Supervision Act (VAG), which envisages the greatest possible level of security and profitability while ensuring liquidity at all times and preserving an appropriate mix and spread of the portfolio. Monitoring of the quotas and limits set out in these guidelines is the responsibility of Group Risk Controlling and the Chief Financial Officer of each company. Any significant modification of the investment guidelines and/or investment policy must be approved by the Board of Management of each company and brought to the attention of its Supervisory Board.
Risks in the investment sector consist most notably of market, credit and liquidity risks.
Market risk
The market risk arises from the potential loss due to adverse changes in market prices and may be attributable to changes in interest rates, equity prices and exchange rates. This can necessitate a value adjustment or result in realized losses upon disposal of financial assets. A fall in the level of interest rates can also lead to lower investment income.
For the bulk of the securities portfolio the experts at AmpegaGerling Asset Management GmbH simulate possible market changes that can cause significant price and interest losses as at the balance sheet date. The Value at Risk, which is determined daily on the basis of historical data, is a vital tool used to manage market price risks. In addition, the risk of market changes is identified using enterprise-specific stress tests and those required by regulators with correspondingly defined stress test parameters.