There is an ongoing process for identifying, evaluating and managing significant risks which is comprehensive and systematic.
Principal Risks and Uncertainties
A significant part of the Group’s business involves the acceptance and management of risk. A detailed review of the Group’s inherent exposures to market, credit, insurance, liquidity and operational risks, together with the framework for their management, is set out in the Corporate Governance section. An overview of the Group’s risk management framework is given as part of the review of Corporate Governance - Management of Risk .
Whilst, at present, the Board considers that there are no immediate risks likely to have a significant impact on the short or long term value of the Group, principal risks and uncertainties may be categorised as follows:
- Legislation and Regulation
- Confidence in the UK Financial Services Sector
- Market and Economic conditions
- Mortality & Catastrophe risks
- Future Savings Market
- Resources
Legislation and Regulation
The financial services markets in which the Group operates are highly regulated, with regulation defining the overall framework for the design, marketing and distribution of products; the acceptance and administration of business, and the prudential capital that regulated companies should hold.
Governmental fiscal policy may also influence the design of products distributed by the Group and the mechanisms for reserving for future liabilities. Additionally, there is a growing international dimension and the volume of regulatory and legislative change is increasing. Principal risks and uncertainties impacting this year have been described in Note 51.
The Group’s activities and strategies are based upon prevailing legislation and regulation, with continuous monitoring to ensure that the Group meets its regulatory obligations. The potential for change is continuously identified and analysed. Sudden, unanticipated changes in legislation, and the differing interpretation and application of regulation over time, may have a detrimental effect on the Group’s strategy and profitability.
Confidence in the UK Financial Services Sector
The Group has followed a strategy of offering value-for-money products to its customers and continually improving customers’ overall experience of doing business with Legal & General. Whilst this enables the Group to differentiate itself from its competitors, earnings and profitability are also influenced by the confidence of the retail investor in the financial services sector as a whole, a number of drivers of which are beyond the Group’s control. Such factors include the adverse performance of investment markets, actions by regulators within the sector and shock events such as significant market failures.
Market and Economic Conditions
Legal & General is a significant provider of term assurance and critical illness products. These products are typically purchased as part of the house buying event or when a property is being re-mortgaged. The Group also provides household and buildings insurance. Whilst the Group is structured to enable resources to be re-directed at other product lines, a downturn in the housing market could impact product volumes and short term earnings.
Legal & General is also a leading provider of index-tracking funds to both pension schemes and retail customers. The fees for managing these funds are directly linked to the value of funds under management. As such, significant falls in the value of tracker funds would impact earnings for these businesses.
Mortality and Catastrophe Risks
The Group writes significant levels of immediate and deferred annuity business. The Group uses its pricing capability for longevity risks to ensure that an appropriate risk premium is applied to the business, taking account of all known risk factors. However, significant unforeseen medical advances may result in the requirement to increase reserves for these lines of business. With regard to the Group’s significant portfolio of protection business, whilst the risk of adverse claims experience is fully assessed and reserved for, an event causing widespread mortality or morbidity, coupled with a re-insurer default, may impact the capital available to the Group.
Future Savings Market
A number of Legal & General’s businesses are focused on the long terms savings and retirement product markets. The factors leading customers to save and to provide for old age are influenced by a number of factors including government policy, social conditions and the general economic environment. The Group seeks to participate actively in debate to highlight those matters which are key to encouraging consumers to save and make adequate provision for old age. However, consumer uncertainty in any of the above factors may have a detrimental effect on these markets.
Resources
Legal & General has market leading expertise in a number of the fields in which it operates. The Group actively focuses on retaining the best personnel and ensuring that key dependencies do not arise through employee training & development programmes, remuneration strategies and succession planning. However, the sudden unanticipated loss of teams of expertise may, in the short term, impact certain segments of Legal & General’s businesses.