Ally Bank 2012 Annual Report Download - page 75

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The change in net interest income sensitivity from the prior year was due to the lower and flatter yield curve and to a lesser extent the
planned sale of our international operations.
Operational Risk
We define operational risk as the risk of loss resulting from inadequate or failed processes or systems, human factors, or external events.
Operational risk is an inherent risk element in each of our businesses and related support activities. Such risk can manifest in various ways,
including errors, business interruptions, and inappropriate behavior of employees, and can potentially result in financial losses and other
damage to us. Examples of operational risk include legal/compliance, vendor management, model, reputational, and representation and
warranty obligation risks (See the Purchase Obligations discussion within this MD&A).
To monitor and control such risk, we maintain a system of policies and a control framework designed to provide a sound and well-
controlled operational environment. This framework employs practices and tools designed to maintain risk governance, risk and control
assessment and testing, risk monitoring, and transparency through risk reporting mechanisms. The goal is to maintain operational risk at
appropriate levels in view of our financial strength, the characteristics of the businesses and the markets in which we operate, and the related
competitive and regulatory environment.
Notwithstanding these risk and control initiatives, we may incur losses attributable to operational risks from time to time, and there can
be no assurance these losses will not be incurred in the future.
Insurance / Underwriting Risk
In underwriting our vehicle service contracts and insurance policies, we assess the particular risk involved, including losses and loss
adjustment expenses, and determine the acceptability of the risk as well as the categorization of the risk for appropriate pricing. We base our
determination of the risk on various assumptions tailored to the respective insurance product. With respect to vehicle service contracts,
assumptions include the quality of the vehicles produced, the price of replacement parts, repair labor rates in the future, and new model
introductions. Insurance risk also includes event risk, which is synonymous with pure risk, hazard risk, or insurance risk, and presents no
chance of gain, only of loss.
In some instances, reinsurance is used to reduce the risk associated with volatile businesses, such as catastrophe risk in U.S. dealer
vehicle inventory insurance. Our commercial products business is covered by traditional catastrophe protection, aggregate stop loss
protection, and an extension of catastrophe coverage for hurricane events. In addition, loss control techniques, such as hail nets or storm path
monitoring to assist dealers in preparing for severe weather, help to mitigate loss potential.
We mitigate losses by the active management of claim settlement activities using experienced claims personnel and the evaluation of
current period reported claims. Losses for these events may be compared to prior claims experience, expected claims, or loss expenses from
similar incidents to assess the reasonableness of incurred losses.
In accordance with industry and accounting practices and applicable insurance laws and regulatory requirements, we maintain reserves
for reported losses, losses incurred but not reported, and loss adjustment expenses. The estimated values of our prior reported loss reserves
and changes to the estimated values are routinely monitored by credentialed actuaries. Our reserve estimates are regularly reviewed by
management; however, since the reserves are based on estimates and numerous assumptions, the ultimate liability may differ from the amount
estimated.
Country Risk
We have exposures to obligors domiciled in foreign countries; and therefore, our portfolio is subject to country risk. Country risk is the
risk that conditions in a foreign country will impair the value of our assets, restrict our ability to repatriate equity or profits, or adversely
impact the ability of the guarantor to uphold their obligations to us. Country risk includes risks arising from the economic, political, and social
conditions prevalent in a country, as well as the strengths and weaknesses in the legal and regulatory framework. These conditions may have
potentially favorable or unfavorable consequences for our investments in a particular country.
Country risk is measured by determining our cross-border outstandings in accordance with Federal Financial Institutions Examination
Council guidelines. Cross-border outstandings are reported as assets within the country of which the obligor or guarantor resides.
Furthermore, outstandings backed by tangible collateral are reflected under the country in which the collateral is held. For securities received
as collateral, cross-border outstandings are assigned to the domicile of the issuer of the securities. Resale agreements are presented based on
the domicile of the counterparty.
Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K