Sun Life 2010 Annual Report Download - page 64

Risk Management Policies
In order to support the effective communication, implementation and governance of our enterprise risk framework, we have codified our
processes and operational requirements in a comprehensive series of risk management policies and operating guidelines. These
polices and guidelines promote the application of a consistent approach to managing risk exposures across our global business
platform. These risk management policies are reviewed and approved annually by the Risk Review Committee, Investment Oversight
Committee and Governance and Conduct Review Committee. These Committees also receive an annual report summarizing
management’s attestation of compliance to these policies.
Risk Categories
The shaded text and tables in the following section of this MD&A represent our disclosure on credit, market and liquidity risks in
accordance with CICA Handbook Section 3862, Financial Instruments – Disclosures, and includes discussion on how we measure
risk and our objectives, policies and methodologies for managing these risks. Therefore, the shaded text and tables represent an
integral part of our audited 2010 Annual Consolidated Financial Statements for the years ended December 31, 2010, and
December 31, 2009. The shading in this section does not imply that these disclosures are of any greater importance than non-
shaded tables and text, and the Risk Management disclosure should be read in its entirety.
Our Enterprise Risk Management Framework highlights five major risk categories – Credit Risk, Market Risk, Insurance Risk,
Operational Risk and Strategic Risk.
Credit Risk
Risk Description
Credit risk is the risk of loss from not receiving amounts owed by our financial counterparties. We are subject to credit risk in
connection with issuers of securities held in our investment portfolio, debtors (e.g., mortgagors), structured securities, reinsurers,
derivative counterparties, other financial institutions (e.g., amounts held on deposit) and other entities. Losses may occur when a
counterparty fails to make timely payments pursuant to the terms of the underlying contractual arrangement or when the
counterparty’s credit rating or risk profile otherwise deteriorates. Credit risk can also arise in connection with deterioration in the
value of or ability to realize on any underlying security that may be used to collateralize the debt obligation (e.g., real estate property
values in the case of mortgage obligations). Credit risk can occur at multiple levels, as a result of broad economic conditions,
challenges within specific sectors of the economy, or from issues affecting individual companies. Events that result in defaults,
impairments or downgrades of the securities in our investment portfolio would cause the Company to record realized or unrealized
losses and increase our provisions for asset default, adversely impacting earnings.
Credit Risk Management Governance and Control
Our core principles of credit risk management include asset diversification, fundamental research and analysis of cash flows, proactive
and continuous monitoring, active management and relative value assessment, with the objective of optimizing risk adjusted returns,
with due consideration for the impacts of capital and taxation.
Key controls utilized in the management and measurement of credit risk are outlined below:
• Enterprise-wide risk appetite and tolerance limits have been established for credit risk
• Ongoing monitoring and reporting of credit risk sensitivities against pre-established risk tolerance limits
• Detailed credit risk management policies, guidelines and procedures
• Specific investment diversification requirements such as investing by asset class, geography and industry
• Risk based credit portfolio, counterparty and sector exposure limits
• Mandatory use of credit quality ratings for portfolio investments which are established and reviewed regularly
• Comprehensive due diligence processes and ongoing credit analysis
• Regulatory solvency requirements that include risk based capital requirements
• Comprehensive compliance monitoring practices and procedures including reporting against pre-established investment limits
• Reinsurance exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk
• Stress-testing techniques, such as Dynamic Capital Adequacy Testing, are used to measure the effects of large and sustained
adverse credit developments
• Reserve provisions are established in accordance with standards set forth by the Canadian Institute of Actuaries
• Target capital levels that exceed regulatory minimums
• Active credit risk governance including independent monitoring and review and reporting to senior management and the Board
Additional information concerning credit risk can be found in Note 6A to our 2010 Consolidated Financial Statements.
Market Risk
Risk Description
We are exposed to significant financial and capital market risk – the risk that the fair value or future cash flows of an insurance
contract or financial instrument will fluctuate because of changes in market prices. Market risk includes the following types of risk:
(i) equity market risk, resulting from changes in equity market prices; (ii) interest rate risk, resulting from changes in interest rates or
credit/swap spreads; (iii) currency risk, resulting from changes in foreign exchange rates; and (iv) real estate risk. In addition, we are
subject to other price risk resulting from changes in market prices other than those arising from equity risk, interest rate risk,
currency risk or real estate risk, whether those changes are caused by factors specific to the individual insurance contract, financial
instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
60 Sun Life Financial Inc. Annual Report 2010 Management’s Discussion and Analysis