Sun Life 2012 Annual Report Download - page 59

The Company’s risk appetite balances the various needs, expectations, risk and reward perspectives and investment horizons of key
stakeholders. In particular, our risk appetite supports the pursuit of shareholder value while ensuring that the Company’s ability to pay
claims and fulfill long-term policyholder commitments is not compromised. Our risk appetite supports long-term credit and financial
strength ratings, ongoing favourable access to capital markets and the continuing enhancement of the Company’s overall franchise
value and brand.
The Company’s risk appetite is the primary mechanism for operationalizing our risk philosophy. To accomplish this, risk appetite
incorporates a number of qualitative and quantitative principles that embody our philosophy and reflect the Company’s overall risk
management principles and values. Our risk appetite and risk tolerance levels are revised periodically to reflect the risks and
opportunities inherent in our evolving business strategies and operating environment. We operate in accordance with our risk appetite,
which is formally set out in our Risk Appetite Policy that is approved annually by the Board of Directors.
Risk Identification, Measurement and Assessment
We identify the key risks facing our business through our enterprise key risk process, where all business segments employ a common
approach to identify, measure and assess risks. Business segments have front line accountability for identifying and managing risks
facing their business. We also evaluate potential correlation between various risk events and categories, and monitor emerging risks,
regulatory and rating agency requirements, and industry developments.
Risk measurement and assessment involves evaluating potential risk exposures, and includes a number of techniques such as
monitoring key risk indicators, stress testing, scenario analysis and stochastic scenario modelling. A robust stress testing program is an
essential component of the Company’s risk management framework. Stress testing is used to set the Company’s risk appetite and
evaluate risk exposures versus tolerance limits. We also use the DCAT process, as required by our regulator, to project income and
capital for a five-year period based on plausible adverse scenarios. We also perform a variety of stress tests on earnings, regulatory
capital ratios and liquidity that consider significant but plausible adverse scenarios.
We also have a process to identify and monitor emerging risks that may have a material impact on our finances, operations or
reputation. We conduct stress testing of the Company’s earnings and MCCSR ratio to key emerging risks and scenarios on a regular
basis.
Risk Response, Monitoring and Control, and Reporting
Risk responses are developed in an integrated framework that considers risk assessment, risk measurement and an assessment of
risk-adjusted return.
Key enterprise monitoring and control processes include oversight by the Board of Directors, which is exercised through four Board
committees – Risk Review Committee, Governance Nomination and Investment Committee, Audit and Conduct Review Committee,
and Management Resources Committee. Senior management oversight is provided through several executive-level committees
including the Executive Risk Committee, Corporate Credit Committee, Corporate Asset Liability Management Committee and Executive
Investment Committee, each of which focus on specific risks.
On a quarterly basis, the Executive Risk Committee, Board Committees and the Board of Directors review the risk monitoring reports
that summarize the exposures across our principal risks including any changes in key risk trends. These committees also review the
effectiveness of the mitigation strategies presented in the risk monitoring reports. On an annual basis, the Board of Directors and the
Board Committees review and approve key policies for the management of risk and review compliance with these policies.
Risk Philosophy and Principles
Our risk philosophy reflects a number of core principles that embody our overall risk appetite and values. These principles are outlined
below:
Strategic Alignment
Our risk appetite is aligned with our overall corporate vision, mission and business strategy. This alignment is obtained by the
consideration of key risks that we are willing to accept in order to achieve return expectations and successfully achieve our stated
mission to “help customers achieve lifetime financial security” and our business objectives. These key risks include insurance risks,
market risks, credit risks and operational risks, and we have established a range of explicit risk appetite limits and operational control
points for these risks. Risks that are associated with activities outside of our risk appetite and approved business strategies are
generally avoided.
Stakeholder Interests
Our risk framework considers the interests of a large number of key stakeholder groups, including policyholders, shareholders, debt-
holders, employees, regulators, rating agencies and other capital market participants. Our risk framework endeavours to appropriately
balance the needs, expectations, risk and reward perspectives and investment horizons of these stakeholders.
Effective risk management requires that objectives and incentives be aligned to ensure management’s decisions are consistent with
the Company’s desired risk and return profile. Compensation practices for executives are approved by the Board of Directors and
aligned with our risk philosophy, values, business and risk strategies, and long-term interests. As appropriate, risk management goals
are considered in establishing annual performance objectives.
Capability Alignment
Our risk appetite is aligned with our inherent risk management capabilities. Our ability to perform robust risk assessments, the quality of
our risk governance and control environment and the depth and quality of our risk responses and pricing strategies are particularly
important capabilities. We seek out profitable risk-taking opportunities in those areas where we have established risk management
skills and capabilities. Conversely, we endeavour to avoid risks that are beyond our risk-taking capability.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2012 57