Sun Life 2012 Annual Report Download - page 62

During 2012, credit risk management procedures were enhanced. In-force public and private corporate debt, as well as whole loan
commercial mortgages were rated using scorecards which combine probability of default and loss given default to determine an
expected loss. These scorecards now support a stochastic value at risk model which produces a distribution of losses dependent on
thousands of scenarios which is used to stress test the portfolio and to uncover unintentional concentrations and correlations.
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, all with the objective of optimizing risk-adjusted returns,
with due consideration for the impacts of capital and taxation.
We employ a wide range of credit risk management practices and controls, as outlined below:
• Enterprise 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 defined investment limits for 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.
• Independent adjudication of new fixed income investment internal rating decisions and ongoing reviews of the in-force portfolio
internal rating decisions.
• Comprehensive due diligence processes and ongoing credit analyses.
• 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 DCAT, are used to measure the effects of large and sustained adverse credit developments.
• Insurance contract liability provisions are established in accordance with Canadian actuarial standards of practice.
• Target capital levels exceed regulatory minimums.
• Active credit risk governance including independent monitoring and review and reporting to senior management and the Board of
Directors.
Additional information concerning credit risk can be found in Note 6 to our 2012 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 or volatility in market prices. Market risk includes: (i) equity market
risk, resulting from changes in equity market prices; (ii) interest rate and spread risk, resulting from changes in interest rates or
spreads; (iii) currency risk, resulting from changes in foreign exchange rates; and (iv) real estate risk, resulting from changes in real
estate prices. In addition, we are subject to other price risk resulting from changes in market prices other than those arising from
equity risk, interest rate and spread 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.
These factors can also give rise to liquidity risk if we are forced to sell assets at depressed market prices in order to fund our
commitments. Market changes and volatility could be the result of general capital market conditions or specific social, political or
economic events.
Market Risk Management Governance and Control
We employ a wide range of market risk management practices and controls, as outlined below:
• Enterprise risk appetite and tolerance limits have been established for market risks.
• Ongoing monitoring and reporting of market risk sensitivities against pre-established risk tolerance limits.
• Detailed asset-liability and market risk management policies, guidelines and procedures.
• Management and governance of market risks is achieved through various asset-liability management and risk committees that
oversee key market risk strategies and tactics, review compliance with applicable policies and standards, and review investment
and hedging performance.
• Hedging and asset-liability management programs are maintained in respect of market risks.
• Product design and pricing policy requires a detailed risk assessment and pricing provisions for material market risks.
• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse market movements.
• Insurance contract liability provisions are established in accordance with standards set forth by the Canadian actuarial standards
of practice.
• Target capital levels exceed regulatory minimums.
• Active market risk governance including independent monitoring and review and reporting to senior management and the Board of
Directors.
Equity Market Risk
Equity market risk is the potential for financial loss arising from declines and volatility in equity market prices. We are exposed to
equity risk from a number of sources. A significant portion of our exposure to equity risk arises in connection with benefit guarantees
on segregated fund contracts. These benefit guarantees are linked to underlying fund performance and may be triggered upon death,
maturity, withdrawal or annuitization.
We derive a portion of our revenue from fee income generated by our asset management businesses and from certain insurance and
annuity contracts where fee income is levied on account balances that generally move in line with equity market levels. Accordingly,
adverse fluctuations in the market value of such assets would result in corresponding adverse impacts on our revenue and net
income. In addition, declining and volatile equity markets may have a negative impact on sales and redemptions (surrenders) for this
business, and this may result in further adverse impacts on our net income and financial position.
60 Sun Life Financial Inc. Annual Report 2012 Management’s Discussion and Analysis