Sun Life 2015 Annual Report Download - page 132

Certain annuity and long-term disability contracts contain embedded derivatives as benefits are linked to the Consumer Price Index;
however most of this exposure is hedged through the Company’s ongoing asset-liability management program.
6.C Liquidity Risk
Risk Description
Liquidity risk is the possibility that we will not be able to fund all cash outflow commitments as they fall due. This includes the risk of
being forced to sell assets at depressed prices resulting in realized losses on sale. This risk also includes restrictions on our ability to
efficiently allocate capital among our subsidiaries due to various market and regulatory constraints on the movement of funds. Our
funding obligations arise in connection with the payment of policyholder benefits, expenses, asset purchases, investment
commitments, interest on debt, and dividends on capital stock. Sources of available cash flow include general fund premiums and
deposits, investment related inflows (such as maturities, principal repayments, investment income and proceeds of asset sales),
proceeds generated from financing activities in normal markets, and dividends and interest payments from subsidiaries. We have
various financing transactions and derivative contracts under which we may be required to pledge collateral or to make payments to
our counterparties for the decline in market value of specified assets. The amount of collateral or payments may increase under certain
circumstances, which could adversely affect our liquidity.
Liquidity Risk Management Governance and Control
We generally maintain a conservative liquidity position and employ a wide range of liquidity risk management practices and controls,
which are described below:
• Liquidity risk governance practices are in place, including independent monitoring and review and reporting to senior management
and the Risk Review Committee.
• Liquidity is managed in accordance with our Asset Liability Management Policy and operating guidelines.
• Liquidity contingency plans for the management of liquidity in the event of a liquidity crisis are maintained.
• Stress testing is performed by comparing liquidity coverage ratios under one-month and one-year stress scenarios to our policy
thresholds. These liquidity ratios are measured and managed at the enterprise and business segment level.
• Stress testing of our collateral is performed by comparing collateral coverage ratios to our policy threshold.
• Cash management and asset-liability management programs support our ability to maintain our financial position by ensuring that
sufficient cash flow and liquid assets are available to cover potential funding requirements. We invest in various types of assets with
a view of matching them to our liabilities of various durations.
• Internal capital targets are established at an enterprise level to cover all risks and are above regulatory supervisory and minimum
targets. Actual capital levels are monitored to ensure they exceed internal targets.
• We actively manage and monitor our capital and asset levels, and the diversification and credit quality of our investments.
• Various credit facilities for general corporate purposes are maintained.
We are subject to various regulations in the jurisdictions in which we operate. The ability of SLF Inc.‘s subsidiaries to pay dividends and
transfer funds is regulated in certain jurisdictions and may require local regulatory approvals and the satisfaction of specific conditions
in certain circumstances. Through effective cash management and capital planning, SLF Inc. ensures that its subsidiaries, as a whole
and on a stand-alone basis, are properly funded and maintain adequate liquidity to meet obligations, both individually and in aggregate.
Based on our historical cash flows and liquidity management processes, we believe that the cash flows from our operating activities will
continue to provide sufficient liquidity for us to satisfy debt service obligations and to pay other expenses as they fall due.
7. Insurance Risk Management
7.A Insurance Risk
Risk Description
Insurance risk is the uncertainty of product performance due to differences between the actual experience and expected experience in
the areas of mortality, morbidity, longevity and policyholder behaviour. In addition, product design and pricing, expense and
reinsurance risks impact multiple risk categories, including insurance risk.
Insurance Risk Management Governance and Control
We employ a wide range of insurance risk management practices and controls, as outlined below:
• Insurance risk governance practices are in place, including independent monitoring and review and reporting to senior management
and the Risk Review Committee.
• Risk appetite limits have been established for mortality and morbidity, longevity and policyholder behaviour risks.
• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.
• Comprehensive Insurance Risk Management Policy, guidelines and practices are in place.
• The global underwriting manual aligns underwriting practices with our corporate risk management standards and ensures a
consistent approach in insurance underwriting.
• Board-approved maximum retention limits (amounts issued in excess of these limits are reinsured) are in place.
• Detailed procedures, including criteria for approval of risks and for claims adjudication are established and monitored for each
business segment.
• Underwriting and risk selection standards are established and overseen by the corporate underwriting and claims risk management
function.
• Diversification and risk pooling is managed by aggregation of exposures across product lines, geography and distribution channels.
• The Insurance Risk Policy, and Investment and Credit Risk Management Policy establish acceptance criteria and protocols to
monitor the level of reinsurance ceded to any single reinsurer or group of reinsurers.
• Reinsurance counterparty risk is monitored, including through annual reporting to the Risk Review Committee.
130 Sun Life Financial Inc. Annual Report 2015 Notes to Consolidated Financial Statements