Unum 2014 Annual Report Download - page 85

UNUM • 2014 ANNUAL REPORT 83
Risk and Capital Modeling
We assess material risks, including how they affect us and how individual risks interrelate, to provide valuable information to
management in order that they may effectively manage our risks. We use qualitative and quantitative approaches to assess existing
and emerging risks and to develop mitigating strategies to limit our exposure to both.
We utilize stress testing and scenario analysis for risk management and to shape our business, financial, and strategic planning
activities. Both are key components of our risk appetite policy and play an important role in monitoring, assessing, managing, and
mitigating our primary risk exposures.
In particular, stress testing of our capital and liquidity management strategies enables us to identify areas of high exposure,
assess mitigating actions, develop contingency plans, and guide decisions around our target capital and liquidity levels. For example, we
periodically perform stress tests on certain categories of assets or liabilities to support development of capital and liquidity risk contingency
plans. These tests help ensure that we have a buffer to support our operations in uncertain times and financial flexibility to respond to
market opportunities. Stress testing is also central to reserve adequacy testing, cash flow testing, and asset and liability management.
In addition, we aim to constantly improve our capital modeling techniques and methodologies that are used to determine a level
of capital that is commensurate with our risk profile and to ensure compliance with evolving regulatory and rating agency requirements. Our
capital modeling reflects appropriate aggregation of risks and diversification benefits resulting from our mix of products and business units.
Our internal capital modeling and allocation aids us in making significant business decisions including strategic planning, capital
management, risk limit determination, reinsurance purchases, hedging activities, asset allocation, pricing, and corporate development.
Risk Management Activities
We accept and manage strategic, credit, and insurance risks in accordance with our corporate strategy, investment policy, and annual
business plans. The following fundamental principles are embedded in our risk management efforts across our Company.
• We believe in the benets of specialization and a focused business strategy. We seek protable risk-taking in areas where we have
established risk management skills and capabilities.
• We seek to manage our exposure to insurance risk through a combination of prudent underwriting with effective risk selection,
maintaining pricing discipline, sound reserving practices, and claims operational effectiveness. Detailed underwriting guidelines and
claim policies are tools used to manage our insurance risk exposure. We also monitor exposures against internally prescribed limits,
and we diversify to reduce potential concentration risk and volatility.
• We maintain a detailed set of investment policies and guidelines, including fundamental credit analysis, that are used to manage
our credit risk exposure and diversify our risks across asset classes and issuers.
• Finally, we foster a risk culture that embeds our corporate values and our code of conduct in our daily operations and preserves
our reputation with customers and other key stakeholders. We monitor a composite set of operational risk metrics that measure
operating effectiveness from the customer perspective.
Risk Reporting
Regular internal and external risk reporting is an integral part of our ERM framework. Internally, ERM reports are a standard part
of our quarterly senior management and board meetings. The reports summarize our existing and emerging risk exposures, as well as
report against the tolerances and limits defined by our risk appetite policy.
Externally, we are subject to a number of regulatory and rating agency risk examinations, and risk reports are often included. During
2015, we must comply with the ORSA requirements, which are intended to become a regular part of reviews of insurers’ ERM programs.
We believe the ORSA will provide strong evidence of the strengths of our ERM framework, measurement approaches, key assumptions
utilized in assessing our risks, and prospective solvency assessments under both normal and stressed conditions. We have implemented,
and will continue to implement, actions to prepare for compliance with this standard. See “Regulation” contained in Item 1 of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2014, for additional information regarding the ORSA.