Identifying and controlling risks

Identifying and controlling risksSCOR aims to provide attractive long-term returns and a transparent level of earnings volatility for its shareholders, through the careful management of diversified risk portfolios and the capital allocated to the risks they contain. This can be particularly challenging during periods of extreme stress, such as the one we have been experiencing since 2008.
Nevertheless, the Group has been able to demonstrate that it is successfully managing the financial market crisis with no impact on solvency, while still delivering profitability in line with its strategic plans.SCOR’s ERM strategy is built around the Capital Shield policy, which determines the risk appetite of the GroupThe cornerstone of the SCOR group’s ERM Framework is the "Capital Shield" policy. The purpose of the Capital Shield policy is to ensure that the Group reconciles its risk and return objectives, risk objectives being measured in terms of earnings volatility and Group solvency. The policy is based on an economic value approach in order to take into account all potential profits and losses, some of which are not immediately recognisable from an accounting point of view.

The Capital Shield policy is based on two concepts. Firstly, our gross exposure is mitigated through retrocession and other hedging mechanisms to achieve an acceptable net risk exposure. Secondly, through the device of Buffer Capital, SCOR calibrates the amount of target capital necessary to respect the Group’s riskreturn objectives.

SCOR’s Board and Executive Management team regularly review the Group’s Risk Profile to ensure that it remains aligned with the Group’s Risk Appetite. SCOR uses various mechanisms within its comprehensive ERM Framework to manage the Group's Risk Profile. These mechanisms enable SCOR to identify, assess, control and monitor specific risks in order to:

• take mitigating action to reduce the Group’s retained exposure to specific risks and to ensure that the Risk Tolerance limits defined above are not breached,
• take optimising action to capitalise on the risk-return ratio.

SCOR’s Enterprise Risk Management policy is rated favourably by the rating agenciesThe stability of SCOR’s results confirms the success of our strategic risk management, which was recognised in September 2009 by Standard & Poor's when they upgraded SCOR’s Enterprise Risk Management (ERM) rating from "adequate" to "strong". According to Standard & Poor’s, the ERM rating upgrade reflects the Group’s excellent risk management culture, excellent emerging risk management, strong strategic risk management and strong or at least adequate risk controls for the Group’s major risks. The rating agency further noted that SCOR’s risk appetite, product and investment mix and financial targets should produce strong earnings, with lower volatility than many of its peers in the reinsurance sector. The ERM upgrade by S&P is a further testimony to the extensive efforts that the Group has made at all levels, and will enhance the Group’s strong franchise even further.


Recent practical examples of risk management action

• The Group has a policy of pursuing "gardening deals" by evaluating the potential acquisition of small to medium-sized portfolios, for instance from insurers or reinsurers who are exiting a line of business. These can frequently represent attractive riskreturn opportunities and often provide the added benefit of increased diversification to the Group’s Risk Profile. This policy led to the purchase of the French reinsurance company Prévoyance Re in 2008 and of XLRe’s USA Life portfolio in 2009.
• In terms of managing its assets, SCOR pursues a conservative strategy and as a consequence has limited exposure to illiquid assets. The majority of the portfolio is invested in high quality securities, mainly in bonds with a small part in equities. Decisions taken during the global economic crisis were aimed at protecting the value of the Group against a possible collapse in asset prices and systemic counterparty risks. The Group’s Executive Management decided to convert as many assets as possible into cash and highly liquid assets, resulting in a lower return on investments but with the benefit of immunization against market difficulties. Given the outstanding amounts of liquidity in the markets and the explosion of public debt, the Group’s main concern at the moment is the highly possible return of inflation in the coming years. In order to protect the balance sheet, the Group Investment Committee decided at the beginning of 2009 to increase the proportion of its assets invested in inflation-linked bonds and variable bonds.
• In 2008 the Group decided to increase its exposure to US Natural Catastrophes, since the Group had relatively limited exposure in terms of its capital base following the integration of Converium. Due to the subsequent increased diversification of the portfolio, the extra required capital was comparatively low and the returns were attractive.
  
  Many of SCOR’s risk management structures and mechanisms have been established or optimised over the last few years in anticipation of known or expected Solvency II requirements. Thus, SCOR has made rapid progress in the development of its internal model, which generates the Group’s Risk Profile as well as the internal capital requirements. The model forms part of a comprehensive ERM Framework, which incorporates a whole range of risk management mechanisms for identifying, assessing, controlling, monitoring and managing risks. Examples of such mechanisms are: the Risk Enquiry process, the Emerging Risks process, the Extreme Scenario process, Credit Risk Monitoring, the Internal Control System and ERM objectives for all staff.

SCOR'S ERM Framework