AVBOB Financial Statements 2018

98 AVBOB MUTUAL ASSURANCE SOCIETY AND ITS SUBSIDIARIES NOTES TO THE SUMMARISED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018 5. Management of insurance and financial risk 5.1 Insurance and financial risk 5.2 Capital management #REF! The summarised financial statements do not include all financial risk management information and disclosures required in the annual financial statements and should be read in conjunction with the annual financial statements for the year ended 30 June 2018. The Group’s objectives when managing capital is to safeguard the Society’s ability to continue as a going concern to provide policyholder benefits. The Society ensures that regulatory capital requirements are met at all times and that it is capitalised in line with the Society's risk appetite. The Group manages capital using the capital adequacy requirement ratio (statutory capital) and by ensuring that sufficient liquid assets are available if required and that the available investments are of a suitable quality. The capital adequacy requirement is the minimum amount by which the value of assets must exceed the value of the policyholder liabilities as required by the Regulator. As a mutual society, the Society does not have access to capital markets and consequently targets to keep excess assets as a multiple of the capital adequacy requirement. If the ratio decreases, following for instance a market value shock or other catastrophe, the Board of Directors has approved planned management actions that allow the Society to remove non-vesting and special bonuses. The Society's capital adequacy ratio is 5.1 times the minimum requirements for the 2018 and 4.8 for the 2017 financial years. The Society did not experience an event which negatively impacted its capital adequacy ratio to such an extent that the planned management actions had to be invoked. The Group issues contracts that contain either insurance or financial risks, or both. Insurance risk is the risk that claims and expenses exceed the value placed on insurance liabilities. The Group’s activities expose it to a variety of financial risks: market risk (including equity risk, currency risk and interest rate risk), credit and counterparty risk, liquidity risk and contractual risk. (continued) The Society and the Group are exposed to financial risk through their financial assets, financial liabilities, reinsurance contracts and insurance liabilities. In essence, the financial risk is the possibility that adverse changes in the market will result in the Society not being able to meet its obligations. The most important elements of financial risk include market risk (equity risk, interest rate risk and currency risk), credit and counterparty risk and liquidity risk. Asset-liability modelling investigations are performed periodically by the Statutory Actuary. The outcome is used to determine whether the asset distribution guidelines unduly expose the Society to insolvency risk based on the nature of the liabilities (guaranteed and discretionary liabilities). The last exercise was performed during the 2016 financial year. The Society manages financial assets within an asset distribution analysis that was developed to maximise long- term investment yield, while taking into consideration the nature of its liabilities. The Society outsources the management of its investments to six leading asset managers. These asset managers are expected to manage their portfolio in accordance with agreed-upon mandates. In addition, total asset distribution of the Society is managed in accordance with the guidelines set by the Prudential Authority. The Society has adequate capital cover on the Solvency Assessment and Management (SAM) basis as at 1 July 2018. 98