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Business risk is the risk of losses due to changes in the competitive environment and/or lack of internal operational flexibility. Unexpected abrupt changes or already identified, but internally neglected trends can cause larger than expected fluctuations in profitability when volumes, margins, costs and capital charges change and in the long run they may also endanger the existence of Sampo Group’s business models.
External drivers behind changes in volumes, margins, costs and capital charges are varied, including for instance general economic development, changes in commonly shared values, developments in the institutional and physical environment and technological innovations.
Due to the predominantly external nature of the drivers and development in the competitive environment, managing business risks is the responsibility of the executive level senior management. Proactive strategic decision making is the central tool in managing business risks, which relate to the competitive advantage. The maintenance of internal operational flexibility – i.e. the ability to adjust the business model and cost structure when needed – is also an efficient tool in managing business risks.
Business risks do not have the regulatory capital charge, although they may be a material source of earnings volatility. Because of this, business risks may have an effect on the amount and structure of the actual capital base, if deemed prudent in the existing business environment.
Because external drivers are inter-connected, the customer preferences and demand can change unpredictably and there may be a need to change regulations as well. Currently the themes of sustainable business practices in general and especially the issues related to environment, society and governance, are changing the preferences and values of different stakeholders and, as a result, competitive environment is also changing in different ways. In case company´s internal understanding of needed changes or willingness and ability to act accordingly is inadequate and competitors are more able to meet clients´ and regulation´s altered expectations, the company is highly exposed to business risk.