Financial risks

In its underwriting and investment operations, Sampo Group is consciously taking certain risks to generate earnings. These earnings risks are carefully selected and actively managed. Underwriting risks are priced to reflect their inherent risk levels and the expected return of investments is compared to the related risks. Furthermore, earnings related risk exposures are adjusted continuously and their impact on the capital need is assessed regularly. Successful management of underwriting risks and investment portfolio market risks is the main source of earnings for Sampo Group companies.  Day-to-day management of earnings risks, i.e. maintaining them within given limits and authorizations is the responsibility of the business areas and the investment units. 

Some risks such as interest rate, currency and liquidity risks are by their nature simultaneously linked to various activities. In order to manage these risks efficiently, Sampo Group companies have to have a detailed understanding of expected cash flows and their variance within each of the company’s activities. In addition, a thorough understanding of how the market values of assets and liabilities may fluctuate at the total balance sheet level under different scenarios is needed. These balance sheet level risks are commonly defined as Asset and Liability Management (“ALM”) risks. In addition to interest rate, currency and liquidity risks, inflation risk and risks relating to GDP growth rates are central ALM risks in Sampo Group.

Reserve risks

Sampo Group conducts property and casualty insurance operations in a geographically diverse area in the Nordic and Baltic countries as well as in the United Kingdom. In the Nordic and Baltic countries, Sampo Group offers a full range of insurance solutions and services to private and corporate customers with Nordic corporate customers having global operations also being served by branch offices in France, Germany, the Netherlands and in the United Kingdom as well as through internationally operating partners. In the United Kingdom, Sampo Group offers motor and home insurance solutions using digital distribution channels such as price comparison websites. Sampo Group’s underwriting business is thereby well diversified across different countries, lines of business and customer segments.

Sampo Group’s most significant reserve risks are higher than expected claims inflation, increased retirement age, increased life expectancy and the occurrence of severe claims caused by catastrophic events, such as natural catastrophes like windstorms or floods. The risks stemming from the higher than expected claims inflation, increased retirement age and increased life expectancy are managed by monitoring the levels of reserves within the Sampo Group and ensuring that the reserve levels comply with the internal and regulatory guidelines. The risks related to the occurrence of severe claims caused by catastrophic events are mitigated by having a well-diversified underwriting portfolio and a group-wide and a properly assessed reinsurance program in place. The actuarial functions within the Sampo Group continuously monitor the reserve levels within the Sampo Group and develop methods and systems to support the reserve risk monitoring processes.

Market risks

Macroeconomic and financial market developments affect Sampo Group primarily through the market risk exposures it carries via its insurance company investment portfolios and insurance liabilities and through strategic investments. Over time, adverse macroeconomic effects, potentially also following economic policy actions or geopolitical risks, could also have an impact on Sampo’s operational business, for example by reducing economic growth or increasing claims costs.

Insurance liabilities are the starting point for investment activities in all Sampo Group insurance entities. As a result, the structures and risks of the investment portfolios differ in the Group’s insurance entities.

To maintain the Asset and Liability Management (ALM) risk within risk appetite, the technical provisions may be matched by investing in fixed income instruments and by using currency and interest rate derivatives. Currently, Sampo Group is economically exposed to a fall in interest rates. This follows from the duration of insurance liabilities being longer than the fixed income asset duration. Sampo Group benefits when interest rates rise, as the economic value of insurance liabilities decreases more than the value of assets backing them.

The insurance entities reduce the currency risk by matching technical provisions with investment assets in the corresponding currencies or by using currency derivatives. Balance sheet FX risk at Sampo Group is mainly driven by translation risks, i.e. the non-EUR net assets over liabilities in the subsidiaries and branches.

Investment activities and market risk taking are arranged pro-actively in order to diversify single name risks, except with regards to Nordic banks, where most Sampo Group companies have placed their extra funds in short-term money market assets and cash.

Liquidity risk at Sampo Group is limited. Insurance entities collect premiums mainly in advance and large claims payments are usually known a long time before they fall due. Liquidity risk is reduced by investing in assets that are readily tradable in liquid markets. Sampo Group’s parent company Sampo Plc may also provide liquidity to Group companies.

Fixed income investments form the core of the Sampo Group investment portfolio. Listed equities, real estate and alternative investments supplement investments in fixed income assets.

Regarding fixed income and equity exposures, financial institutions and covered bonds have a material weight in the group-wide portfolios, whereas the role of public sector investments is quite limited. Most of these assets are issued by Nordic corporates and institutions. Most corporate issuers, although being based in the Nordic countries, are operating at global markets and hence their performance is not as dependent on the Nordic markets.

Macroeconomic and financial market developments affect Sampo Group primarily through the market risk exposures it carries via its insurance company investment portfolios and insurance liabilities and through strategic investments. Over time, adverse macroeconomic effects, potentially also following economic policy actions or geopolitical risks, could also have an impact on Sampo’s operational business, for example by reducing economic growth or increasing claims costs.

More up-to-date information on the major risks and uncertainties for Sampo Group in the near-term: