As a provider of risk products, including general insurance, we recognise that the management of risk lies at the heart of our business. As a result, effective risk management capabilities are an area where we can gain real competitive advantage.

We manage the Group’s capital and the risks to which it is exposed, with the aim that we would remain financially strong even following a shock to the markets we operate in.

The Group’s risk management framework seeks to ensure that the Group is only exposed to those residual elements of risk that are within our risk appetite, and that risk adjusted capital in respect of residual risk is accurately calculated. The framework includes structured risk identification and assessment procedures, minimum standards of control defined within formal risk management policies, and mandatory risk reporting requirements.

Our risk appetite sets out our tolerance to risk exposures as well as our approach to risk management and return optimisation. We monitor our risk profile continuously against agreed limits.

We operate a continuous risk identification and assessment process under which all our businesses consider the profile of their risks and potential changes as the business develops and markets change. Identified risks are recorded and responsibility is allocated to an owner to assess and manage the risk within agreed tolerances.

Risk mitigation plans are developed and implemented to manage or respond to risks. These plans are kept under regular review to ensure that they remain robust and appropriate as the nature, probability or impact of risks may change over time.

The Group’s approach to the identification, assessment and management of risk is underpinned by a Group-wide programme of stress and scenario tests. These tests aim to demonstrate the resilience of our balance sheet to a range of alternative stresses and scenarios and to ensure that we maintain the target level of capital that we wish to hold above our solvency requirements.

Recent stress tests have included consideration of the impact of recessionary conditions, sovereign debt crisis and the effects of inflation. The range of stress tests performed include reverse stress tests.

Regular reporting of risks and the mitigation strategies occurs through individual business level risk committees to the executive level risk committees, and ultimately to the Board committees.

The operation of the Group’s risk management framework is overseen by the Group Risk Committee. Oversight of the management of the Group’s exposures to market, insurance, counterparty credit, operational, liquidity and group risk are set out in the table below.

Note 48 describes the risks to which our core product lines are exposed and our approach to managing those risks so as to ensure that the residual risk exposures are within acceptable tolerances agreed by the Board, together with sensitivity analysis setting out how changes in a range of risk factors may impact our results. We set out overleaf an analysis of the current principal risks and uncertainties.