Our risk landscape.

Our risk landscape.

The products that we write, the investments that we hold to meet our obligations and the environment in which we operate give rise to a broad range of risks. Our risk management framework, which is described overleaf, seeks to ensure that we are only exposed to those residual risks for which we have an appetite.


Investment performance

We invest in a range of investment assets including equities, bonds and property to meet the obligations from our insurance products; however, there is a risk that the income and value of these investment assets may fluctuate relative to required targets.

Interest rates and inflation

Interest rate movements and inflation can impact the value of the investment assets we hold to meet our obligations, as well as the value of the obligations themselves.


Fluctuations in exchange rates can vary both the value and income from investment assets denominated in foreign currencies, as well as the sterling profits and value of our overseas businesses.


Bond default

We hold a significant portfolio of corporate bonds to back our annuity business. The portfolio is diversified across a range of sectors and geographies, but inherently is exposed to the risk of default.

Property lending counterparties

We also hold property lending and sales and leaseback investments and are inherently exposed to the risk of default by a borrower or tenant, although we protect our interests by taking security over underlying property.

Banks and the issuers of financial instruments

Banking and money market counterparties, the issuers of financial instruments and the providers of settlement and custody services may default on their obligations to us.

Reinsurance counterparties

In using reinsurance in our annuity and protection businesses, we are exposed to the risk that a reinsurer may default, impacting the payment of claims to us and requiring us to either seek alternative reinsurance arrangements, potentially on less advantageous terms or bear the reinsured risks directly.


Longevity, mortality and morbidity

The pricing of long-term life insurance business requires assumptions to be made for future trends in the life expectancy and general health of those that we insure; with the risk that actual experience may diverge to our assumptions.

Life catastrophe

We also make assumptions about the likelihood of catastrophic events that could cause a widespread loss of life or disability within the pool of the lives that we insure.

Persistency (lapse)

We’re exposed to the risks that acquisition costs may not be recovered from product margins if policies lapse earlier than we anticipated within our pricing assumptions.


Product pricing must also take account of the future costs of product servicing, with deviations in actual costs presenting the risk of reduced product profitability.

Weather events

In pricing household insurance products, we make assumptions about the likelihood of weather events, with the risk that actual experience may diverge from assumptions.


People, process, systems and external events

Our business processes can be complex, with significant reliance placed upon a combination of IT systems and manual processes. Weakness or failure of these systems or processes could result in financial loss or adversely affect our customers.

Regulation and legislation

The markets in which we operate are highly regulated. Changes in regulation or legislation can require changes to our products or business processes. A breach of legislative or regulatory requirements may expose us to financial penalties and damage our reputation.


Contingent events

Low probability and typically extreme events that if not adequately planned for can result in unanticipated requirements for liquidity.


Failure to hold sufficient cash or suitable liquid assets to meet collateral requirements for financial instruments, resulting in unplanned disposals of assets at excessive cost.

There are potentially material correlations between all the above risks, with a single event leading to losses on multiple risk types. These correlations are difficult to estimate though they would tend to be more acute as the underlying risk scenarios become more extreme.

An assessment of the principal risks and uncertainties that may impact our business strategy, earnings or profitability are set out in the Our principal risks and uncertainties section.

Note 8 (‘asset risk’), 18 (‘insurance risk’) and 28 (‘operational risk’) to the financial statements further describe how the above risks relate to our businesses and the control techniques that we apply to manage them.

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