Risk appetite

Our risk appetite sets the ranges and limits of acceptable risk taking for the Group as a whole.

We express our overall attitude to risk using the following statements and measures

Strategy

We manage a diversified portfolio in which we accept risk in the normal course of business and aim to deliver sustainable returns on risk based capital in excess of cost of capital.

Risk appetite measure

Minimum return on equity over the planning cycle.

We have an appetite for risks we understand and are rewarded for, and which are consistent with delivery of our strategic objectives.

Risk appetite measure

Maximum economic capital to be deployed over the planning cycle.

Capital

We aim to maintain an appropriate buffer of capital resources over the minimum regulatory and economic capital requirements.

Risk appetite measure

Minimum statutory and economic capital coverage ratios.

Earnings volatility

We have a low appetite for volatility of earnings. In particular volatility arising from risks where Legal & General has more exposure than the wider market.

Risk appetite measure

Maximum acceptable variance in earnings to plan over the planning cycle.

Customer and reputation

We treat our customers with integrity and act in a manner that protects or enhances the group franchise.

Risk appetite measure

Customer and reputation risk dashboard.

Liquidity

We expect to be able to meet our payment and collateral obligations under extreme, but plausible, liquidity scenarios.

Risk appetite metric

Minimum liquidity coverage ratio.

We further define our appetite to the specific risks to which we are exposed as follows.

Market risk

We have an appetite for market risk within our annuities and with-profits businesses, and our shareholder funds, where we are rewarded for taking exposure to the risk. In particular, we have an appetite for selected risks associated with equity, bond and property investments as the asset class may provide higher investment returns relative to the risk free rate over the medium term and enable the optimisation of risk adjusted returns.

We have limited tolerance, however for significant losses or volatility from these market risks and so we seek to set clear investment risk limits which must be adhered to by group businesses. We also have limited tolerance for significant mismatches in interest rates where asset outgoes are expected to cover liability outgoes over a long time horizon, and risks arising from fluctuations in inflation. Where hedging instruments exist, we seek to remove both these risks. Similarly, we have a limited tolerance for developed country currency risk relative to the base currency of our investment assets and will selectively hedge these currency risks.

Credit risk

We have an appetite for selected credit risk to the extent that accepting this risk enables us to optimise policyholder and group risk-adjusted returns.

In particular, we accept a degree of bond default as a necessary part of bond investments. However, we have limited tolerance for significant losses from single or interrelated counterparty failures, and therefore set credit rating based exposure limits for investment portfolios as well as limits on exposures to specific sectors and single counterparties.

We also have an appetite for property direct lending counterparty risk where we can assess the risk of default on loan repayments and the taking of the risk enables us to optimise group risk adjusted returns, including those derived through a diversification of credit risk. We have limited tolerance, however, for significant loss from the failure of property lending counterparties and require that all lending is subject to formal underwriting and secured on physical property assets.

We accept the risk of reinsurer default, where the use of reinsurance is used to support our pricing strategies for longevity, mortality, morbidity and disability risks, or is used to mitigate exposure to significant accumulations of risk. However, we have limited tolerance for significant financial loss or operational disruption from a default event and we will seek to set and monitor credit risk derived exposure limits for each reinsurance counterparty with which we do business.

We have limited tolerance for the risk of default by banking and money market counterparties, the issuers of derivative financial instruments, or the providers of settlement and custody services, and will seek to actively manage all such exposures against our defined counterparty exposure limits.

Insurance risk

We have an appetite for longevity, mortality and morbidity risk together with selected household insurance risks where we expect to add value by accepting such risks, and have the capability to assess, price for and monitor trends in the risks assumed.

We have a low tolerance for not achieving our target reward for risk as a result of policies lapsing at a faster rate than that anticipated. Similarly we have a low tolerance for negative variances on product expense assumptions. We seek to manage both these risks by investigations and monitoring experience and reflect the conclusions in our product design and reserving strategies.

We have limited tolerance for an accumulation of catastrophe risk by geographic location and will seek to use a combination of underwriting, geographic concentration limits and reassurance to manage such exposures. Similarly, we have limited tolerance for exposure to weather events and will seek to purchase excess of loss reinsurance to protect against this risk.

Operational risk

We accept a degree of exposure to operational risk where exposures arise as a result of core strategic activity, however, we have very limited appetite for large operational losses due to the likely customer impact, reputational damage and opportunity costs.

We aim to implement effective controls to reduce operational risk exposures except where the costs of such controls exceed the expected benefits.

Liquidity risk

We do not seek exposure to liquidity risk, but accept that a degree of exposure will arise as a consequence of the markets in which we operate, the products that we write and through the execution of investment management strategies. However, we have no appetite to fail to meet our obligations as they fall due or to incur material losses on forced asset sales to meet obligations.

We seek to maintain at a group level sufficient liquid assets and standby facilities to meet a prudent estimate of the group’s cash outflows, as identified through annual planning processes.