Risk Management at Old Mutual Group
Old Mutual risk management strategies are shaped by the potential impacts on the company's reputation, earnings, liquidity and future sustainability. They are strategic, and the companies closely monitor them. Owing to various strategic changes that the company underwent in the period under review, strategic execution risk is the principal risk facing Old Mutual. The company is faced with other principal risks including, economic situations in the country of operation, shifting credit risk across the group and currency devaluations. There are also other inherent potential risks owing to the changing customer needs, market exposures, liability insurance risks, and interest volatility. These inherent risks affect the company's capital and consistency in earnings. We shall discuss in details the above risks in the section below.
Theoretical Value of the Risk Management Activity
For us to understand the company's risk management strategies and assess their effectiveness, we need first to detail the theoretical value of the risk management activities. The company is faced with various risks, and the management is always striving to manage the said risks and ensure that it does not get too exposed. The risks facing the company differ in magnitude and potential impacts and thus demands specified actions to manage them. Below are the risks that Old Mutual faces in its operations.
Strategic execution risk and pace change across the organization
The risk assessment team has identified the changing pace as a potential risk in the foreseeable future. The company is expanding its operations into the key African market and at the same time consolidating operations in the South African Market. The company is also focusing on integrating the recent acquisition into the company business model. The company plans to expand and reach a multi-boutique asset management business through series of mergers and acquisition. All these strategies are geared towards the company goals of becoming the financial leader across all the markets and in all business segments. The company has had a series of acquisitions and mergers in the period under review. Since it is in the process of integrating operations, the company's wealth is at risk during this transition period.
Mitigation strategy
The company has instituted a strong governance structure that comprises a blend of group executives, local executives and as well non-executive directors that are equipped to handle any challenge that might arise. The operations in business units are supervised by an oversight committee at the executive and as well at the board level to oversee the strategic information technology. For the key projects, there is a control both at the group and at the strategy level. The impacts of any change in these processes are monitored through the group monitoring and governance processes.
Uncertain Economic Strategies in SA
A significant portion of the company income is derived from the South African market. Thus, if the economic conditions are harsh such that the customers are unable to raise their premiums, cancel the existing processes, and be unable to invest in future saving and insurance programs. This will affect the growth of the business both in the long run and as well in the short run. Low-interest income from the bank affects interest income. In general, weak economic forum affects the credit risks of the customers and thus indirectly affecting the business.
Mitigation strategies
The company monitors external economic factors and incorporate that into the business model periodically. The business model is occasionally tested to evaluate the resilience against changes in the macroeconomic variations. The company has tailored some products solutions that will help the customers through tough financial times. The business can manage premium collections and can realize any early sign of distress in the economic sector. The group's future strategy is to expand its portfolio to other markets to spread the risks.
Credit Risk and Location of Credit Risks
The exposure to credit risk is as a result of the company’s ownership of Nedbank. Profits in the banking sector are sensitive to slight movement in the credit loss ratio. However, the exposure to the credit risk of the bank is limited to the earnings as the liquidity and credit risks are met from the bank’s resources. The credit risk owing to unsecured lending also emanates from other financial institutions that are under the Old Mutual group. They include the Old Mutual unsecured loans, Faulu, a Kenyan microfinance, and CABS- a building society that is based in Zimbabwe.
Mitigation Strategy
The company monitors the credit loss ratio on ongoing cases. In the period under review, the credit risk of the group as a whole increased owing to the acquisition of Faulu Kenya. The credit risk remains within appetite. The challenge posed by the economic factors in South Africa that are beyond the company ability still continue to exert pressure on the credit risks of the company. The portion of the unsecured loan in comparison to the secure loan remains relatively low as compared to the secured portion. The credit risk rates will continue to rise owing to the company strategy to increase the lending through the lending arm of the business. The company lending business carries out periodic stress testing to ascertain the credit risk exposure. The bank portfolios are built such that they offer more robust, consistent long-term returns. Large concentrations are supervised from the group level.
Currency Translation Risk and Capital Allocation
The company dividends, group earnings, surplus capital, are denominated in sterling. However, a majority of the group earnings are in SA Rand. Thus, translation of the earning is subjected to exchange rate fluctuation risks. The capital is held in SA Rand, and thus, the losses can only be realized if there was a movement involving large amounts, for example in aid of a subsidiary in financial distress. The company aims at maintaining a strong group balance sheet that can withstand minor shocks.
Mitigation Strategies
In the period under review, the South African Rand depreciated by 27% from the previous year value, an indication of the economic situation I South Africa and a declined US appetite for the emerging market investments. The company's outlook points to further weakness in the SA Rand. If the international interest rises, most external investors will offload their investments in the government bonds. The company holds the capital resources and matched currencies and service interest on debts on matched earnings. The income earned in other currencies is closely monitored and the dividend paid is also monitored to address the risk. In addition to that, the company uses currency forward contracts to hedge the expected Rand to keep the payable dividend. The company carries out regular testing of the stress in pilot situation to assess the ability of the SA Rand held capital to withstand fluctuation and as well ability to pay dividends. As part of the mitigation strategy, the group plans to extend the currency development.
Changing Industry Shape as a Result of Changing Customer Needs and Regulations
The key milestone for this industry is to attract and retain new customers over a long time. The regulations, customer needs, and the business environment are constantly evolving and thus putting the business at risk if it will not be able to adopt at the same pace. The ability to offer advice to the consumers is affected by the changing regulations such as the Retail Distribution Review RDR) and the new law that allows the withdrawal of pensions that came to effect as from April 2015. In South Africa, there are new requirements including fair treatment of the customers, Retirement Fund Reform amongst other regulations are likely to change the way business are conducted. The increase in regulation complicates the business process and as a result leads to an increase in the cost of doing business. There is also an increase in the adoption of the use of information technology in the processing of payments and other business functions. This poses a cyber security risk and an additional cost of maintaining the security of the information.
Mitigation strategies
The customer needs are evolving, the customers today need direct control of their finances while at the same time have that personal customer service experience. Regulators are increasingly moving towards fair treatment of customers. Companies thus should adapt to these changes while keeping tab with their long-term strategies. As a mitigation strategy, companies are adopting the new IT policies, which allow them to change with the changing needs of the customers. Old Mutual brand promise is a commitment to responsible business with the strong focus on customers enables them to change swiftly to the changing regulations. The company engages the regulators in the decision making to avoid drastic changes that might negatively affect the customers. It also has a group-wide Information Security Steering Committee policy that is responsible for coming up with measures that are aimed at reducing the risk associated with information systems security. Old Mutual has adopted a leadership strategy that prioritizes customer issues, and thus always acts in the interests of the customers (Old Mutual Financial Report, 2014).
Effectiveness of their Risk Appetite Framework
Old Mutual is financial management firm that drives its numbers through the management of other people's assets and insurance premium sales. The company has diversified its investment to include various financial institutions in various countries in Africa. For an asset management company, the need to venture into risky ventures is higher than in other organization. The company value chain and position amongst the competition are based on the ability to deliver returns and at the same time lower the risks. Thus, a balance has to be reached between the risk and the returns. Whereas the company could invest in less risky assets, the returns are relatively low and thus it will lose the ground on returns. If the company focuses on the high return high-risk venture, in the case of a huge loss, the company could lose its reputation regarding secure investments (Galai & Mark, 2000).
In the mitigation of exchange rate risks and fluctuations of prices, most companies use various derivative techniques to caution against that risk. There are however some scholars and investors who argues that the use of derivatives is not necessary as it lowers the potential benefits that a company can gain. In our case, old mutual with a strong balance sheet can afford some of the risks in foreign exchange fluctuations, it can also lower the dividends paid thus it may not be necessary to incur all those expenses (Smithson & Simkins, 2005). . Other scholars recommend changes in the risk management strategy to a more targeted ones where by companies will only hedge when risk when there is need (Stulz, 1996).
The old Mutual Group has no appetite for treating any of the concerned parties unfairly, reasonably and in an honest manner. All decisions are vetted against the potential impacts to all the stakeholders. In situations where decisions are in the gray area, and no outright correct decision can be reached, the concerned parties are advised to decide to lean on the side that offers a caution. In the situations where breaches or errors have been identified, the concerned party should escalate the matter to the responsible individual. The group has no appetite for any employee being not aware of what is expected of them. All individual employees are supposed to fulfill their duties in an articulate way and strive to steer the company towards its goals and obligations Holmes, 2002). This strategy, combined with the responsible business policy caution the company from various risks (Douglas, 2009).
Old Mutual strategy statement is “Creating enterprise value by growing in markets of greatest opportunity and where we have a strong competitive positioning while becoming recognized as the financial services leader in responsible business.” From the strategy statement, we can deduce the fact that company aims at leading in the financial services sector while at the same time; there is a need for responsible investment. The statement indicates that the firm is risk averse and only takes a considerable amount of risk to avoid irregular incomes in its books. Thus, an investment strategy that delivers consistent returns while keeping the risk low is an ideal solution for the organization. To be able to work within this strategy, the company fosters a close relationship with the governments and highlights the possible risks that might arise from various.
Old Mutual is divided into four market segments that include the Old Mutual United Kingdom, Old Mutual United States, Old Mutual Emerging Markets, and finally Nedbank. The company formulates strategies and risk assessment at group levels, which are then customized to meet the specific needs of the region that it operates. In our case, the emerging market has some unique risk and as well opportunities that the company targets. The unpredictable currency fluctuations in the emerging markets, the unpredictable interests both expenses and income) are just a few risks that a company is operating in such regions faces. Further risk exposures are discussed above.
Defining the appropriate risk appetite for an organization is a daunting task for any enterprise risk management. The terms mean different think for different organizations as coined by the management cultures, industry regulation, and the company both short-term and long-term objectives (Ashby, . Old Mutual objective has been to attain a financial services leadership position in the markets that it serves. To achieve this, the company has to align its investment strategies to the goals and objectives. Risk appetite works in retrospect with the risk tolerance (Crouhy, 2000). A company can only pursue a risk that it can cope with. Risk mutual having diversified its investments across Africa, it has vast assets that enable it to have a higher risk tolerance and thus it can pursue relatively large risks (Krause, 2009).
Effectiveness of their enterprise risk management framework
Old Mutual operates under an operation policy that is referred to as responsible policy. This policy is designed to ensure that the company can reduce the ethical, social, and environmental risks. If proper internal controls are not in place, or the environment, ineffective performance management, and reward processes that foster unhealthy competitions and the ability, ineffective evaluation of the legal, ethical, commercial or other competitions can result to various risks. This model also aims at directing the business towards a sustainable future. These policies support the groups subscription to other external regulations such as the United Nations Global Compact, OECD Organization for Economic Co-operation and Development), and International Labor Organization amongst others.
The responsible business policy is based on the five principles as follow: responsible to the customers, investment, to the employees, to the community and the environmental management. This policy is set in the guidance of the management of the retirement benefits. In line with Enterprise Management Risk processes, the Responsible Business Policy aims at standardizing the operations while reducing the risks that might arise.
This strategy is aligned with the company goals and objectives. Thus, the company can mitigate the following risks, reputational risks, strategic risks, investment risks, legal risks, regulatory risks, operational risks, social and environmental risks, external validation risks, and employee risks (Bromiley, et.al., 2014).
Old Mutual has been in operation for decades and has managed to build strong, trusted brands and a reputable organization. The company has been able to maintain a strong and steady growth in its core business. This led to the diversification of the company assets and as well to business portfolio. Though the responsible business policy, Old Mutual has managed to build a strong trust and reputation amongst the customers.
Many studies have been carried out on the effectiveness risk management strategies for insurance and other financial services business. Many scholars acknowledge that risk management adds value to an organization by cautioning against volatile income (Smithson & Simkins, 2005 & Chew, 2008). Bromiley (2014) suggests that companies should adopt a new approach to the management of the risks. Enterprise Risk Management (ERM) proposes an approach system whereby all organization's risks are integrated, and the corporate strategy and governance be aligned to caution the organization against those needs. Some organizations risk strategies fails militate against the risks despite efforts by the management. This happens due to the presence of forces that are beyond the organizational control (Hubbard, 2009).
Does the corporate governance arrangement adequately support their risk management activities?
Policies, structures and company cultures without the proper corporate governance structures cannot adequately meet the expected goals. Corporate governance defines the company organization culture and determines their ability to take risks (Eling & Marek, 2014) The Company is headed by a proactive board of directors at group level who is responsible for steering the company. The company abides by the United Kingdom corporate governance structure and as well to the London Stock Exchange rules and regulations. It also abides by the rules of the other stock markets where it is listed. The company has 13 directors, of which three are executive, and the rest are non-executive.
The company is structured such that customers’ interests are the center of all operations. The management recognizes the importance of treating the customers’ right. The management also focuses on risk management and operational efficiency. The overall group has four market segments, each with strong prospects for growth, strong balance sheet, a good market share, and a strong governance structure. All the governance team members work in line with company responsible business policy that aims at reducing the risk to all the stake holders in their respective groups.
Conclusion
Old Mutual has a strong risk management structure, strategy and a good governance team that is aimed at overseeing operations and risk management programs. The company has no appetite for risky ventures. Instead, it operates on a responsible business policy that dictates minimum risks and cautions in decisions making. The company is faced with many risks that include the macro-economic factors risks; industry risks a firm's specific risks. Owing to a good governance and ERM strategies, the company has managed to grow beyond these risks and build a strong brand.
Reference List
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Old Mutual Group, 2014. Annual Report 2013-2014. [Online]. Available at <https://www.google.com/search?q=old+mutual+2014+fianncial+statement&ie=utf- 8&oe=utf-8> [Accessed on April 18, 2016].
