Old Mutual Group Policy Suite

1. Details

Title Group Policy for Market Risk

Policy Specialist Alex Duncan, Director of Finance - Capital

Date Produced / Version 27 January 2009 / Version 1.0

Primary Audience Old Mutual Group and all Business Units

2. Summary
The objective of this document is to provide the mandatory minimum standards for the management of market
risk across the Old Mutual Group.

This policy applies to market risk management on both shareholder and policyholder funds.

Ownership of the policy vests with the Group Risk & Capital Committee (“GRCC”) on behalf of the Board. The
policy is to be reviewed annually by Group Risk, Group Treasury and Group Actuarial to ensure that it reflects
current practice within the Old Mutual Group, and to benchmark against international best practice.

3. Scope
In Scope: This policy is applicable to the management of market risk within the Old Mutual Group
and Business Units and applies to market risk management on both shareholder and
policyholder funds.
Out of Scope: None.

4. Risks controlled by this Policy

.
Market risk The risk that as a result of market movements, Old Mutual Group may be
exposed to fluctuations in specified financial risk factors (equity and real
estate returns, yield curve shifts and exchange rates), where the changes
are applied to assets and do not cause similar movements to the liabilities
or vice versa.
Sub risks:
Interest rate risk The risk of loss due to fluctuating interest rates that affect the firm’s
earnings and capital values (through changes in market prices of assets
and liabilities and income/interest expense).
Equity risk The risk of loss due to adverse movements in individual equity prices.
Commodity risk The risk of loss due to adverse movements in commodity prices.
Forex risk The risk of loss due to adverse movements in currency rates.
Volatility risk The risk of loss due to changes in the volatility of asset values, or in the
perception of the future volatility of asset values.

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 5. Mandatory requirements

a) Market risk governance

Each Business Unit exposed to material market risk must:

• Establish a Board or Executive Committee with responsibility for market risk; and

• Establish a market risk control function and appoint a senior executive with responsibility
for the function. The function must be independent of sales / trading functions.

At Old Mutual Group level, market risk oversight is provided through the GRCC.
Activities to enable the GRCC to fulfil its responsibilities will include:
• Providing oversight on Market Risk matters;
• Assisting the Board to formulate Market Risk Appetite;
• Reviewing and challenging Market Risk information received;
• Monitoring the effectiveness of market risk processes and reports; and
• Defining clearly articulated escalation processes for breaches in Market Risk policy.

b) Market risk appetite

Old Mutual Group is exposed to market risk in the course of operating risk business through its
Business Units. Old Mutual accepts market risk to gain reward and enhance shareholder value but it
only retains market risk in line with risk appetite.

The Old Mutual Group appetite for market risk will be defined by the GRCC, and ratified by the Group
Board. Market risk appetite limits will be allocated and cascaded to Business Units by the GRCC.

Each Business Unit exposed to market risk must define its own market risk appetite within the
framework and guidance provided by Old Mutual Group. The market risk appetite should determine
the level of market risk exposure the business is willing to incur in order to meet business objectives
and optimise returns against capital. All Business Units must aim to operate within their own market
risk appetite and tolerance levels.

c) Key sources of market risk

Old Mutual incurs market risk across all the lines of business within which it operates i.e life
assurance, general insurance, banking and asset management.

Specific key sources of market risk across the Old Mutual Group include:

• Equity risk;
• Interest rate risk;
• Commodity risk;
• Liquidity risk pricing;
• Volatility risk; and
• Foreign exchange (or currency) risk.

d) Market risk limits

Each Business Unit must define market risk limits to control and monitor market risk exposure.
Business Units should consider defining market risk limits by key sources of risk and take the
following factors into consideration when defining their own limit structures:

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 • Asset class and its nature
• Level of matching
• Country;
• Cluster / sub business unit; and
• Product line and business type.

e) Market risk monitoring and reporting

The GRCC is responsible for monitoring each Business Unit market risk exposure against market risk
appetite tolerance limits and the market risk exposure of the Old Mutual Group against the overall
market risk appetite.

All Business Units should have the ability to monitor and report on market risk on at least a monthly
basis, or more frequently if required by the Old Mutual Group Policy Owner. All Business Units should
consider that reports detailing their market risk exposure are:

• Submitted on a timely basis;

• Accurate and reflect market risk exposure;
• Highlight areas of market risk concern;
• Provided with analysis and commentary, outlining actions underway to rectify issues;
and
• Precise as possible.

All Business Units should have processes and procedures for addressing limit breaches, including
escalation of breaches. At a minimum, these processes and procedures should comply with
escalation requirements defined by the risk appetite framework.

f) Market risk metrics and techniques

Each Business Unit should define its own market risk measurement techniques taking account of the
nature of its business. Each Business Unit should adopt the following, as a minimum:

• Metrics as defined by the economic capital framework in particular the movements in

market risk capital against defined target; and
• Metrics defined by the risk appetite framework.

Particular attention should be paid in measuring second order market risks, such as in the case of
equity risk; volatility and in the case of interest rate risk; curve twists and inversions etc.

Each Business Unit should utilise stress testing and scenario analysis as techniques to test the
resilience of their business to market risk events occurring.

All Business Units should have an integrated risk and management information system that both
measures market risk exposures and provides comprehensive risk reporting.

The risk management process should incorporate controls that either prevent trading or provides
warnings to the business in the event of a limit breach.

Market risk systems should be capable of monitoring intra-day positions.

g) Pricing and valuation

All pricing and valuation models used by Business Units should be aligned to market risk appetite.
Pricing methods should be independently checked and verified on at least an annual basis.

Where embedded options or guarantees are utilised by a Business Unit, these must be priced and

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 reported on a market consistent basis.

h) Documentation and record keeping

Documentation supporting transactions giving rise to market risk must give legal title to the relevant
Old Mutual business i.e. be legally enforceable.

The business should retain records, which show the business’s transactions, market risk exposures
and applied valuation methodologies for at least 5 years.

Historical data including market rates, prices and volatilities should be stored in a separate database
and/or hard copy for 5 years

6. Policy Breaches
Breaches of this policy must be reported to Group Risk in accordance with the Group risk reporting
requirements and the Group Escalation Policy.

7. Supporting Materials
Materials Where located
Liquidity risk policy Extranet
Credit risk policy
Risk appetite policy

8. Contact point for queries or guidance

Alex Duncan Alex.Duncan@omg.co.uk +44 (0) 207 002 7272

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 Appendix A – Definitions
Market risk The risk that as a result of market movements, Old Mutual Group may be
exposed to fluctuations in specified financial risk factors (equity and real estate
returns, yield curve shifts and exchange rates), where the changes are applied
to assets not directly backing customer liabilities.
Interest rate risk The risk of loss due to fluctuating interest rates that affect the firm’s earnings
and capital values (through changes in market prices of assets and liabilities).
Equity risk The risk of loss due to adverse movements in individual equity prices.
Commodity risk The risk of loss due to adverse movements in commodity prices.
Forex risk The risk of loss due to adverse movements in currency rates.
Volatility risk The risk of loss due to changes in the volatility of asset values, or in the
perception of the future volatility of asset values
Loss Direct or estimated economic loss that can be specifically and wholly attributed
to a risk
Stop-loss limit A pre-defined value that, should the value of an asset fall below the defined
value, the asset is sold.
Stress tests A simulation applied to a business to determine potential reaction of the
business to different situations, e.g. 40% fall in global equity markets.
Scenario analysis A process whereby management define future events over a range of
confidence intervals (e.g. 1 in 10 year event, 7 in 10000 year event) and then
work through their potential consequences or effects and how they would
respond to, or benefit from, the event should it occur. Scenario analysis can
include the combination of risks from different risk types.
Market risk appetite The amount of market risk the business is willing to incur to meet its business
and strategic objectives.

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