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Meeting objectives through risk and compliance management

Meeting objectives through risk and compliance management

By Honest Madzivadondo

Senior Manager: Governance, Risk and Compliance FFR-NAM

[email protected]

In order for a risk management framework to add value, it needs to be formulated and implemented in such a way that it addresses the organisational needs. Additionally in order for an organisation to be able to ascertain and measure its needs, it has to come up with its ‘needs statement’, which is what we call the strategic plan or the business strategy.

It it is through this that I ask organisations one pertinent question: Does your organisation have an approved strategic plan?

Business Strategy

Business strategy is the art, science, and craft of formulating, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives. Strategy drives and determines the risk and compliance process. Strategies are typically planned, crafted or guided by the Senior Management, approved or authorized by the Board of directors, and then implemented under the supervision of the organization’s top management team or senior executives. It is at this level that risk appetite of the organisation is determined. The risk appetite statement is based on the broader context of the strategic, tactical, operational and compliance objectives of the company, as set out in the organizational strategy.

Risk Appetite Statement

Any organisation is made up of a number of different people, each taking decisions on behalf of the organisation on a daily basis. Unless the organisation has a defined risk appetite, it is reasonable to assume that these people will be taking decisions based on their own personal risk appetite.

The Institute of Risk Management has recommended the following steps when developing an approach to risk appetite and the production of associated risk appetite statements:

1. Identify stakeholders and their expectations, together with an analysis of the risks to strategy, tactics, operations and compliance, as set out in the risk register.

2. Establish the desired level of risk exposure that will lead to a risk appetite statement that provides a set of qualitative and quantitative statements.

3. Define the range of acceptable volatility or uncertainty around each of the types of risks leading to a statement of acceptable risk tolerances.

4. Reconcile the risk appetite, risk tolerances with the current level of risk exposure and plan actions to bring current risk exposures into line with risk appetite.

5. Formalize and ratify a risk appetite statement(s), communicate the statement with stakeholders and implement accordingly.

Does your organisation have a risk appetite statement?

Policies and Procedures

The senior management has the responsibility to formulate strategy. That strategy is designed as a screen meant to shield the business from the internal and external exposures and to maximize value out of them as well. The same team must then formulate the policies that guide the business. According to the business dictionary, policies are “principles, rules, and guidelines formulated or adopted by an organization to reach its long-term goals and typically published in a booklet or other form that is widely accessible.” Policies must be shared with everyone relevant in and outside the organisation to make them aware and to protect the organisation.

Procedures are the specific methods employed to express policies in action in day-to-day operations of the organization. Together, policies and procedures ensure that a point of view held by the governing body of an organization is translated into steps that result in an outcome compatible with that view. The policies are therefore meant to guide the decision making process in such a way that it is aligned to the strategy. Do you have policies and procedures to protect your organisation, are the employees made aware? Are your policies and procedures reviewed and updated regularly?

Compliance

In an organization there are policies and procedures that should and must be adhered to. In an industry set up, there are rules and regulations to be complied with. Some acts of non-compliance will expose the business to fines, loss of business, even loss of life, reputational damage, loss of assets, liability claims and perhaps even complete business failure. Management must formulate a process of managing corporate compliance to meet all these regulations within a workable time frame and budget. The company act, environment act, financial intelligence centre act, banking act, insurance act are some of the few legal compliance, among many, that enforces compliance.

Is your organisation submitting tax and or social security returns, and on time, do you know the implications of non-compliance? Do you understand all the acts that govern your industry, do you know the effect of non-compliance with those?

Meeting Objectives

Risk and compliance management acts as enabler that enables the organisation to meet its strategic objectives within the constraints of time, cost and scope. The cost benefit analysis is the best measure to evaluate the efficiency of your framework.

Risk management workshops facilitated by experienced risk consultancy will help the business to identify and analyse potential risks. This should be done in a practical way that will help management understand the risks it is taking and appreciate the need for risk management in enabling the business to meet objectives. Do you know and understand the sources and causes of risks that could affect your business, country and country as well as the consequences?

What are the factual risks your organization is managing? And do your colleagues also perceive these as risks? Take a moment to go back to basics and make sure you take into account the perception of risk.

Picture This

Every day, everywhere we read, see and hear about fraud cases, disciplinary hearings, labour disputes, and businesses closing down due to license cancellation. These are only a few of the loads of risks that businesses face on a daily bases and your business is not immune to that. Every organisation needs a risk management framework that addresses its set up. Prevention is better than cure.


About The Author

Sanlam 2018 Annual Results

7 March 2019

 

Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at www.sanlam.com.