RBS 2006 Annual Report Download - page 98
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97
RBS Group • Annual Report and Accounts 2006
Operating and financial review
The tables below set out the Group’s structural foreign currency exposures.
Foreign
currency Structural
Net investments borrowings foreign
in foreign hedging net currency
operations investments exposures
2006 £m £m £m
US dollar 15,036 5,278 9,758
Euro 3,059 1,696 1,363
Swiss franc 462 457 5
Chinese RMB 3,013 — 3,013
Other non-sterling 132 107 25
21,702 7,538 14,164
2005
US dollar 15,452 6,637 8,815
Euro 2,285 139 2,146
Swiss franc 431 430 1
Chinese RMB 914 — 914
Other non-sterling 76 72 4
19,158 7,278 11,880
The increase in the US dollar open structural foreign currency exposure over 2005 was created in order to minimise the impact of
movements in the US dollar exchange rate against sterling on the Group’s capital ratios. The increase in the Chinese RMB position
reflects the uplift in the value of the Group’s strategic investment in Bank of China.
●Equity risk
Non-trading equity risk arises principally from the Group’s
strategic investments, its venture capital activities and its
general insurance business.
VaR is not an appropriate risk measure for the Group’s venture
capital investments, which comprise a mix of quoted and
unquoted investments, or its portfolio of strategic investments.
These investments are carried at fair value with changes in fair
value recorded in profit or loss, or in equity.
Insurance risk
The Group is exposed to insurance risk, either directly through
its businesses or through using insurance as a tool to reduce
other risk exposures.
An insurance contract transfers risk from the policyholder
to the insurer, whereby, in return for a premium paid, the
insurer indemnifies the policyholder on the occurrence of
specified events.
Insurance risk is the risk of fluctuations in the timing, frequency
or severity of insured events, relative to the expectations of the
Group at the time of underwriting. This risk is managed
according to the following separate components:
•Underwriting and pricing risk,
•Claims management risk,
•Reinsurance risk,
•Reserving risk
Insurance risk is predictable, especially with the analysis of
large volumes of data over time. There is, however, uncertainty
around the predictions from various sources, for example,
volatility of the weather. However, the Group has documented
risk policies, coupled with governance frameworks to oversee
and control and hence minimise the risks.
Underwriting and pricing risk
The Group manages underwriting and pricing risk through a
wide range of processes which include:
•Underwriting guidelines that detail the class, nature and type
of business that may be accepted;
•Pricing policies which are set by senior management
through pricing committees;
•Centralised control of policy wordings and any subsequent
changes.