Risk Management

Part of the Internal Audit function, risk management refers to the identification, assessment, limitation and control of principal risks arising out of VER’s own operations or external circumstances. Internal Audit seeks to minimise unforeseen risks and ensure efficient, reliable and financially sound operations.

VER’s risk management policies are controlled by the Financial Supervisory Authority. VER is also audited by the National Audit Office of Finland.
 

Risk management in practice

A risk analysis is carried out on an annual basis as part of the risk management plan and in consultation with Internal Audit to define the key operational risks, their effects and probabilities including any needs to develop the risk management capabilities as well as to chart the external operating environment with regard to investments, the probabilities and effects of the risks present in the operating environment and the potential of VER’s risk management function to regulate such risks. Additionally, risk management seeks to identify ways of controlling and limiting risks.
 
At VER, risks are divided into investment risks and operational risks. Risk management comprises both a qualitative risk management plan and a quantitative risk analysis undertaken in the form of portfolio stress testing. At its core, risk management amounts to the identification of acceptable and non-acceptable investment-related risks and the tools available to control them.
 

Risks associated with investment activities

To be able to earn a return exceeding risk-free interest, it is necessary to bear investment risks in a controlled manner. Investment risks are due to the fluctuations in the value of the investment instruments and rates of return. By managing investment risks, VER seeks to attain the long-term target returns established for it.

Investment risks are managed by adjusting the portfolio allocation, i.e., the amount of risk, to optimise the contents of the portfolio with a view to the market conditions as well as long-term target returns.

The main risks associated with the fixed-income portfolio are interest rate and credit risks. With equities, the principal risks are the share and currency risks. Alternative investments are primarily exposed to the share, interest, credit and liquidity risks. Position Management and Diversified Investments are used to limit said risks.
 

Operational risks

Operational risks refer to the risk of loss arising out of in-house processes or misguided actions due to unexpected external developments, any threat to the continuity of operations or loss of confidence in VER. As a rule, operational risks are associated with processes and procedures, IT systems and data security, reputation management, potential misconduct, outsourcing, contracts, damage to property and staff skills and capabilities.