Risk management policies

Each year, SACE defines the risk appetite framework (RAF), which explains the set of metrics, processes and systems supporting the proper management of the level and types of risk that SACE is willing to assume in line with its own strategic objectives. The RAF is a key instrument for SACE operations, guaranteeing sustainable development in the medium to long term and avoiding options that maximise short-term profits associated with an excessive level of risk.

The most material risks managed by SACE and its product companies fall under the following types:

• Technical risk, understood as underwriting risk and credit risk. The first case, related to the insurance portfolio, refers to the risk of incurring economic losses arising from an unfavourable trend in claims compared to that expected or from differences between the cost of claims and provisions to reserves; the second case refers to the risk of default and deterioration of the counterparty’s creditworthiness. Both are governed through prudent pricing and reserving policies, underwriting policies, monitoring techniques and active portfolio management;
• Market risk, generated by transactions on the market with respect to financial instruments, currencies and commodities, managed using ALM techniques and maintained within predetermined levels through asset allocation guidelines and quantitative risk measurement models (Market VaR);
• Operational risk: the risk of incurring losses arising from inadequate or failed internal processes, human resources and internal systems or due to external events. All companies regularly perform qualitative assessment of potential risk factors (risk self-assessments), detecting and logging effective operating losses through the loss data collection process. This data forms the input of the operational risk measurement and management process in line with market best practices;
• Liquidity risk: the risk of the company being unable to realise investments and other assets to settle its financial obligations when due. For insurance portfolios, there are no significant liquidity risks because – in addition to technical underwriting methods that allow the staggered settlement of claims – the investment policy is strictly consistent with liquidity needs. All instruments in the trading portfolios covering technical provisions are related to securities traded on regulated markets, and the short average life of overall investments ensures rapid rotation. Liquidity risk is instead material for factoring activities, essentially in the form of funding liquidity risk. In particular, it is related to the difficulty in efficiently coping with current and future cash outflows, in meeting operational business commitments for the closing of outstanding loans, and in raising funds on the market without incurring capital losses or excessive borrowing costs;
• Concentration risk, arising from exposure to counterparties, groups of related counterparties and counterparties operating in the same economic sector, carrying out the same business or belonging to the same geographic area;
• Interest rate risk, specific for factoring transactions and referring to assets other than those allocated in the trading portfolio. It represents the exposure of the financial position of the company to unfavourable changes in interest rates.

The most material risks managed by SACE and its product companies fall under the following types:

• Reputation risk: the risk of the corporate image deteriorating and conflict with customers increasing, due to the poor quality of the services offered, placement of unsuitable products or the conduct of the sales network. This risk is strongly mitigated by internal control, compliance and risk management measures, as well as internal procedures governing the operations of SACE and its product companies;
• Group risk (“contagion risk”), related to the possibility that issues at SACE or associated companies propagate with negative effects on the solvency of companies in the SACE consolidation scope. This type of risk also includes the risk of conflict of interest;
• Risk of non-compliance with regulations, arising in the event of legal or administrative sanctions, losses or damage to reputation as a result of non-compliance with laws, regulations, supervisory authority measures or self-regulations (articles of association, codes of conduct, corporate governance codes); also, the risk arising from unfavourable changes to the regulatory framework or court decisions.

The role of Risk management

The structure also defines methods and tools for risk identification, measurement and control, verifying that the procedures are suited to the risk profile of each company.

The Risk Management department:

• Proposes methods, develops models and integrated risk measurement and control systems, monitors the best allocation of capital, in compliance with corporate guidelines and regulations;
• Defines the risk appetite framework and its operational limits; it monitors compliance with the same throughout the year;
• Defines, develops and regularly reviews measurement and control systems regarding the risk/return ratio and the value creation of the individual risk-taking units;
• Calculates current and future internal capital in light of the relevant risks, ensuring the measurement and integrated control of risks based on overall exposure;
• Prepares suitable detection, assessment, monitoring and reporting procedures also through scenario analyses and stress tests;
• Oversees the levels of technical reserves in cooperation with the other departments concerned;
• Monitors operations aimed at optimising capital structure, reserve management and liquidity (ALM).

Reinsurance

Reinsurance is an important instrument in the integrated control and management system for corporate risks.

SACE’s insurance activities rely on reinsurance coverage in line with market standards and export credit best practices.

The main purposes of reinsurance are to:

• Improve the balance of the portfolio;
• Strengthen the financial soundness of the company;
• Share risk with reliable insurance counterparties;
• Stabilise economic results;
• Increase the underwriting capacity.

During the year, the Risk Management department set up a structure dedicated to Reinsurance, with the mandate of managing the operation and monitoring the risks associated with the use of reinsurance for SACE SpA, verifying consistency between the disposal plan and the reinsurance strategy approved by the Board of Directors.

Credit and guarantee portfolio

SACE’s private portfolio contains more than 2,600 counterparties at risk; 830 of these are shared with SACE BT, which follows over 93 thousand names in the Credit and Surety business. 92% of shared counterparties are Italian, mainly operating in the mechanic, metallurgical, and food and agricultural industries.

Exposure analysis shows that the main sectors at risk are infrastructure and construction, oil & gas, aeronautics, chemical and petrochemical, as well as metallurgy.

SACE Fct is exposed to more than 3,200 counterparties, of which 316 in common with SACE BT and 42 shared with SACE SpA. 74% of the counterparties shared by SACE Fct and SACE BT are Italian companies: 86% are private companies (53% in wholesale and retail); the remaining 11% are local public administration authorities (79% of which are municipalities).

86% of counterparties shared between SACE Fct and SACE are foreign (97% of which are involved in trade finance transactions), primarily active in the mechanical engineering or infrastructure and construction sectors.

18 counterparties are shared between all three companies of the SACE Group, mainly operating in the infrastructure and construction, electrical and mechanical engineering sectors.

Terms of cover