Risk management

Effective risk management is fundamental to the success and sustainability of our business. It's one of our core commitments that our approach protects the interests of customers and avoids pricing shocks during potential extremes in an economic cycle.

Our approach to risk management is both dynamic and robust and conforms to best practice. We regularly review the risks the business faces and how we manage and control them. A culture of active risk management and control is embedded within all areas of our business and we have a dedicated risk management function and a board director with specific responsibility for risk.

Three lines of defence

See how we manage risk with our own 'three lines of defence' approach.

Risk Management Framework 2015

With our comprehensive risk management processes, we can identify and assess the potential risks that we face. Defining and evaluating these risks is key to effective mitigation.

Risk Appetite Framework


Our risk management approach through the development of a Risk Appetite Framework (RAF) formalised risk reporting, the framework builds on our strong risk management culture and aligns our strategic planning and risk management activities.

The RAF captures the business’s risk appetite against all key risk components and leverages our governance culture to provide an alert system against the set appetite levels which includes over 140 risk metrics.

The development of this framework drew on best practice and has been independently assessed. The responsibility for monitoring and review of the RAF has been included within our governance framework.

risk-appetite

Risk management

See how we assess six areas of risk management and put mitigants in place to stop them affecting our service.

Residual value

With £6bn of vehicle assets on our Balance Sheet, the effective management of residual values is key to our financial stability and ability to provide a sustainable and affordable proposition for customers

Potential impact

  • Volatility in profitability, reserves
    and pricing. Potential impact on affordability and choice

Mitigation

  • Sophisticated in-house residual value setting and forecasting process
  • Risk Capital management for asset risk using Economic Capital principles
  • Market-leading remarketing approach

Relevance to strategy

  • The setting of residual values is one of our core competencies. Our strategic approach ensures that we invest appropriately to maintain a market-leading capability (in terms of people, methodology and technology)

Insurance

Since 1 October 2013, we have retained a proportion of insurance premium exposure through our A+ rate reinsurance captive MO Reinsurance Ltd. The effective management of insurance risk is essential in enabling us to provide stable prices and affordable mobility for our customers

Potential impact

  • Financial impact of claims exceeding priced expectations
  • Failure of a reinsurer could transfer risk back to Motability Operations

Mitigation

  • Conservatively placed reinsurance programme effectively limits the Group’s net risk
  • Risk Capital in place to cover net risk
  • Access to extensive expertise
  • Diversification of supply across highly-rated reinsurers

Relevance to strategy

  • Our revised insurance arrangement has been carefully designed to ensure that the structure delivers value for customers and is sustainable into the long term

Treasury

We are financed through a combination of Debt Capital Market financing and bank term-borrowing, with aggregate committed facilities exceeding £3bn. Managing the diversity, maturity profile and mitigating exposure to interest or exchange rate movements, remains the prime focus of our Treasury function

Potential impact

  • Potential impacts include volatility in funding costs, with knock-on effects on lease pricing, and lack of availability of growth funding

Mitigation

  • Majority of funding on fixed rates or fixed through interest rate and/or foreign currency swaps
  • Balanced portfolio of funding maturities and diversification into bond market
  • Maintenance of good credit rating
  • Good treasury system, controls and governance

Relevance to strategy

  • The strategic pillar of ensuring long-term sustainability guides our approach to determining treasury policy, which is designed to be ‘vanilla’ and risk averse

Supplier failure

Failure of key manufacturer or other key Scheme supplier

Potential impact

  • Compromised customer service provision and potential financial impact of securing alternative supplier
  • In case of manufacturer failure, likely impairment of residual values and threatened availability of parts and warranties

Mitigation

  • Active monitoring of credit ratings and market announcements
  • Strong supplier relationships and communication
  • Diversification of supply
  • Diversified portfolio

Relevance to strategy

  • Through our annual strategic review we assess the performance and stability of all main Scheme suppliers, including contingency planning in the event that a major failure occurred

Credit

Risk of default of key income streams and exposure to bad debt

Potential impact

  • Potential impact on cash inflows and consequent write-off to Income Statement

Mitigation

  • Principal income stream directly from DWP – therefore minimal credit risk
  • Residual credit risks are managed through credit assessments and an effective credit control function

Relevance to strategy

  • The assignment of customers’ allowances directly to the Group is a fundamental strategic underpinning of the effective and efficient operation of the Scheme

Operational

Risk of failure of key systems, controls or processes

Potential impact

  • Potential financial and reputational risk
  • Risk of business disruption

Mitigation

  • Robust control environment
  • Active monitoring of Business Continuity and Disaster Recovery plans
  • Information Security framework aligned to best practice and industry standards

Relevance to strategy

  • We ensure that we make appropriate strategic investments in our infrastructure, systems and processes