Risk Management Policy

RISK MANAGEMENT

Risk Management System

The principal function of risk management is to identify all key risks, and manage them in accordance with the Company’s procedures and policies. MNC Financial Services as one of the largest investment firms in Indonesia, MNC Financial Services (“The Company”) endeavors to strengthen its capacity to manage business risks, including those that might, directly or indirectly, affect the Company’s business continuity, which is derived from the Company’s subsidiaries.

The Company has a comprehensive and integrated risk management strategy. This ensures that the Company’s determination of risk appetite and risk tolerance is appropriate to the complexity and characteristics of its business, which in turn can generate synergy, as well as improve the capacity of business and capital. Additionally, having an integrated risk management is expected to ensure a stable financial system that grows in a sustainable manner, consequently increasing competitiveness.

The implementation of risk management refers to the Company's policies and procedures, which include the guidelines set by the Board of Directors. The Board of Directors establishes, maintains, and evaluates risk so that it can be contained within tolerable limits.

The Company has identified a number of risks that could potentially affect its business activities, and the business activities of its Subsidiaries, including:

Credit Risk

The Company’s credit risk is associated with operating and financing activities arising from the failure of its business partners or Subsidiaries to fulfill their contractual obligations, causing losses to the Company and the Subsidiaries. The credit risk of the Company and its Subsidiaries is derived from bank deposits, short-term investments, accounts receivable from leasing space, receivables from policy holders and other business receivables.

The Company and its Subsidiaries manage and control credit risk on business receivables by setting limits on the amount of acceptable risk for individual customers and monitoring the exposure associated with such limits.

To mitigate risk, it is necessary to place funds in reliable and trustworthy financial institutions, hand over account receivables to reliable third parties and select the right business partners. The risk exposure to the Company and its Subsidiaries, as well as business partners, is continuously monitored and the related aggregate value of transactions are spread among approved business associates.

Market Risk

The Company and its Subsidiaries are exposed to a risk associated with fluctuations in the value of future cash flows of a financial instrument because of changes in market prices, including foreign exchange risk and interest rate risk.

The Company and its Subsidiaries are exposed to foreign currency risk arising from monetary assets in a different currency to the functional currency of the Company. Currency risk arises from the position of the financial statements, as well as commitments and contingencies, both in terms of assets and liabilities. The Company and its Subsidiaries are also exposed to an interest rate risk, which is the risk that the fair value, or future cash flows of a financial instrument, will fluctuate because of changes in market interest rates. This risk is associated with loans of the Company and its Subsidiaries with a floating interest rate.

The Company is prudent when making transactions involving foreign currencies and interest rates. The Company and its Subsidiaries mitigate this risk by obtaining loans with a longer tenor and minimum interest rates. Therefore, exchange rate fluctuations and cash flow of debt payments do not interfere with the operational activities of the Company and its Subsidiaries.

Liquidity Risk

Risks associated with liquidity arise when the Company has an insufficient short-term income to cover short-term expenditure. The Company and its subsidiaries must maintain cash and cash equivalent balance, and continually evaluate its cash flow position and actual cash flow by matching the maturity profiles of financial assets to financial liabilities so that the revenues are sufficient to meet operational needs and to pay short-term and long-term debts of the Company and its Subsidiaries at the time of maturity.

Operational Risk

Operational risk relates to the inadequacy and/or failure of internal processes, human error, system failure or external problems that affect the operations of the Company. Operational risks in the Subsidiaries may arise from the differences between the actual results and the estimations used when an insurance product is designed, the difference between the actual claims and payment of estimated benefits, and changes in legislation and economic conditions in insurance or reinsurance. Subsidiaries also face external problems related to competition for available of land for construction and property development. The Company manages operational risks by identifying and overseeing inherent risks associated with operational activities and fraud.

Legal Risk

Legal risk is associated with weaknesses in legal documentation or non-compliance with regulations. These risks include, but are not limited to, risks arising from the possibility of default on contracts/agreement, lawsuits/claims by third parties, problems associated with standard operating procedures, weaknesses in engagements with third parties, imperfect binding of warranty, inability of the determination of court decision, court decisions that may affect the implementation of the Company's activities, violations of a provision or other external regulations. The Company strives to implement consistent internal controls in each business processes, which include composing the legal documents in accordance with the applicable regulations, and performing administrative functions in an orderly manner.

Reputation Risk

Reputation risk is associated with negative publicity relating to the Company's operations or a negative public perception of the Company. To minimize reputation risk, the Company has to maintain a good name by publishing information in a selective and transparent manner, in addition to educating customers about their rights and obligations when making transactions with the Company.

Strategic Risk

Strategic risk is partly due to the establishment and implementation of inappropriate strategies, making incorrect business decisions or lack of responsiveness to external changes. Strategic risk management is primarily conducted through a comprehensive decision-making process in the Company and its Subsidiaries, and is supported by due regard to internal and external conditions, as well as accurate and up-to-date data.

Compliance Risk

Compliance risks arise when the Company fails to comply with, or implement, legislation and other regulations that affect its business activities. Compliance risks are managed by applying the principles of GCG in business activities, and adhering to the applicable legislation and regulations.

Inter-Group Transaction Risk

Is the risk associated with the dependence of an entity, either directly or indirectly, on other entities under the Company in order to meet its written or unwritten contractual obligation agreements, which are either followed or not followed by a fund transfer. This risk is mitigated by monitoring transactions carried out between subsidiaries.

Insurance Risk

Insurance risk relates to the failure of the insurance company to meet its obligations to the policyholders as a result of the inadequacy of the risk selection process (underwriting), determination of premiums (pricing), the use of reinsurance, and/or the handling of claims. The Company mitigates its insurance risk through monitoring and providing advice about the operations conducted between subsidiaries.