STRATEGIC REPORT
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Financial risk modelling is used to assess the amount of each risk type against our capital risk appetite. This modelling is principally aligned to our regulatory capital metrics. This modelling allows the Board to understand both the risks included in the Solvency Capital Requirement (“SCR”), and how they translate into regulatory capital needs, and those not included in the SCR, such as liquidity risks. By applying stress and scenario testing, we gain insights into how risks might impact the Group in different circumstances. OWN RISK AND SOLVENCY ASSESSMENT The Group’s Own Risk and Solvency Assessment (“ORSA”) embeds comprehensive risk reviews into our Group management processes. Our annual ORSA report is a key part of our business cycle and informs strategic decision making. ORSA updates are prepared each quarter to keep the Board appraised of the Group’s evolving risk profile.
VIABILITY STATEMENT The Directors confirm that they have a reasonable expectation that the Group will continue in operation and meet its liabilities, as they fall due, over the next five years. The Directors have carried out a robust assessment of the principal risks facing the Group, including those that could threaten its business model, future performance, solvency or liquidity, and make this assessment with reference to the risk appetite of the Board and the processes and controls in place to mitigate the principal risks and uncertainties as detailed in the Strategic Report, including risks from the COVID-19 pandemic, from the UK’s withdrawal from the European Union and regulatory intervention. The Directors have also assessed the impact of complying with the updated regulatory expectations set out in SS3/17 “Solvency II: matching adjustment – illiquid unrated assets and equity release mortgages” and PS19/19 “Solvency II: Equity release mortgages – Part 2”, which will be fully phased in by the end of 2021. The impact of meeting these updated regulatory expectations is included in the Group plan approved by the Board. The Board has considered the ability of the Group to continue to write the anticipated levels of new business over the next five years and the associated capital requirements in order to write that level of new business. The Group has raised additional capital during 2020 through the issue of £250m Tier 2 capital (before issue costs), £75m of which was used to tender for part of the Group’s Tier 3 loan notes. The Group has also continued to take steps to improve its capital efficiency during 2020, including increasing the level of reinsurance for GIfl contracts, launching newmore capital-efficient products, additional no-negative equity guarantee (“NNEG”) hedging and the sale of a portion of our lifetime mortgages portfolio to further protect against UK residential property risk; reduction in new business volumes and cost saving initiatives. The Group plans to continue to strengthen its capital position in order to support the new business franchise over the next five years, through organic capital generation and through further steps to de-risk the balance sheet. The Group undertakes stress and scenario testing to consider the Group’s capacity to respond to a series of relevant financial, insurance, or operational shocks or changes to financial regulations should future circumstances or events differ from current assumptions. Such testing includes assessment of the impact of a property price shock on the Group, given that the Group holds a significant proportion of its assets in Lifetime Mortgages. The review also considers mitigating actions available to the Group should a severe stress scenario occur, such as raising further capital, varying the volumes of new business written and a scenario where the Group ceases to write new business. In particular, if adequate capital is not available to fund continued writing of material levels of new business, the scope of the Group’s business would change. In that case, even if the Group ceases to write new business, the Group would still be viable, although as a Group managing its existing book of business in run-off. The Directors note that the Group is subject to the Prudential Regulatory Regime for Insurance Groups which monitors the Group’s compliance with Solvency Capital Requirements. Given the inherent uncertainty which increases as longer time frames are considered, the Directors consider five years to be an appropriate time frame upon which they can report with a reasonable degree of confidence. A five year time frame has been selected for this statement, although the Group, as with any insurance group, has policyholder liabilities in excess of five years and therefore performs its modelling and stress and scenario testing on time frames extending to the expected settlement of these liabilities, with results reported in the Group’s ORSA. The Directors have no reason to believe that the Group will not be viable over a longer period.
3 RD LINE
Independent assurance Internal Audit is the third line of defence, offering independent challenge to the levels of assurance provided by business operations and oversight functions
Risk & Control • Provide independent challenge and assurance
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