STRATEGIC REPORT
35
EMBEDDING GOVERNANCE VIA THREE LINES OF DEFENCE
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 would 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 the risks from the UK’s withdrawal from the European Union. 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” over the next five years, including the restructuring of the Group’s internal LTM securitisation, which was effected on 31 December 2019. 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 2019 through the issue of equity, Restricted Tier 1 and Tier 2 capital, a total of £500m new capital (before issue costs), £100m of which is being used to re-finance the Partnership Life Assurance Company Limited 9.5% Tier 2 loan notes. The Group has also taken steps to improve its capital efficiency during 2019, including 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, both through organic capital generation and potentially including raising new capital, in order to achieve its stated goal of a sustainable capital model. In assessing viability the Board has considered the risk that the Group may not be able to raise new capital. 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.
1 st
Risk & Control • An established risk and control environment
BUSINESS OPERATIONS The first level of the control environment is the business operations which perform day-to-day risk management activity OVERSIGHT FUNCTIONS Oversight functions in the Company, such as Risk Management, Compliance and Chief Actuary, support the Board in setting risk appetite and defining risk and compliance policy 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
Line
2 nd
Risk & Control • Oversight of the risk and control environment • Independent challenge and reporting on the risk profile and conduct of the business • Monitoring actions being taken to mitigate risk
Line
3 rd
Risk & Control • Provide independent
challenge and assurance
Line
A Risks from regulatory changes B Risks from the economic environment C Risks from our pricing assumptions D Risks arising from operational processes and IT systems
E Risks from our chosen market environment f Risks to the Group’s brands and reputation
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