Solvency and Financial Condition Report ( SFCR )

Transcription

1 Solvency and Financial Condition Report ( SFCR ) Porsche International Reinsurance dac For the financial year ended 31 December 2016 Page 1 of 37

2 Contents Executive Summary... 4 A Business and performance... 5 A.1 Business and external environment... 5 A.2 Objectives and strategies... 6 A.3 Performance from underwriting activities... 6 A.4 Performance from investment activities... 8 A.5 Operating/other expenses... 9 A.6 Any other disclosures... 9 B System of governance B.1 General governance arrangements B.2 Fit and proper B.3 Risk management system B.4 Own Risk and Solvency Assessment ( ORSA ) B.5 Internal control B.6 Internal audit function B.7 Actuarial function B.8 Outsourcing B.9 Any other disclosures C Risk management C.1 Underwriting risk C.2 Market risk C.3 Credit risk C.4 Liquidity risk C.5 ALM risk C.6 Operational risk C.7 Other material risks C.8 The nature of material risk exposures C.9 The nature of material risk concentrations C.10 Risk mitigation practices C.11 Risk sensitivities C.12 Any other disclosures D Regulatory balance sheet D.1 Assets Page 2 of 37

3 D.2 Technical provisions D.3 Other liabilities D.4 Any other disclosures E Capital management E.1 Own funds E.2 Minimum capital requirement and solvency capital requirement E.3 The option set out in Article 305b used for the calculation of its solvency capital requirement E.4 Differences between the standard formula and any internal models used E.5 Non-compliance with the minimum capital requirement and significant noncompliance with the solvency capital requirement E.6 Any other disclosures F Appendices - Annual Quantitative Reporting Templates F.1 Balance Sheet F.1 Balance Sheet (Continued) F.2 Premiums, claims and expenses by line of business F.3 Premiums, claims and expenses by country F.4 Non-Life Technical Provisions F.5 Non-Life Insurance Claims Information F.6 Own Funds F.7 Solvency Capital Requirement F.8 Minimum Capital Requirement Page 3 of 37

4 Executive Summary Porsche International Reinsurance dac ( PIRD ) is a captive reinsurance company providing reinsurance for preowned Porsche car warranties to the fronting insurer Allianz Versicherungs AG, Germany ( Allianz ). The financial performance of the company continues to be strong as a result of the combination of the on-going levels of new business being written together with a low blended portfolio loss ratio. The table below summarises both the new business volumes (by unit and value) for the last 3 years together with development of net underwriting profit for those years New Business volumes # 44,972 43,385 44,749 Written Premiums ( 000s) 59,239 63,602 60,868 Net underwriting profit ( 000s) 16,842 21,787 23,979 Solvency Capital Requirements and Minimum Capital Requirement calculations have been undertaken at relevant intervals during the Solvency II preparatory stage and quarterly since the commencement of Solvency II reporting on 1 January A summary of the quarterly calculations is provided in the table below: Day 1 Q Q Q Annual 2016 SCR 155% 161% 145% 150% 152% MCR 622% 643% 578% 599% 609% The business of PIRD is supported through the corporate governance structures in place including risk management, compliance, actuarial and internal audit functions. Given the size, nature and complexity of the organisation, core functions are outsourced to external providers under outsource arrangements and deliverables and services are managed closely through regular review by management of the Company against the various SLAs in place. The Board of the company meets at least twice annually where management provides updates in relation to new business volumes, financial performance, compliance, risk management, Solvency II reporting, loss ratios and reserves as well as receiving direct updates from the Actuarial, Risk and Internal Audit functions. The Company operates a straightforward investment policy placing short term time deposits on a revolving basis between (currently) three counterparties. This ensures adequate liquidity is available at all times. The solvency of the business has remained strong throughout the period under review and there are no plans to materially change the business model. Page 4 of 37

5 A Business and performance A.1 Business and external environment Porsche International Reinsurance dac ( the Company ) is a captive reinsurance company incorporated in Ireland and regulated by the Central Bank of Ireland. The Company provides reinsurance for the European Porsche Approved Warranty product for used Porsche vehicles. The warranties have durations of either 12 or 24 months and are offered on vehicles up to 9 years old (8 in the case of 24 month warranties) and with mileage limits of 125,000 miles (200,000 kilometres). A used Porsche vehicle requires inspection at a Porsche Centre/Service Centre prior to a new policy being issued. The fronting insurer is Allianz Versicherungs AG, Germany ( Allianz ) and the Company accepts a 100% quota share of all these warranty policies. The following table provides an overview of new business volume for the year ended 31 December 2016: Warranty Type Variance 12 months 24,841 28,005-11% 24 months 19,908 15,380 29% Total 44,749 43,385 3% While overall volume of new business has remained consistent year on year, there has been a reduction in 1 year warranty policies and a comparative increase in 2 year warranty policies. This movement is a result of a strategic decision by Dr. Ing. h.c. F. Porsche AG ( Porsche AG ) to increase the sale of 2 year warranties from Q The Company s operating and registered address is: Porsche International Reinsurance dac 1 Exchange Place IFSC Dublin 1 Ireland The Central Bank of Ireland ( CBI ) is responsible for the supervision of the Company. The CBI s address is: Central Bank of Ireland North Wall Quay PO Box 559 Dublin 1 Ireland Page 5 of 37

6 The Company s external auditor is PricewaterhouseCoopers, Chartered Accountants and Statutory Audit Firm, One Spencer Dock, North Wall Quay, Dublin 1 Ireland. The Company is a wholly owned subsidiary of Porsche International Financing dac ( PIF ), a company incorporated in Ireland which provides treasury services to the worldwide subsidiary companies of Porsche AG. PIF is a wholly owned subsidiary of Porsche AG, the automotive manufacturing company with its headquarters in Stuttgart, Germany. Porsche AG is a wholly owned subsidiary of Porsche Holding Stuttgart GmbH and Porsche Holding Stuttgart GmbH is wholly owned by Volkswagen Aktiengesellschaft ( VW AG ). VW AG, the multinational automotive manufacturing company, is the ultimate parent company of the Group which has its headquarters in Wolfsburg, Lower Saxony, Germany. The reporting currency of the Company is the Euro ( ). All financial figures quoted in this report are in 000s. A.2 Objectives and strategies The Company has a single line of business which is the reinsurance of Porsche Approved Warranties in Europe. The Company takes a quota share of 100% of these warranty policies from the fronting insurer Allianz in Germany. There have been no changes to the objectives or strategy of the company in the year under review. A.3 Performance from underwriting activities As stated previously, the underlying warranty policies are directly linked to the volume of sales of Porsche Approved Warranty products in Europe. In order of total volume of warranties for 2016, the following is a summary of the top 10 countries and others (with comparatives for 2015): Country of Origin Germany 19,558 19,496 United Kingdom 7,707 7,380 Switzerland 5,867 5,614 France 2,691 2,370 Italy 2,470 2,060 Austria 1,637 1,479 Spain 1,637 1,535 Netherlands 1, Poland Portugal Others 1,057 1,588 TOTAL 44,749 43,385 The reinsurance of these policies is governed by the 100% quota share reinsurance agreement between the Company and the fronting insurer Allianz Versicherungs AG, Germany Page 6 of 37

7 The following is a summary of underwriting performance for the Company as at 31 December 2016: 000s Variance Gross Written Premiums 60,868 63,602-4% Gross Earned Premiums 60,546 57,308 6% Claims Incurred (35,269) (34,487) 2% Acquisition costs (1,298) (1,034) 25% TOTAL 23,979 21,787 10% While total contract numbers have increased by 3% year on year, gross written premiums have decreased in monetary terms by around 4%. This is predominantly due to the Euro equivalent value of GBP warranty contracts sold where the average GBP/EUR exchange rate has decreased from a 0.72 average in 2015 to a 0.82 average in With a mature portfolio as at the end of 31 December 2016, the level of earned premiums was closely linked to that of written premiums with only a small movement of around 300k between opening and closing unearned premiums reserve for the year. Claims Incurred are analysed as follows: 000s Variance Claims Paid 34,289 27,345 25% Opening Claims payable provision (17,393) (12,146) 43% Closing Claims payable provision 18,070 17,393 4% Opening IBNR (9,076) (7,181) 26% Closing IBNR 9,379 9,076 3% Claims Incurred 35,269 34,487 2% The loss ratios of claims incurred as a percentage of earned premiums have remained consistent year on year. Acquisition costs are analysed as follows: 000s Variance Acquisition Costs 1,296 1,691-23% Opening DAC 1,675 1,018 64% Closing DAC (1,673) (1,675) 0% TOTAL 1,298 1,034 25% The acquisition costs attributable to gross written premiums reduced by 23% year on year. This is as a direct result of a reduction in commissions on new business from 2.65% in 2015 to 2.15% in Page 7 of 37

8 A.4 Performance from investment activities The Investment Policy of the Company is straightforward with liquidity held in the form of either money market deposits with external banking counterparties or intercompany deposits with the parent company PIF. Cash balances are also held with Barclays Bank Ireland plc. Deposits with external banking counterparties are subject to wider Group approved limits and the placing of deposits with these banks requires completion of standard KYC processes. Deposits are generally short term in nature with a maximum up to 12 months. Single deposits with both internal and external counterparties are subject to limits determined and communicated by VW Group Treasury and Porsche AG Treasury. It is the aim of the Company to maintain diversification in its investment strategy by placing deposits with a minimum of three counterparties. This approach is reviewed on an on-going basis and particularly during the ORSA process. Appropriate action would be taken by the Board to adjust this strategy where necessary. The below table summarizes the deposits by counterparty as at 31 December 2016 together with interest income as reported in the income statement of the Company: 000s Maturity Variance Deposits Porsche International Financing dac 31/01/17 50, Barclays Bank Ireland plc 04/04/17 60,000 60,015 0% Bank of Tokyo-Mitsubishi 15/02/17 50, Cash at Bank Barclays Bank Ireland plc N/A 20,014 97,907-80% Total 180, ,922 14% Interest Income % Following the output of the 2015 ORSA process, diversification of deposit holdings was implemented during Interest income has reduced significantly over the period due to the fact that all deposits are held in Euro. Rates for money market deposits in Euro have been at zero percent for the majority of 2016 and, while returns are therefore limited, the Company is not yet attracting negative interest rates on its positive cash positions. Due to the nature of the underlying warranty policies and the strong solvency position of the Company, an investment policy seeking greater returns is not deemed necessary. Page 8 of 37

9 A.5 Operating/other expenses Other operating expenses include exchange gains and losses, management fees, guarantee fee and bank charges as follows: 000s Variance Exchange Gain/Loss (74) % Management Fees (474) (434) 9% Guarantee Fee (30) (30) 0% Bank Charges (1) (1) 0% Total (579) (137) 322% Exchange gains and losses in any financial year are realised by the movements in FX rates on business denominated in GBP and CHF. Management fees are a recharge from Porsche Financial Management Services Limited ( PFMS ), a company incorporated in Ireland providing management services to the Company. The recharges include cost for rent, rates, personnel costs, accountancy services, audit, tax and other consultancy related expenditure. These costs are deemed to be overheads. The company is provided with a guarantee by Porsche AG whereby the Company's reinsurance claims payable to the reinsured are effectively underwritten by Porsche AG. The Company pays an annual guarantee fee of 0.125% based on the total of the claims payable and IBNR balances on or before 31 December each year. Bank charges are considered immaterial. A.6 Any other disclosures There are no additional disclosures required for the Company. Page 9 of 37

10 B System of governance B.1 General governance arrangements The Company, a captive reinsurance undertaking, is classified as a Low Risk firm under the Central Bank of Ireland s risk-based framework for the supervision of regulated firms, known as PRISM or Probability Risk and Impact SysteM and is subject to the Central Bank of Ireland s Corporate Governance Code for Captive Insurance and Reinsurance Undertakings The Company s Board of Directors has responsibility for the oversight of the business and sets the Company s strategy and risk appetite. The governance structure put in place ensures the effective oversight of the captive, taking into consideration the nature, scale and complexity of the warranty reinsurance business being undertaking. The corporate governance structure is set out and communicated within the Board s policy document Corporate Governance Guidelines and Terms of Reference for the Board. The Board has 4 Directors who meet formally at least twice a year. There is additional ad-hoc interaction between members of the Board throughout the financial year. Board of Directors Mr Dan Ludford ACA (Chairman) Ms Carmen Selg, Vice President of Accounting and Taxation, Porsche AG Mr Juergen Rittersberger - Vice President of Corporate Development, Porsche AG Mr Christoph Kulik, Vice President of Treasury, Porsche AG Company Secretary Wilton Secretarial Limited, 2 Grand Canal Square, Dublin 2. The Company outsources certain control functions to external parties under outsource arrangements refer to paragraph B.8 for further information. The Company has appointed Allied Risk Management to support with Compliance and Risk Management and Allied Risk Insurance and Reinsurance Services Limited for Actuarial services. Deloitte provide Internal Audit services. Given the size, nature and complexity of the captive reinsurance business, the Company does not operate individual sub-committees. Management of the Company presents directly to the Board of Directors at least twice a year and the Board of Directors receive direct updates at least once a year from the Company s external auditors, the Head of Actuarial Function and Head of Internal Audit. A suite of policy documentation supports the corporate governance regime of the business ensuring robust procedures and a strong internal control environment at all times. Oversight controls around key business processes and outsourced activities are a key focus of management and this is supported by the reviews undertaken by the Internal Audit function. All accounting and administrative arrangements are undertaken by a related management services company called Porsche Financial Management Services Limited. The Company is charged a management fee on an annual basis for all related overhead costs. As a result of these management recharges, the Company does not operate a remuneration policy as such Page 10 of 37

11 remuneration is discharged via the related management services company. Within the remuneration policy of the management services company, the personal targets of Management are not linked to the financial performance or profitability of the Company. During the year under review, the Company placed a 50 mio deposit with its parent company which provides Group Treasury services. There have been no other transactions with any member of the administrative, management or supervisory body of the undertaking. There have been no material changes to the system of governance in place during the reporting period to 31 December B.2 Fit and proper The Company has adopted a Fitness and Probity Policy which sets out the due diligence checks that must be performed in the following areas and which align with the CBI s Guidance on Fitness and Probity Standards 2014 and subsequent amendments. These include: Identification (copy of passport) Compliance with minimum competency code, where relevant Professional qualification(s) Continuous Professional Development Application References Record of previous experience Record of experience gained outside the State Concurrent responsibilities Individual Questionnaire For key Control Functions (referred to as Pre-approved Control Functions ( PCFs ), approval from CBI is required prior to appointment to the Company s Board. Members of the Board are all PCF functions as are the Control Functions including Risk Officer, Compliance Officer, Head of Actuarial Function ( HoAF ) and Head of Internal Audit. Additionally, other service providers (for example, the Company Secretary, Wilton Secretarial Limited) annually attest to the Company in respect of the fitness and probity of those who hold control functions. Annually, each of the Directors attest to a Fitness and Probity declaration stating if there have been any material developments in relation to an individual s compliance with the Fitness and Probity Standards and confirming that disclosure would be made to that effect if there was a material change to this situation. The Board of Directors also undertakes completion of an annual Board performance questionnaire. The results of the questionnaire are tabled at the Board meeting for discussion and consideration. B.3 Risk management system The Risk Management framework of the Company consists of a suite of policy documents detailing the key risks (or potential risks) faced by the Company. The risk policies deal with the following key risks to the business: Page 11 of 37

12 Strategy and Business Planning Underwriting Risk and Reserve Risk; Operational Risk; Investment Risk (encompassing ALM, Liquidity and Credit Risk); Capital Management; and Outsourcing The design, implementation and monitoring of these risk related policies are subject to review and on-going development by the Board of Directors of the Company. The policies are prepared in accordance with the requirements outlined in the Central Bank of Ireland s Corporate Governance Code for Captives and reference also to the requirements of the European Solvency II Directive. The Company has a risk appetite statement which has been approved by the Board. The risk appetite statement establishes qualitative and quantitative measures for each of the material risks to the business. In general, the risk management objectives of the Company are to: Ensure the risk appetite is reflective of the company s overall business strategy; Enable the Board and Management Team to discharge their responsibilities to shareholders; and Comply with all legal and regulatory requirements. The Company s sole business objective is the provision of warranty reinsurance, via a 100% quota share of all Porsche Approved Warranty business underwritten by the fronting insurer Allianz in Germany. This objective has remained core to the business of the Company are there are no plans to change this business strategy. Within the individual risk policy documents, each risk is defined in relation to the business undertaken by the Company. The documentation sets out relevant risk measurements and how these should be reported to the Board as part of regular or ad-hoc reporting. The management and monitoring of risks to the business is an on-going process which is integrated into the overall organisational structure of the Company. The Own Risk and Solvency Assessment process referred to in the following paragraph is a key component in the Company s risk management and decision making processes. Risk Management and the processes surrounding its governance and implementation are subject to review by Internal Audit as part of the defined 3 year revolving internal audit programme. B.4 Own Risk and Solvency Assessment ( ORSA ) In line with the Company s ORSA policy, a full ORSA is performed each year. A full or partial ORSA would also be performed in the event of a known or expected event that could cause the risk profile of the Company to change. The objective of the ORSA process is to enable the Board to assess capital adequacy in light of the assessment of its risks and the potential impacts of its risk environment, and enable it to make appropriate strategic decisions. The Board requires that the ORSA process produces meaningful reports on the adequacy of the Company s capital and risk sensitivities so that the output can be used in shaping future strategy and risk appetite. Page 12 of 37

13 The ORSA provides both a quantitative and qualitative view on the solvency of the Company and its risks and focuses on the following key risks: Insurance Risk (Underwriting, Catastrophe, Reserve Risk, Claims) Investment Risk Retrocession Risk Asset-Liability Matching Risk Operational Risk These risks are considered and discussed in the report and an assessment is made as to whether there have been any significant changes to these risks from either an internal or external market perspective. The assessments undertaken include stress and scenario testing including reverse stress tests, a review of reinsurance arrangements (if applicable), a current Solvency II Balance Sheet, projected Solvency II Balance Sheets at short and medium term planning horizons and an Operational risk assessment. The consistency and quality of data used in the ORSA based calculations is crucial to how meaningful the outputs of the process are and the ability for the Board to make informed decisions. All information used in the ORSA calculations of the Company is fully referenced to the most recently available Management Accounts. The final ORSA report documents the work performed, the results and the outcomes including any risk mitigation plans arising. The Board approve the ORSA annually prior to submission to the CBI. As a Low Impact firm under the CBI s PRISM framework, the annual ORSA process is submitted to the CBI on-line via the ORSA Reporting Template. The ORSA process is an integral part of the Company s Risk Management, Capital Management and Business Planning processes. Based on the output from the 2016 ORSA process, the Company is adequately capitalised over the projection period and its risks are deemed to be well managed. Business volumes and claims management / loss ratios remain consistent with prior periods combined with an extremely prudent investment policy. The following table summarises the Company s forecast base case SCR / MCR position, using the Standard Formula, over a 4 year projection period: Period Ended: 000s 2016 (predicted) 2017 (forecast) 2018 (forecast) 2019 (forecast) SCR 84,640 86,784 88,502 90,442 Available Capital SCR 127, , , ,471 SCR Coverage Ratio 150% 170% 190% 209% SCR Margin 42,485 60,867 79,863 99,029 MCR 21,160 21,696 22,125 22,610 Available Capital MCR 127, , , ,471 MCR Coverage Ratio 601% 681% 761% 838% MCR Margin 105, , , ,860 Page 13 of 37

14 B.5 Internal control The system of internal control of the Company has three elements: Board Level Controls As set out in the Company s Corporate Governance and Terms of Reference of the Board policy document, the Board is the focal point of the corporate governance regime of the Company. The Board is responsible for ensuring that it has the appropriate knowledge, skills and experience to manage the effective oversight of the Company. The Board is responsible for establishing and ensuring compliance with key business policies, setting the strategy and risk appetite, reviewing outsourced arrangements and ensuring the continued solvency of the business. Detailed policy documents supported by operational process documentation, reports to the Board and minutes of Board meetings are combined with regular updates from the Actuarial Function, Compliance and Internal Auditors. Control Functions The Company has established the four key independent control functions required under the Corporate Governance Requirements for Insurance and Reinsurance Undertakings 2015 namely, risk management, compliance, actuarial and internal audit. The functions are established taking account of the nature, size and complexity of the Company but, at all times, ensuring there is sufficient independent oversight or challenge to enable the functions to provide assurance to the Board in relation to the Company s overall control framework. The Chief Risk Officer ( CRO ) is designated to Allied Risk Management Limited via an outsource arrangement to support the implementation and review of the Company s risk management policies. The CRO reports to the Chairman of the Board of the Company and is responsible for ensuring that material risks to the business, both current and potential, are reported to the Board for consideration and assessment. The process of risk management is also linked to the Company s wider Group Directive on Governance, Risk and Compliance. In the event that a material risk is identified that is not able to be resolved through implementation of normal risk mitigation techniques, the Board is responsible for onward escalation to both the Central Bank of Ireland as well as the Executive Board of Porsche AG. The CRO also ensures that the Annual ORSA process is undertaken and submitted to the Board for discussion, challenge and approval. The Head of Internal Audit is designated to Deloitte via an outsource arrangement. The Head of Internal Audit reports to the Chairman of the Board as well as directly to the Head of Internal Audit at Porsche AG. The content of the Internal audit reports, including findings, remediation actions and management responses are presented to both the Board of the Company as well as the Executive Board of Porsche AG. The internal audit programme is developed based on a risk rated assessment of the core processes of the business and aims to assess the design and operational effectiveness of controls within these core business processes. In the case of remediation actions, timescales for implementation are agreed with the management responsible for their implementation. Wherever practical, completion of remediation is required within 3 months of the issue of the final internal audit report. These actions are followed up with management on a regular basis. The Head of Compliance is designated to Allied Risk Management Limited via an outsource arrangement. The Head of Compliance reports to the Chairman of the Board. From the perspective of the Group wide Porsche Compliance Management Directive, ultimate responsibility Page 14 of 37

15 for all Compliance related topics remains with the General Manager of the Company. The Head of Compliance provides the core services of: Act as the outsourced service provider to perform PCF12, Head of Compliance; Act as the main point of contact between the Company and Regulator; Advise on corporate governance requirements including any implications for the Company arising from the Corporate Governance Requirements for Captive Insurance and Captive Reinsurance Undertakings 2015 and any subsequent updates issued by the Regulator; Advise on fitness and probity requirements including any implications for the Company arising from the Fitness & Probity Standards 2014 and any subsequent updates issued by the Regulator; Advise on regulatory requirements for the Company particular to the Requirements for Non-Life Reinsurance Undertakings and any subsequent updates issued by the Regulator; Prepare the annual compliance statements and data accuracy statements for signature by the Board; Provide a compliance report to be included in all board packs for board meetings; and Attendance at all board meetings where requested. The Head of Actuarial Function is designated to Allied Insurance and Reinsurance Services Limited via an outsource arrangement. The Head of Actuarial Function reports to the Chairman of the Board. The services provided by the Actuarial Function are detailed further in section B.7. Outsourced Activities The Company requires that any outsourcing arrangement manages its overall control environment in a manner consistent with that of the Company s own internal control environment. In developing outsourcing agreements, the Company ensures the following key criteria from outsource service providers at all times: Services provided by persons who are fit and proper and possess the suitable skills and experience to undertake such work; Comply with all applicable Laws and Regulations, and all guidelines and policies approved by the Company; Act in accordance with the instructions, guidelines and directions of the Company and perform the services in accordance with prescribed timescales in particular with reference to agreed Service Levels; That the services will not impact on the system of governance of the Company and place no undue increase in the Company s operational risk; Ensure no conflicts of interest; Enable audit rights, inspection and cooperation with the Company, its internal and external auditors and the CBI and/or all other competent authorities; Ensuring compliance with the respective obligations under the Data Protection Laws; Confidentiality; and Business Continuity. Through planned reviews of the Company s processes and those of its service providers, internal audit provide an independent opinion on the overall control framework to the Board of Directors of the Company s business. Page 15 of 37

16 B.6 Internal audit function Under the Solvency II Directive, the Company is required to provide for an effective internal audit function that includes an evaluation of the adequacy and effectiveness of the internal control system and other elements of the system of Governance. In doing so, the Internal Audit Function must be objective and independent from the operational functions of the business. In order to comply with these requirements, the Company has engaged Deloitte under an outsource agreement to undertake the role of PCF-13, Head of Internal Audit. The relationship management of the engagement is managed jointly between local management of the Company and the Internal Audit Department of Porsche AG. In this way, the proposed audit plans are not only approved by the local Board, but are also subject to inclusion in the wider group audit planning of Porsche AG. There is direct liaison on reporting between Deloitte s and the Porsche AG Internal Audit Department to ensure that the reporting for the Company by Deloitte s can be aligned to the reporting of internal audits within the wider Porsche Group. The scope and planning of the audits are subject to annual review by the Internal Audit function and based on the key risks associated with the business. During 2016, internal audits were carried out in the areas of: The Reserving Process; and Solvency II Pillar 3 Reporting Process In both the internal audits undertaken during 2016, there were no issues noted in relation to Financial Reporting, Commercial or Tax Law, no issues in relation to Compliance and no issues with regard to Strategy. There were a few items noted in relation to operational matters such as enhancements to policy documents and procedures. At the date of submission of this report, all items of remediation have been completed by management and the points noted as closed by the Internal Audit function. Any findings and recommendations of Internal Audit are reported to the Management and Board of Directors of the Company as well as to the Porsche AG Executive Board of Management. The Head of Internal Audit is in attendance at the Board meetings held by the Company each financial year and provides a presentation of the current status and upcoming plans. The overview of the audit plan for the period is set out on the next page. Page 16 of 37

17 The Internal Audit Function is integral to the overall governance and risk management of the Company. B.7 Actuarial function The Actuarial services to support the Company are outsourced to Allied Risk Insurance and Reinsurance Services Limited ( ARIRS ) via an outsource agreement to act in the capacity of PCF- 48, Head of Actuarial Function. The role of the Actuarial function as set out in Article 48 of the Solvency II Directive and Article 272 of the Commission Delegated Acts, together with the requirements of the Central Bank of Ireland in its Domestic and Actuarial Regime and Related Governance Requirements under Solvency II is to: Co-ordinate the calculation of the Technical Provisions; Provide an opinion on the overall underwriting policy; Provide an opinion on the adequacy of reinsurance arrangements (if applicable); Contribute to the effective implementation of the risk management function; Present an Actuarial Function Report to the Board at least annually; and Provide and actuarial opinion to the Board regarding the range or risk and adequacy of the scenarios, including financial projections, considered as part of each ORSA process of the Company. In respect of the functions set out above, the Head of Actuarial Function performs or provides input into some areas of key risk management for the business including assessing the sufficiency of the technical provisions of the Company, considering the sufficiency and quality of data of the Company and verifying and/or validating courses of action undertaken by Management during the review process. Page 17 of 37

18 The outputs of the Actuarial Function Report and opinion on scenarios used in the ORSA process are key risk management and decision making tools for the Board of Directors. These independent views enable the Board to get a further opinion on the operating effectiveness of the Company and provide useful insight into the effects of certain risks, capital management and solvency requirements and can be further used in their decision making processes. The opinion from the Head of Actuarial Function report for the Company during 2016 reflected on the continued improvements being shown in data quality and sufficiency for the purposes of calculating the technical provisions. In addition, it concluded that the Underwriting Policy of the Company is appropriate for a captive undertaking of its size, nature and complexity and that the policy is followed in practice. It noted that loss ratios are also closely monitored by the Company. The Company does not operate a retrocession policy and based on the current level of capital and solvency, this is unlikely to change and does not fit with the overall strategy of the business. B.8 Outsourcing Outsourcing is defined as any arrangement between the Company and a service provider where the service provider performs a process, service or activity which would otherwise be performed by the Board, management or administrative body of the organisation. Critical outsourcing areas for the Company are determined by the Board with reference to the Company s Outsourcing Policy. It is clearly stated that outsourcing shall not be undertaken in such a way that it would lead to the following situations: Materially impairing the quality of the system of governance of the Company; Unduly increasing operational risk; or Impairing the ability of the Central Bank of Ireland to monitor the compliance of the Company with its obligations. The Board requires that all outsourcing arrangements are properly documented and that service levels are in place for all outsourced activities. Additionally the Board will review the service levels on an on-going basis with a formal review annually. Day to day management of the outsourced activities is delegated by the Board to the Managing Director but monitoring will occur at Board level. The Board will determine: which services may be outsourced based on level of importance and associated risks; awarding of outsource contracts; and performance against service level agreements, corrective actions and termination where necessary Each Outsource agreement, concluded and signed by both the Company and the service provider, must contain the minimum requirements as follows: the duties and responsibilities of both parties; the service provider s commitment to comply with applicable laws and regulatory requirements; the service provider to disclose any changes in organisation or ownership, and any developments that may have a material impact on its ability to carry out the outsourced service, including any adverse effect from new laws or regulations Page 18 of 37

19 introduced in its home country and any material changes to its financial resources or risk profile; the Company s right to issue guidelines and instructions on performance of the outsourced service; the service provider should be able to terminate the agreement only after a period of notice that is sufficiently long to enable the Company to find an alternative solution; the Company has the right to terminate the agreement with a reasonable period of notice, or immediately with cause; Data protection relating to the Company and its clients; and The Company, its internal and external auditor and the Central Bank will have access to all information of the outsourced services, including an on-site inspection or audit. Administration is outsourced to Porsche Financial Management Services Limited, a company registered in Ireland. Company Secretarial is outsourced to Wilton Secretarial Limited, a company registered in Ireland. Compliance and Risk Management is outsourced to Allied Risk Management, a company registered in Ireland. Actuarial Services are outsourced to Allied Risk Insurance and Reinsurance Services Limited, a company registered in Ireland. Internal Audit services are provided by Deloitte, the Audit and Risk Advisory Firm registered in Ireland. Outsourcing and the processes surrounding its governance and implementation are subject to review by Internal Audit as part of their defined 3 year internal audit programme. Outsourcing was last reviewed by Internal Audit in December B.9 Any other disclosures There are no additional disclosures required for the Company. Page 19 of 37

20 C Risk management The Company writes small limits, has a prudent investment policy and proactively manages and monitors its underwriting and claims. The Company uses the Solvency II Standard Formula as its measure of economic capital in the quantitative assessment of risk presented below. C.1 Underwriting risk Underwriting risk is the risk of potential losses arising from the underlying used car warranty policies that are reinsured by the Company. Under the Obligatory Warranty Quota Share Treaty Reinsurance Agreement that is in place between the Company and the fronting insurer, Allianz Versicherungs AG in Germany, the Company is required to take a 100% quota share of all written business. Underwriting risk is managed in a number of different ways through policies and controls embedded in processes with both the fronting insurer and Porsche AG. The warranty policies issued by the fronting insurer are subject to specific age and mileage criteria and the used Porsche vehicle is required to be inspected by a Porsche Centre or Service Centre prior to the Approved Used Warranty being underwritten. The warranty itself is only available to Porsche customers through the approved Porsche dealer network. The Approved Warranty product is administered by Porsche AG through its World Warranty System ( WWS ) and this effectively validates vehicle data for the purposes of determining the origin of country of business, type, age and mileage by reference to the individual Vehicle Identification Number ( VIN ). The WWS receives an automated feed of information back from the fronting insurer stating that the policies have been underwritten by the insurer in line with the underwriting criteria. Monthly new business reporting is subject to policy by policy review by the fronting insurer. This data is checked thoroughly by the insurer before being passed to the reinsurer for further processing. Warranty pricing is the responsibility of Porsche AG and reviews on pricing are conducted on an on-going basis by the Warranty department. Changes to warranty pricing would be communicated, discussed and agreed by the Porsche Approved Warranty Steering Committee which meets on a quarterly basis to review new business volumes, pricing and loss ratios as well as projects relating to the wider provisions of warranty related business within the organisation. The CEO of the Company sits on this Steering Committee as a named attendee. Changes to pricing within the approved warranty programme are minimal with the last change occurring back in August Claims management is outsourced to Porsche AG and the fronting insurer is responsible for ensuring that the Porsche AG claims handling system remains fit for purpose. On a yearly basis, the fronting insurer undertakes an audit of the claims management process at Porsche AG and will provide the Company with a copy of the findings and recommendations from the audit. The extent of the controls surrounding the claims handling process is reflected in the development of the loss ratios. The loss ratios are carefully monitored by the Company for inclusion in assumptions and estimates concerning the provisioning for claims incurred but not reported ( IBNR ). These claims and loss ratios are also subject to on-going review by the Head of Actuarial Function and reported on to the Board of Directors as part of both management update and via the Head of Actuarial Function Report on at least an annual basis. Page 20 of 37

21 Through these combined means, underwriting risk remains a key risk for the business but is mitigated and managed by thorough reviews and documented reporting mechanisms via Steering Group, Management, Head of Actuarial Function review and also by the Board of Directors. Underwriting risk is the main driver of the Company s Solvency Capital Requirement ( SCR ) namely in the form of Premium and Reserve Risk and Catastrophe Risk. The stand-alone Underwriting Risk SCR charge is 62.2 mio. C.2 Market risk Market risk is the potential adverse change in income or the value of net worth arising from movements in interest rates or other market prices. The Company recognises that the effective management of market risk is essential to the maintenance of stable earnings, the preservation of shareholder value and the achievement of the Company s objectives. With the majority of assets held in Euro, the Company is not currently exposed to interest rate risk from an accounting perspective. The current holdings of term deposits and cash are split between rated banks and an intercompany deposit with a group Treasury Company all of which generate little or no interest income. Rates are constantly reviewed to ensure that the Company is not become subjected to negative interest rates on deposits. In addition, where interest is accruing (or has in the past accrued) these are for fixed rates and terms and therefore not subject to adverse movements. However, from a Solvency II perspective, Market Risk is the second largest driver of the SCR calculation. Under the standard formula, term deposits are subject to Market Risk (Concentration Risk) assumptions whereas cash deposits are subject to Counterparty Default Risk. The charge to the SCR at 31 December 2016 is therefore driven by the three main term deposits referred to in paragraph A.4 above. While the deposits with Barclays Bank Ireland plc and Bank of Tokyo- Mitsubishi result in market risk charges, the largest charge within this calculation comes from the intercompany term deposit with Porsche International Financing dac ( PIF ), the parent company and a provider of group Treasury related services. The larger charge arises as a result of the fact that PIF does not possess a rating from a recognised External Credit Assessment Institution ( ECAI ). The stand-alone Market Risk SCR is 38.5 mio of which 37.8 mio relates to Concentration Risk. C.3 Credit risk Credit risk is the risk that the Company is exposed to lower returns or potentially a loss if another party fails to perform its financial obligations to the Company. With a prudent Investment and Banking Policy in place, the Company only places short term deposits and holds cash with certain approved external financial institutions. The level of deposits that the Company may hold with these external institutions is controlled by the allocation of counterparty credit limits managed by the wider VW and PAG Group Treasury functions. The Company is operating within these prescribed limits. S&P Investor ratings for Barclay Bank plc are currently A- (negative) and for Bank of Tokyo- Mitsubishi A+. Page 21 of 37

22 The limit for intercompany deposits with the parent company PIF is currently set at 50mio and fully utilised. PIF provides treasury services to the international subsidiary companies of the wider Porsche AG Group and at 31 December 2016 has net assets of c. 54 mio. PIF is not a rated entity, but given the strength of its balance sheet and that its core function is treasury services, the Board have sanctioned deposits with PIF providing SCR coverage does not fall below 150% going forwards. This intercompany deposit also provides a degree of flexibility in the event that the Company needed to respond to a potential breach of regulatory capital. In the case of this occurring, the intercompany deposit could be recalled and moved to an A-rated bank instead. Furthermore, it should be noted from the 2016 ORSA that if the deposit with PIF defaulted entirely, this would not lead to a breach of the SCR. Monitoring the development of available cash and the SCR calculation outputs may enable the Company to place further cash deposits with PIF in the future. This would be considered in conjunction with the annual (or ad-hoc) ORSA process. Credit risk is mitigated through this diversification of counterparties. C.4 Liquidity risk Liquidity risk is the risk that the Company, though solvent, does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure them at excessive cost. The Company has determined that liquidity risk does not represent a significant exposure to its business. This assessment is based on the fact the Company has a prudent Investment and Banking Policy which dictates that funds may only be held in short term bank deposits, short term intercompany deposits with its parent company or cash. The table in paragraph A.4 shows the future maturity dates of the three current deposits as at 31 December For further information on the development of cash and short term deposit holdings, refer to paragraph C.5 below. The Expected Profit in Future Premiums calculated in accordance with Article 260(2) of the Delegated Acts is 17.0 mio. C.5 ALM risk The Company is not exposed to risk from Asset Liability Management. There is sufficient liquidity held in short term deposits and cash at bank to cover claims arising from the reinsurance activities of the Company. In addition, due to the nature of the current and prior loss ratios of the reinsurance business, new business volumes net of acquisition costs exceed claims payable in the year resulting in net cash inflow to the business in excess of 20 mio year on year. Page 22 of 37

23 The following is a summary of the development of short term deposits and cash at bank balances for the last 5 years: 000s Deposits 57, , ,602 60, ,000 Cash at Bank 22, ,907 20,014 Total 80, , , , ,014 Net cash inflow - 28,295 22,523 26,868 22,092 In the event of ceasing to underwrite new reinsurance business, future claims would become payable from existing cash balances without the benefit of new business cash inflows. However, with a policy of holding short term deposits and cash at bank, the risk of insufficient liquidity being available to meet requirements of future claims is further mitigated. The Company is not currently exposed to interest rate risk refer also to paragraph C.2 under Market Risk. However, given that the majority of material deposits and cash holdings are denominated in there is regular monitoring of deposit rates with financial institutions so as to avoid the potential for negative interest rate charges on cash balances. C.6 Operational risk Operational risk represents the risk that failed or inadequately processed data or systems, human error or exposure to external events could result in unexpected losses. Operational risk is deemed low for the Company given the nature, size and complexity of the organisation. The introduction of Solvency II with its governance requirements (including the requirement for Internal Control, Internal Audit, Actuarial and Risk functions) assists in further reducing operational risk. The Company is in the process of reviewing its outsourcing agreements to address some additional operational risks, including cyber-risk and business continuity risk which, although considered low, are to be referenced and addressed in future revised outsourcing agreements. C.7 Other material risks No other material risks were identified in the Company s 2016 ORSA Process. While acknowledged, the Company s potential risks associated with Brexit are as yet unknown but not considered material. C.8 The nature of material risk exposures The material risks to the business have been discussed in paragraphs C.1 to C.6 including information relating to how these material risks are managed, monitored and mitigated. Page 23 of 37

24 In relation to the investment policy of the Company, assets have been invested with 2 major banks and a Porsche Group Treasury Company on the basis of either cash deposits of short term deposits. In this way, the Company maintains that it has invested its assets in accordance with the prudent person principle as set out in Article 132 of Directive 2009/138/EC. The Company does not use derivative instruments. C.9 The nature of material risk concentrations The Company is somewhat exposed to concentration risk in that it reinsures the warranties on a relatively small model line of Porsche vehicles. There is a potential risk of a systemic issue across a specific model range, or a number of vehicle models where common systems are shared across these same models. However, this risk is considered low due to the fact that: Product recalls are not covered under the warranty; The warranty covers used cars only, so systemic issues within a model range are likely to have emerged before there is likelihood of a warranty claim; and Porsche is a premium car brand with the highest standard of engineering and workmanship, so systemic issues are considered very unlikely. Similarly, the model ranges tend to be very distinct, therefore limiting the potential risk around issues relating to the sharing of common systems. Investment concentrations also present a potential risk to the Company as quantified within section C.2 Market Risk. As part of the on-going annual ORSA process, the Board will continue to review its Investment and Banking policy and take any necessary action accordingly. C.10 Risk mitigation practices The Company does not have a retrocession arrangement in place. Given the stability of the underwriting result, and absence of exposure to large or catastrophic claims, this is not considered necessary. However, retrocession strategy remains an option for the Board. C.11 Risk sensitivities As part of the 2016 ORSA Process, the Company considered a number of quantitative and qualitative stress tests and scenarios, including reverse stress tests. These were as follows: Qualitative - A Fall-off in premium volume - Brexit scenario, break-up of the European Union Reverse Stress tests - Loss required that would breach SCR. The largest loss the Company could absorb without breaching its SCR is 42 mio. - Loss required that would breach MCR. The largest loss the Company could absorb without breaching its MCR is 106 mio. Page 24 of 37

25 Quantitative Scenario Event Description SII Impact Bank Credit Event Multiple Credit Drops Downgrade of Barclays Bank plc from A to BBB Increase in SCR of approx. 2 mio., reducing SCR coverage to approx. 166% Failure of Largest Counterparty Insolvency Insolvency of Barclays Bank plc with 40% recovery in 2017 Immediate loss of 36 mio. with corresponding decrease in available capital. SCR ratio would fall to approx. 135% Catastrophe Loss Ratio of 120% in 2018 Catastrophe Loss Event Additional loss of approximately 36 mio. Immediate loss of approx. 38 mio with corresponding decrease in available capital. SCR ratio would fall to approx. 131% The Company met its SCR throughout the projection period in all of the scenarios considered above. While the reported SCR coverage has been strong throughout 2016, and no material changes are planned to the business model, the Board will look at additional sensitivity analysis as part of the 2017 ORSA process. For example, it will look to establish a view on the effect on the SCR of a 1% increase in the blended portfolio loss ratio. C.12 Any other disclosures There are no additional disclosures required for the Company. Page 25 of 37

26 D Regulatory balance sheet D.1 Assets The following table analyses the Company s financial assets at fair value at 31 December 2016 for solvency purposes: 000s Solvency II Financial Statements Premiums Receivable - 28,819 Deferred Acquisitions costs - 1,673 Deposits 160, ,000 Cash at Bank 20,014 20,014 Total 180, ,506 Deferred acquisition costs of 1.7 mio are excluded from the valuation of assets for solvency purposes. In addition, premiums of 28.8 mio due from the fronting insurer Allianz AG are treated as a Technical Provision in accordance with Article 36 of the Delegated Act which states that Technical Provisions shall include benefits, expenses and premiums, and therefore carries no capital charge. These are the only material differences between valuation of assets for Solvency purposes and the valuation in the financial statements. D.2 Technical provisions The following table analyses the technical provisions of the Company as at 31 December 2016: 000s Solvency II Financial Statements Claims payable - 18,070 Incurred but Not Reported - 9,380 Unearned Premium - 76,851 Technical Provisions 49,556 - Total 49, ,301 Chain Ladder and Bornhuetter Ferguson methods were used to derive the Claims Provision. The Premium Provision was projected using Expected Loss Ratios by currency and warranty type based on the Company s recent experience. Given the nature of the Company s business, the risks to the Techncial Provisons are low claims are relatively small and short-tailed. There is no exposure to latent claims or catastrophe claims. In respect of the Premium Provision the risk is the volatility of the loss ratio historically, this has been very consistent with a standard deviation of the realised loss ratio being in the region of 3%. For its Financial Statements the Company uses the undiscounted Best Estimate Claims Provision as a floor for the Technical Provisions with an appropriate margin for prudence added to this figure. Page 26 of 37

27 The Company does not apply the matching adjustment referred to in Article 77b of Directive 2009/138/EC. The Company does not use the volatility adjustment referred to in Article 77d of Directive 2009/138/EC. The Company does not apply the transitional risk-free interest rate-term structure referred to Article 308c of Directive 2009/138/EC. The Company does not apply the transitional deduction referred to in Article 308d of Directive 2009/138/EC. The Company does not have any recoverables from retrocession contracts or Special Purpose Vehicles. There have been no material changes in the relevant assumptions made in the calculation of technical provisions compared to the Day 1 Technical Provisions calculations. D.3 Other liabilities Other liabilities for solvency calculation purposes include trade payables and a deferred tax liability as set out below as at 31 December 2016: 000s Solvency II Financial Statements Trade payables Deferred tax liability 3,032 - Total 3, A deferred tax liability arises on the treatment of the premiums receivable being allocated to technical reserves. At a high level, it is calculated that there will be future tax due on the assumed profit element of the unearned premium reserve. The deferred tax liability is calculated on this balance less the risk margin at 12.5%. The Company has no contingent liabilities. D.4 Any other disclosures There are no additional disclosures required for the Company. Page 27 of 37

28 E Capital management E.1 Own funds The Company is a single shareholder entity whose shares are fully paid up. It has no debt financing nor does it have any plans to raise debt of issue new shares in the short or medium term. The Company s own funds are invested in cash, short term money market deposits or short term deposits with its parent undertaking. There is no intention to change this methodology. The medium-term capital management plan set by the Board is as follows: Own funds to be maintained at an agreed level in excess of the SCR (or MCR where relevant), currently 40 mio; No capital is planned to be issued in the short or medium term; and Own fund items are to be invested in external bank deposits, cash or deposited with its parent company PIF in accordance with Group approved counterparty limits as set out in the Company s Investment Policy. Own funds comprise paid-in ordinary share capital, retained earnings and a reconciliation reserve as follows: 000s Equity in the financial statements Share Capital 2,556 2,556 Retained earnings 103,294 82,814 Total 105,850 85,370 Reconciliation reserve 21,222 22,533 Basic Own Funds 127, ,903 The eligible amount of own funds to cover the Solvency Capital Requirement and the Minimum Capital Requirement is mio. This is comprised entirely of Tier 1 Basic Own Funds. Page 28 of 37

29 The following table reconciles the differences (reconciliation reserve) between the equity in the financial statements and the excess of the assets over liabilities as calculated for solvency purposes: Reconciliation of Basic Own Funds to Equity in the financial statements as at 31 December s Total Equity in the financial statements 105,850 85,370 Add: Reserves 104, ,999 Reclassification - 10 Deduct: Deferred Acquisition Costs (1,673) (1,675) Receivables due (28,819) (29,080) Technical Reserves (42,626) (40,563) Risk Margin: Technical Reserves (6,930) (5,939) Deferred Tax (3,032) (3,219) Solvency II Basic Own Funds 127, ,903 None of the Company s own funds are subject to transitional arrangement. No deductions are applied to own funds and there are no material restrictions affecting their availability and transferability. All of the Company s own funds are Tier 1; all own funds are eligible to meet the SCR and MCR. The Company has no own fund items subject to the transitional arrangements referred to in Articles 308b(9) and 308b(10) of Directive 2009/138/EC. The Company has no ancillary own funds. There are no items deducted from own funds for solvency purposes. E.2 Minimum capital requirement and solvency capital requirement The amount of the Company s Solvency Capital Requirement and Minimum Capital at the end of the reporting period are as follows: 000s SCR 83,400 69,423 MCR 20,850 17,356 Ratio of Own Funds to SCR 152% 155% Ratio of Own Funds to MCR 609% 622% Page 29 of 37

30 The following diagram shows the components of the SCR (using standard formula) as at 31 December 2016: The Company uses EIOPA s Solvency II Standard Formula. It does not use Company specific parameters and does not use simplified calculations in its computation. The Company does not use any simplified calculations in the calculation of the Standard Formula. The MCR, as calculated using premium volume, is as follows: Line of Business Miscellaneous Financial Loss Net Technical Provisions Net Premium Written Parameters α β MCR NL 42,626 60,868 19% 12% 15,354 Since the figure of 15.4 mio is less than the floor of 25% of the SCR, the floor of 25% of the SCR is applied i.e mio There has been no material change in the Company s SCR or MCR over the reporting period other than change due to organic growth of the Company. Page 30 of 37

31 E.3 The option set out in Article 305b used for the calculation of its solvency capital requirement This does not apply to the Company. E.4 Differences between the standard formula and any internal models used The Company applies the standard formula model and does not use an internal model to calculate the Solvency Capital Requirement. E.5 Non-compliance with the minimum capital requirement and significant non-compliance with the solvency capital requirement There was no breach of the Solvency Capital Requirement (and hence the Minimum Capital Requirement) over the reporting period. E.6 Any other disclosures There are no additional disclosures required for the Company. Page 31 of 37

32 F Appendices - Annual Quantitative Reporting Templates F.1 Balance Sheet Page 32 of 37

33 F.1 Balance Sheet (Continued) F.2 Premiums, claims and expenses by line of business Page 33 of 37

34 F.3 Premiums, claims and expenses by country F.4 Non-Life Technical Provisions Page 34 of 37

35 F.5 Non-Life Insurance Claims Information Page 35 of 37

36 F.6 Own Funds F.7 Solvency Capital Requirement Page 36 of 37

37 F.8 Minimum Capital Requirement Page 37 of 37