Group Solvency and Financial Condition Report 31st March 2017

Transcription

1 Collingwood Holdings (Gibraltar) Limited Collingwood Insurance Company Limited Group Solvency and Financial Condition Report 31st March 2017 Address 7.02 World Trade Center, Collingwood Insurance Bayside Road. Company Limited Gibraltar. Telephone: ( Fax: enquiries@collingwood.gi

2 Our aim is to offer flexible and adaptable systems to react quickly to consider and deliver on new propositions. Consistent Reliable Professional and Ethical

3 Executive Summary 5 Business and Performance 6 A.1 Business 6 A.2 Underwriting Performance 7 A.3 Investment Performance 8 A.4 Performance of Other Activities 8 A.5 Any Other Information 8 System of Governance 9 B.1 General Information on the System of Governance 9 B.2 Fit and Proper Requirements 16 B.3 Risk Management System Including the Own Risk and Solvency Assessment ORSA 17 B.4 Internal Control System 19 B.5 Internal Audit Function 20 B.6 Actuarial Function 20 B.7 Outsourcing 21 B.8 Any Other Information 21 Risk Profile 22 C.1 Underwriting Risk 22 C.2 Market Risk 23 C.3 Credit Risk 24 C.4 Liquidity Risk 25 C.5 Operational Risk 26 C.6 Other material Risks 26 C.7 Any other Information 27 Valuation for Solvency Purposes 28 D.1 Assets 28 D.2 Technical Provisions 31 D.3 Other Liabilities 35 D.4 Alternative Methods for Valuation 35 D.5 Any Other Information 35 Capital Management 36 E.1 Own Funds 36 E.2 Solvency Capital Requirement and Minimum Capital Requirement 38 E.3 Use of the Duration Based Equity Risk Sub-module 40 E.4 Differences between the Standard Formula and Internal Model 40 E.5 Non-compliance with the SCR and MCR 40 E.6 Any Other Information 40 Quantitative Reporting Templates QRTs 41 Glossary 60

4 Quantitative Reporting Templates QRTs 41 Collingwood Insurance Company Limited QRTs 41 S Balance Sheet 41 S Premium, claims and expenses by line of business 43 S Premium, claims and expenses by country 44 S Non-Life Technical Provisions 45 S Non-Life insurance claims information 46 S Own Funds 47 S Solvency Capital Requirement - for undertakings on Standard Formula 49 S Minimum Capital Requirement - Only life or only non-life insurance or reinsurance activity 50 Collingwood Holdings (Gibraltar) Limited 51 S Undertakings in the scope of the Group 51 S Balance Sheet 52 S Premiums, Claims and Expenses by Line of Business 54 S Premiums, claims and expenses by country 55 S Own Funds 56 S Solvency Capital Requirement - for Groups on Standard Formula 59

5 5 Executive Summary Collingwood Holdings (Gibraltar) Limited CHGL is a Gibraltar registered Holding Company and the sole parent of Collingwood Insurance Company Limited CICL. The aforementioned entities were incorporated in 2003 and form the Collingwood Group. CICL is a specialist motor insurer with a strong track record of underwriting niche motor insurance products. In the past financial year the Group made an operating profit of 3.346m, which continues the positive performance of previous years, reflecting both the strategic focus of CICL and the skills and experience of its staff. The harmonised EU-wide regulatory regime for Insurance Companies, known as Solvency II, came into force on 1st January The regime requires reporting and public disclosure arrangements to be implemented by insurers, and their Groups where applicable, some of the disclosures must be displayed on the insurer s website and this document represents the first version of the Solvency and Financial Condition Report ( SFCR ) to be published by the Company. This report covers the following sections, the content of which are summarised for ease of reference: Purpose and Content Business and Performance A description of the Collingwood Group, its business and external environment, as well as any significant changes during the reporting period. System of Governance Risk Profile Valuation for Solvency Purposes Capital Management Details of the Group s governance structure, lines of accountability, remuneration policy and information about material transactions during the reporting period. Having been specifically considered, information, where applicable, in relation to the exposures, concentrations, mitigations and sensitivities regarding each material risk category facing the Collingwood Group. Information on the Group s solvency balance sheet valuation, including a description, separately for assets, technical provisions and other liabilities, of the bases and methods used for their valuation, together with a quantitative and qualitative explanation on any major differences in the valuation bases and methods used in the financial statements. A description of the Group s approach to capital management, including details of interactions with the Risk Management Function, information on the planning horizon used, capital management methods employed, and any material changes from the previous reporting period. The ultimate Administrative Body with responsibility for these matters is CICL s Board of Directors. The Boards of both CHGL and CICL have created robust governance structures, ensuring the firms deliver their core cultural ethos as well as adhere to key regulatory requirements. Their Risk Profiles have remained consistent and are managed according to a focused and effective Risk Management framework. No changes are anticipated to CICL s material lines of business nor to the Group firms Risk Appetites or the Risks faced by the Group companies. The Group has always been, and is projected to remain, significantly above its Solvency Capital Requirement SCR. As at 31st March 2017, Collingwood s Own Funds as a proportion of its SCR were 153.8%. SOLVENCY OWN FUNDS SCR M M* COVERAGE (%) 153.8% *Covered in its entirety by Tier 1 funds.

6 6 Business and Performance A.1 Business 1.1 Collingwood Insurance Company Limited CICL is a company limited by shares, which is authorised and regulated by: Gibraltar Financial Services Commission, PO Box 940 Suite 3, Atlantic Suites, Gibraltar Tel: The Collingwood Group s external Auditor is: EY Regal House Queensway GX111AA Gibraltar Tel: Collingwood Holdings (Gibraltar) Limited CHGL shareholders with qualifying holdings are: JZ INTERNATIONAL FUND III LP AND ASSOCIATED CO-INVESTORS 60 % ALAN BEENSHILL 40 % 1.4 Collingwood Holdings (Gibraltar) Limited CHGL is the 100% owner and sole parent of Collingwood Insurance Company Limited CICL. The aforementioned entities form the Collingwood Group. CICL is licensed by the Gibraltar Financial Services Commission under the Financial Services (Insurance Companies) Act to carry on insurance business in Gibraltar. Its sole material line of business is Motor Insurance, which is geographically restricted to the United Kingdom.

7 7 A.1 Business Continued 1.5 During the reporting period, the following external events arose: Notice to leave the European Union as required under Article 50 of the Lisbon Treaty was provided by the UK government to the European Council. The effects of Brexit will not be known for some time however any impacts upon the Collingwood Group are not considered material. This topic is considered below. Delays to Whiplash reforms (a disincentive to minor, exaggerated and fraudulent road traffic accident related soft tissue injury claims) are anticipated as a result of the recent UK General Election. Whilst the legislative amendments will be positive for the Motor Insurance industry, such delays do not affect CICL given the present status quo is unaffected. Ogden discount rate changes. Whilst under longer term review, the Ministry of Justice announced in March 2017 that the Ogden rate was cut from 2.5% to -0.75%, as of 20th March When a personal injury claim occurs and a lump sum is paid as compensation for life-changing injuries, the amount awarded is adjusted to compensate for the amount of interest the claimant can expect to earn by investing it to ensure that they are never under, or over, compensated. The amount by which this is adjusted is known as the Discount Rate. It is applied by the courts to an amount calculated to cover loss of earnings and any care costs for claimants. Due to the company s strong reserving approach and the Reinsurance arrangements it has in place (Excess of Loss with a minimal retention for each and every loss and an Appetite for a panel of Reinsurers with a minimum A rating), the recent Ogden discount rate changes have had no impact on net Underwriting Profitability or historic reported profit. A.2 Underwriting Performance 2.1 As noted above, CICL s material line of business is Motor Insurance, which is provided on a services basis into the United Kingdom only. During the year ended 31st March 2017, CICL wrote 65.6m of gross premium, which is an increase of 16.7m from its 2016 year ending figure of 48.9m. Underwriting performance has been positive with technical profits reported in the year-end financial statements as follows: 2016/2017 Gross Written Premium GBP (000 s) Net Written Premium GBP (000 s) Net Earned Premium GBP (000 s) Net Claims Incurred GBP (000 s) Other Technical Income & Expenses GBP (000 s) Technical Profit GBP (000 s) 65,755 57,023 51,063 32,403 13,168 5, /2016 Gross Written Premium GBP (000 s) Net Written Premium GBP (000 s) Net Earned Premium GBP (000 s) Net Claims Incurred GBP (000 s) Other Technical Income & Expenses GBP (000 s) Technical Profit GBP (000 s) 48,865 43,907 42,501 26,394 11,972 4,135

8 8 A.3 Investment Performance 3.1 CICL s investment Appetite and approach are conservative. Investments comprise predominantly cash or cash equivalents and its asset portfolio does not, for example, include any securitised investments: 80% Cash & Cash Equivalents 15.5% Bonds & other debt instruments 3% Property 1.5% Equities Mar-17 Income 000 s Mar-17 Gain/Loss 000 s Mar-16 Income 000 s Mar-16 Gain/Loss 000 s Property 7 (207) 28 (262) Cash & Cash Equivalents Bonds & other debt instruments (156) Equities 172 (26) 49 (141) Total 589 (133) 424 (559) A.4 Performance of Other Activities 4.1 CICL does not receive any material income or incur any material expenses other than from its underwriting and investment activities. A.5 Any Other Information 5.1 There are no further disclosures

9 9 System of Governance B.1 General Information on the System of Governance 1.1 CHGL carries ultimate responsibility for Group governance but CICL governs itself and the activities it undertakes as an authorised insurance company in a manner that is suitable to legal, regulatory and operational requirements. Both Boards of Directors contain a mixture of Executive and Non-Executive Directors, with some Directors common to both Boards. Terms of Reference detail the purpose, responsibilities, membership and authority of each Board. 1.2 CHGL Board of Directors Alan Beenshill Executive Director Sharon Webber Executive Director Martin Wright Non-Executive Director Andrew Gibson Non-Executive Director Hamish Mair Non-Executive Director Miguel Rueda Non-Executive Director 1.3 CICL Board of Directors Alan Beenshill Chief Executive Officer Sharon Webber Executive Finance Director Martin Wright Non-Executive Director Andrew Gibson Non-Executive Director Michael Oliver Non-Executive Director Craig Fortunato Non-Executive Director

10 CICL Board & Sub-Committee Structure CICL Board Risk & Compliance Sub Investment Sub Committee Service Level Review Underwriting Performance Committee (Management) Meetings (Management) Meetings Audit Sub Committee Reinsurance Sub Committee Terms of Reference describe the purpose, responsibilities, membership and authority delegated from the Board to each Committee. Attendees are invited to Committees as determined by the Committee according to their expertise or experience, for example Legal, Regulatory or Investment knowledge. Each of the CHGL and CICL Board of Directors has a duty to supervise the management of the business and affairs of the Company. The Boards, directly (and in relation to CICL through its Sub Committees), provide direction in pursuit of the best interests of the Companies. The Boards set Risk Appetites and Tolerances (individual and in aggregate), and are responsible for the identification of principal Risks. They are also responsible for the implementation of appropriate systems to effectively monitor and manage such principal risks with a view to their long-term viability and achievement of a proper balance between the risks incurred and potential return to the Company s shareholders. CICL s Board and Board Sub-Committee structure is displayed below, with core roles and responsibilities specifically identified. This is followed by the diagrammatic arrangement of CICL s Key Functions structure, which includes a description of the roles within, and responsibilities for, each Key Function.

11 (a) (b) Risk & Compliance Sub Committee Chair: NED Responsibilities include ensuring CICL is taking: appropriate measures to identify, assess and monitor compliance with the requirements of all applicable statutes and regulations to which the operations of the business is subject in all jurisdictions in which it operates appropriate measures to (a) (b) (c) (d) Audit Sub Committee Chair: NED Responsibilities include: CICL Board of Directors Reviewing Financial Statements (as well as influences or impacts thereon) Considering and reviewing the Internal Control framework Reviewing the plans, activities and structure of Internal Audit Reviewing external auditors, proposed scope, approach and performance, including coordination of audit effort with Internal Audit Alan Beenshill - CEO Sharon Webber - FD Martin Wright NED Andrew Gibson NED Michael Oliver NED Craig Fortunato NED Investment Sub Committee Chair: FD Responsibilities include: (a) Recommending Investment Policy (including changes) to the Board (b) Overseeing ongoing implementation of Investment Policy (c) Considering and recommending ideas for new investment opportunities to the Board (d) Monitoring all aspects of investment performance Making recommendations Reinsurance Sub Committee Chair: CEO Responsibilities include producing a Reinsurance strategy that: (a) Meets CICL s business plan as agreed with shareholders (b) Reflects risk appetite (c) Meets regulatory and budgetary requirements (d) Ensures Reinsurance is purchased and monitored in accordance with internal and regulatory requirements (e) Monitoring large losses identify, assess, monitor, regarding any outsourced control and mitigate risks Investment Manager 11

12 Risk Function Holder - Alan Beenshill (CEO) Performer - Peter Guillan (Head of Risk & Compliance) BOARD RISK & COMPLIANCE SUB-CO Compliance Function Holder - Alan Beenshill (CEO) Performer - Peter Guillan (Head of Risk & Compliance) CICL BOARD (KEY FUNCTIONS STRUCTURE) Actuarial Function Holder - Sharon Webber (FD) Performer and support to Holder - Mazars (External Actuarial expertise) BOARD AUDIT SUB-CO Internal Audit Function Holder - Sharon Webber (FD) Performer - Peter Guillan (Head of Risk & Compliance) 12 assistance is provided to the business in the identification, control and management of Risks Individual Risks sit with the relevant business areas, with each area required to evidence the suitability and effectiveness of controls a quarterly Sub-Committee meeting is held to discuss business performance (in the management of Risk) A formal Risk & Compliance Report is produced for discussion during each Sub-Committee meeting advice and guidance is provided on the legal and regulatory landscape facing the firm asistance is provided to help the firm identify, create and manage internal policies that will enable it to achieve and maintain compliance with legal and regulatory requirements As the Head of Risk & Compliance will not be involved in operational-specific activities, Conflicts of Interest will not arise i.e. Audits will not review tasks in which the Head of Risk & Compliance is involved CICL s Board or Board Audit Sub-Committee will not provide input to the methodology or planning process, nor will they approve such processes or documents The Head of Risk & Compliance will be provided with unfettered access to any records or information relevant to the Audit in question As long as Audit findings are accurate i.e. they cannot be challenged through the presentation of contrary evidence, all Recommendations will be accepted and implemented without question (the cost v- reward aspect of implementing such Recommendations will be discussed at Audit debriefings i.e. before the Final Report is produced) Terms of Reference will be produced for each Audit before it takes place Reports will be produced following the completion of every Audit and a debrief A formal Audit Report is produced for discussion during each Sub-Committee meeting assurance is provided to the Board and Senior Management in relation to the protection of assets, reputation and sustainability of the organisation Audit methodology is specifically documented prior to the beginning of each business year a Risk based Audit plan is created prior to the beginning of each business year containing resource requirements, the high level scope of each Audit and relevant prioritisation based on Plan scoring a quarterly Sub-Committee meeting is held to discuss - actual -v- planned Audits undertaken, - issues identified in following the plan, - Audit Report ratings (R/A/Y/G), - Recommendations made (by priority), - Recommendations outstanding (by priority), - business performance in closing Recommendations i.e. average timescales

13 Key Functions (applicable to CICL only) The Solvency II Directive defines a Function as the internal capacity to undertake practical tasks and requires the establishment of at least 4 Key Functions (listed below). All of the Functions have core duties Duties of CICL s Key Functions Risk Function (a) (b) (c) (d) Assist in the identification of Risks; Assist in the design and implementation of internal controls; Monitor on the effectiveness of those controls; Report to the Board on the activities as well as other specific areas of Risk both on its own initiative and following requests from the Board. Compliance Function (a) (b) (c) (d) (e) Identify and monitor legal & regulatory developments; Provide advice to the Board and internal business units on legal & regulatory developments and industry best practice; Monitor business performance against legal & regulatory requirements; Resolve compliance difficulties as they occur; Report to the Board on business performance against legal, regulatory and internal requirements. Internal Audit Function (a) (b) (c) (d) (e) Establish, implement and maintain an audit plan setting out the audit work to be undertaken across the planning horizon, taking into account all activities and the complete system of governance: Take a risk based approach in deciding Audit priorities; Produce a report containing the findings and recommendations for Executive Management following the completion of each Audit; Report details of, and performance against, the audit plan to the Board via the Audit Sub-Committee on a quarterly basis; and Report details of, and performance against, all recommendations, envisaged timescales to remedy any shortcomings, and information on the achievement of their completion to the Board via the Audit Sub-Committee on a quarterly basis. Actuarial Function (a) (b) (c) (d) (e) (f) Co-ordinate the calculation of technical provisions; Provide a view on data availability and quality; Compare best estimates against experience; Provide an opinion on underwriting policy and reinsurance arrangements, taking into consideration the interrelations between them and the technical provisions; Report to the Board in writing at least annually; Contribute to the effective implementation of the firm s Risk Management programme.

14 Responsibilities for, and Roles within, Key Functions CICL allocates personal responsibility for each Key Function thus providing clear ownership. Its approach to the individual s allocated such responsibility ensures there is independence from the performance of activities within those Functions Key Function Holders Alan Beenshill, the Chief Executive Officer (Risk and Compliance) and Sharon Webber, the Finance Director (Internal Audit and Actuarial) are CICL s Key Functions Holders Key Function Performers Risk, Compliance and Internal Audit Functions are operated and managed by the Head of Risk & Compliance. Actuarial activities are split between several individuals, including Actuarial services obtained from a professional firm of Actuaries. 1.6 CHGL and CICL follow strict Remuneration Policies, which remain the responsibility of the relevant Board. CHGL has no employees. Its Executive Board members are not salaried, nor do they receive financial bonuses. The firm s Non-Executive Directors are appointed for specific, renewable, periods under service contracts for which a set fee is payable. CICL recognises the concept of variable remuneration and believes that properly crafted packages play a role in aligning the interests of management, business partners and owners. The firm focuses on ensuring sound and effective Risk Management through: a governance structure for setting goals and communicating such goals to employees and business partners, as applicable in the circumstances; alignment with business strategy, key priorities and long-term objectives; alignment with the protection of customers, and avoidance of conflicts of interests; ensuring that any remuneration pool does not undermine the firm s capital base. CICL s Board understands its duties towards the firm s shareholders and customers. It therefore seeks to avoid any conflicts between such duties and the attraction/ongoing retention of quality personnel in the firm.

15 15 The Board: Board remuneration ensures the firm can attract and retain the most qualified members and to provide a solid basis for succession planning. In connection with regular assessments of the remuneration of the Executive Board, developments in market practice are assessed systematically. In the event a bonus is considered available for consideration i.e. a bonus may not always be awarded, it will be allocated as a percentage of salary, taking into account market conditions and actual -v- budgeted profit. The Staff: At annual performance and appraisal interviews, performance in the previous year will be reviewed by the individual s Line Manager, who may set new goals. Decisions on the adjustment, if any, of the individual s remuneration are made on the basis of this appraisal. Various remuneration components are combined to ensure an appropriate and balanced remuneration package is achieved. They are determined by the role and position of the individual employee, including professional experience, responsibility and job complexity. The specific remuneration components are: - Salary and/or Bonus, and - Benefits in kind Decisions surrounding bonuses (a percentage of salary) and any other form of remuneration are made by CICL s CEO and/or Finance Director, taking into account individual performance, market conditions and actual -v- budgeted profit. 1.7 Directors fees were paid to the Executive and Non-Executive Board in 2016/17 totalling 410,733. CICL pays a management fee of 3% of EBITDA to JZI Asset Management LLC.

16 16 B.2 Fit and Proper Requirements 2.1 Neither CHGL nor CICL appoint or employ individuals without the knowledge, skills and expertise necessary to discharge the responsibilities allocated, or to be allocated, to them in their role. Documented policies direct the necessary approaches to ensure such a philosophy is strictly applied. The firms will consider a number of factors when assessing the fitness and propriety of a person to perform a particular role, in particular where this involves a senior position within the organisation, for example the Board and Heads of departments. Such factors are identified through pre-appointment checks e.g. references and background vetting, supported by ongoing annual self-certification accompanied by random sampling. The most important considerations will be the individual s: (1) Honesty, integrity and reputation In determining a person s honesty, integrity and reputation, CHGL and CICL will have regard to all relevant matters including, but not limited to, criminal convictions or regulatory sanctions. (2) Competence and capability In determining a person s competence and capability, the firms will have regard to all relevant matters including but not limited to: (a) (b) Whether the person has demonstrated by experience and training that he/she is suitable to perform their role, or In relation to Board roles, whether the person has adequate time to perform his/her Board activities and meet his/her responsibilities. (3) Financial soundness In determining a person s financial soundness, CHGL and CICL will have regard to any factors including, but not limited to: (a) (b) Whether the person has been the subject of any judgment debt or award that remains outstanding or was not satisfied within a reasonable period, or Whether, the person has made any arrangements with his/her creditors, filed for bankruptcy, had a bankruptcy petition served on him/her, been adjudged bankrupt, been the subject of a bankruptcy restrictions order (including an interim bankruptcy restrictions order), offered a bankruptcy restrictions undertaking, had assets sequestrated, or been involved in proceedings relating to any of the preceding topics. If a matter comes to the relevant firm s attention which suggests that the person might not be fit and proper, this will be immediately escalated to the Board which will take into account the matter s relevance and importance.

17 B.3 Risk Management System Including the Own Risk and Solvency Assessment ORSA 3.1 CHGL and CICL have developed Risk Management programmes that are embedded into the corporate fabric, ensuring the businesses, shareholders and employees, where applicable, are not unduly exposed to Risk. The relevant Board is responsible for Risk identification, measurement, monitoring and reporting so it is effectively positioned to take suitable decisions in the eradication or mitigation of the Risks they face. CHGL outsources the day to day management of its Risk framework to CICL s Risk Function via an Intra- Group Agreement, thus utilising its core expertise and experience. CICL s Board is assisted in fulfilling its oversight responsibilities by the Risk & Compliance Sub-Committee, which works under a delegated and controlled Terms of Reference. 3.2 Risk Appetite Risk Appetites have been assessed and agreed by the CHGL and CICL Boards, at individual Risk level and in Aggregate. 3.3 Both CHGL and CICL retain Risk Registers, recording the key Risks to which the firms are exposed. An individual owner is allocated to each Risk, who is responsible and accountable for the Risk including evidencing controls. CICL s Risk Function challenges Risk owners on the adequacy of evidence available and the performance of the area to which the Risk relates, through a regular Assessment process. 3.4 CICL s Head of Risk & Compliance regularly reports to CICL s Risk & Compliance Sub-Committee and the Group s Boards. Such reports detail, amongst other topics, performance against Appetite, accompanying the latest versions of the Risk Registers. 3.5 The Own Risk and Solvency Assessment ORSA has a twofold purpose: 17 (a) (b) To be an integral part of the Group, embedding such Assessments into strategic decisions on an ongoing basis; and As a supervisory tool for the Financial Services Commission FSC (it is informed of the results of Assessments through an agreed reporting framework). 3.6 CHGL and CICL do not consider the ORSA to be an exercise that only takes place at specific times of the year, they ensure all relevant areas feed into the Assessment throughout an ongoing process. Whilst Assessments culminate in a Report that is scrutinised by the FSC, the ORSA is viewed as a management tool to run the businesses more effectively over the planning period. Each Assessment commences with the Business Plan, looking forward across the planning horizon (the process flow is displayed on the following page). Finance, Underwriting, Risk and Compliance all provide ongoing input, with further support and control provided by the Actuarial Function. CICL s Board Sub-Risk & Compliance Committee monitors and manages the ORSA framework, for example, the creation of Group policy and both firms overall Risk Frameworks. The above Board Sub-Risk & Compliance Committee operates within a defined Terms of Reference as noted in Section B1.4 above.

18 18 COLLINGWOOD GROUP ORSA PROCESS Business Planning (Board(s)) Risk Profiles Results (quantitative & qualitative) Stress Testing and Scenario Analyses Results (quantitative & qualitative) Capital Management Results (quantitative) SCR/MCR Calculations Results (quantitative & qualitative) Challenges to SCR - Standard Model Assumptions Results (quantitative & qualitative) Actuarial Review Draft ORSA Report (Board challenges) Final ORSA Report and regulatory submission End of Process

19 Assessments are ongoing throughout each and every Accounting Year however a report is produced and submitted to the FSC at least annually. The following non-exhaustive list identifies when an interim ad hoc Assessment may be undertaken (the general ORSA process shall be invoked but will be followed by a report comparing, contrasting and identifying differences to the most recent preceding Assessment): - launching a new product not already incorporated into CICL s existing business plan (in terms of anticipated GWP or moving into a new business line); - entering or changing material outsourcing arrangements; - material changes to CHGL or CICL business Risk profiles; - significant negative deviations in product performance. 3.8 Collingwood continually monitors its exposure to Risks in order to ensure that it does not breach its agreed Risk Appetite. Collingwood accepts appropriate underwriting risk to ensure an acceptable underwriting gain is generated, while minimising other risks. The Group s Risk Profile is demonstrated numerically through its Solvency Capital Requirement ( SCR ), which is calculated on the basis of the Standard Formula. The proportionate Risks presented in the SCR are considered to presently accurately represent the Risks to which the Collingwood Group is exposed. B.4 Internal Control System 4.1 CHGL s and CICL s Boards are responsible for Internal Control of the Group, including determination of Appetite, Controls to manage performance against Appetite and to ensure that an appropriate culture has been embedded throughout the organisations It is the role of the Boards to ensure Internal Control systems are robust and effective and take account of the Risks the businesses face. 4.2 As noted in Section 3.1, CHGL outsources the management of Risk to CICL s Risk Function via an Intra-Group Agreement to utilise the expertise and experience contained therein. Section also outlines the purpose of the Risk and Compliance Functions, which have been embedded into the business. Both Functions contribute to the creation, assessment and performance monitoring of internal Controls that underpin the Risk Management Frameworks for CHGL and CICL. Section 3.4 confirms the relevant lines of performance reporting under the Internal Control system(s) by CICL s Head of Risk & Compliance. 4.3 By understanding the nature of the Group s Risk Universe, CHGL and CICL have implemented a framework that is based upon the following principles: design and implementation of appropriate Risk Management and internal control systems through - the identification of key Risks; - determination of the extent to which those key Risks will be tolerated in the achievement of strategic objectives (Appetite); - ensuring appropriate culture and reward systems have been embedded throughout the organisations where applicable; - agreeing how identified key Risks should be managed or mitigated to reduce the likelihood of their occurrence or subsequent impact if materialization occurs; and - monitoring and reviewing Internal Controls, satisfying itself that they are functioning effectively and corrective action is being taken where necessary.

20 20 ensuring sound internal and external information and communication processes and taking responsibility for external communication on Risk Management and Internal Control. On the basis of the above, the Group has implemented and embedded a 3 Lines of Defence model reflecting: (a) (b) (c) Operational areas (generally creators and users of Internal Controls); Central oversight (Risk Management and Compliance Functions); Assurance (Internal Audit Function). This structure, alongside internal policies covering all Risk types and exposures relevant to the Group as well as reporting lines through to CICL s Audit and Risk & Compliance Committee Sub-Committees plus the Boards themselves, ensure the Group s Enterprise Risk Management is proportionate and effective. B.5 Internal Audit Function 5.1 CHGL outsources its Internal Audit requirements to CICL via an Intra-Group Agreement. CICL has implemented an Internal Audit Function that is independent from the businesses it Audits, supported by an Internal Audit Policy, Audit planning methodology and Audit Plan (covering a 3 year rolling period that reflects the Group s planning horizon). 5.2 Having appointed an individual internally to assume the responsibility of Internal Audit Function Holder, the Function s duties are to: (a) (b) (c) (d) (e) Establish, implement and maintain an audit plan setting out the audit work to be undertaken across the planning horizon, taking into account all activities and the complete system of governance: Take a risk based approach in deciding Audit priorities; Produce a report containing the findings and recommendations for Executive Management following the completion of each Audit; Report details of, and performance against, the audit plan to the Board via the Audit Sub-Committee on a quarterly basis; and Report details of, and performance against, all recommendations, envisaged timescales to remedy any shortcomings, and information on the achievement of their completion to the Board via the Audit Sub-Committee on a quarterly basis. 5.3 The Internal Audit Function is free from any Board, or other, interference in conducting its duties. B.6 Actuarial Function 6.1 CICL has appointed an internal Actuarial Function Holder, supported by a professional firm of Actuaries. The Actuarial Function: - Co-ordinates the calculation of technical provisions; - Provides a view on data availability and quality; - Compares best estimates against experience; - Provides an opinion on underwriting policy and reinsurance arrangements, taking into consideration the interrelations between them and the technical provisions; - Reports to the Board in writing at least annually. The Function links with the Risk and Compliance Functions, enabling key Risks to be managed and regulatory requirements delivered compliantly. It naturally weaves into the ORSA process and contributes to the creation of resultant reports that are submitted to the FSC.

21 B.7 Outsourcing Both CHGL and CICL pay particular attention to this topic and the Risks associated with such activities. Appetite for outsourcing remains low and is restricted to those areas deemed necessary and where control can be retained through robust oversight. CHGL therefore limits its outsourcing to an intra-group agreement with CICL for the provision of Risk Management and Audit expertise, whilst CICL minimises its exposure to Risks surrounding outsourcing by restricting outsourcing to the following key areas and partners: Marketing, Distribution, Finance and Policy Administration (Collingwood Insurance Services (UK) Limited CISL ); Claims handling services (Collingwood Business Solutions Limited CBSL ); Information Technology (Collingwood Business Solutions Limited CBSL ); and Approved garages network (Fleet Accident Repair Group FARG ) All of the above firms have been partners of CICL for many years. Relationships are managed by a written Agreement containing key requirements (including the provision of Management Information MI ) and responsibilities. The Agreements also contain termination clauses, exit strategies and rights of ownership. Outsourcing is managed by the firms Material Outsourcing Policies and Checklists. Risks associated with Outsourcing are managed in the same manner as any other facing the businesses, in accordance with their core (documented) Risk Management Policies. All material outsourcing arrangements will only be implemented: once the relevant Board has considered the appropriateness of outsourcing a particular activity; following suitable due diligence of the chosen partner (this includes completion of the Material Out sourcing Checklist, which covers selection, pre-launch and post-launch activities. Any evidence associated with a Material Outsourcing arrangement will be retained indefinitely or until 7 years after the termination of such an arrangement); after the FSC are aware of the firm s proposals; and after contracts are agreed and signed, which contain suitably robust clauses enabling the firm to maintain and manage its business (in CICL s case, as a regulated entity). All material outsourcing arrangements are: measured through suitable, and regular MI; reviewed on an ongoing basis to ensure such an arrangement remains suitable and the chosen partner is performing as expected; and periodically monitored or audited using a risk-based methodology and approach. B.8 Any Other Information 8.1 The Group s Boards consider that the systems of governance in place are suitably robust to ensure the Collingwood Group is managed in a way that takes into consideration the needs of all stakeholders, while ensuring that the Group s capital position and profitability remain strong. Further, the Boards consider the Group s governance to be adequate and relevant to the nature, scale and complexity of the businesses. There is no material risk within the Group outside CICL.

22 22 Risk Profile Introduction As an Insurance Company Underwriting Insurance business, holding core assets and trading investments, items C.1 C.6 affect CICL only. CHGL holds a minimal amount of cash on deposit to operate. CICL recognises the uncertainty and potential fragility of financial markets and Institutions, and therefore commits to annual Stress and Scenario Testing (across a number of Risk types, not Financial Risks in isolation). Such Testing is controlled by the firm s Stress Testing policy and generally agreed in the Risk & Compliance Sub-Committee to ensure relevant Tests are undertaken reflecting current conditions and identified Risk exposures, including during the ORSA process. C.1 Underwriting Risk 1.1 Underwriting Risk generally refers to the risk of loss on Underwriting activity and can materialise through cash inflows and/or outflows: Inflows Pricing Investment General claim recoveries Reinsurance recoveries Outflows Claim payments Reinsurance placement Risk identification and management take place through the frequent monitoring of Management information followed by regular detailed reviews during Underwriting Performance meetings and the Investment, Risk & Compliance and Reinsurance sub-committee meetings. This framework ultimately feeds into the Board. CICL operates within niche Personal Lines and Commercial Motor Insurance markets. Its Risk Appetite is conservative, concentrating on the delivery of profitable Underwriting results. Whilst business is generated through a network of Insurance Intermediaries, this is managed though a robust Agreement that does not provide delegated Underwriting authority, structures responsibilities appropriately and controls premium payment. Claims Handling activities are undertaken by a specialist partner, Collingwood Business Solutions Limited, with whom CICL has a long standing relationship and which is subject to a robust written Agreement and regular performance review. Although the company is naturally exposed to Catastrophe Risk, such exposure is significantly mitigated by the bespoke Reinsurance arrangements the firm has in place, containing an Excess of Loss programme that is subject to a suitable retention limit for all individual claims. Reserving Risk (the Risk that claims reserves are insufficient to meet insurance liabilities) is mitigated by: a documented Policy for the Reserving of claims covering initial notification through to claim development; regular Underwriting reviews of claims reserves, particularly large loss claims, to ensure they follow Reserving Policy and are adequate; the assessment of data quality and methodology used in calculating reserves; and annual external Actuarial reviews to independently assess claims reserves. CICL s balanced approach to the lines of business it writes, the geographic locations and customer profiles to which it is exposed as well as the channels through which this is achieved, ensure Risk concentration is mitigated.

23 C.2 Market Risk 2.1 The Group s key exposures lie with CICL as CHGL holds a minimum amount of funds in cash deposits with which to operate. CICL s Board delegates day to day management of the Company s investment strategy to the Finance Director, with oversight from the Investment Committee, which meets on a quarterly basis. The Finance Director may appoint and remove Investment Managers, in accordance with authority limits contained within agreed authority limits, to assist in the management of CICL s investments subject to the scope of the investment mandate set out in the firm s Investment Policy, and in accordance with regulatory requirements relating to admissibility, security and counterparty exposure. Key Risks associated with Market Risk are: Interest Rates For CICL, the effect of a change in value of an asset or liability due to an alteration in the term structure of interest rates or interest rate volatility is negligible ( 121k) Equity The effect of a change in value of an asset or liability due to fluctuations in the level or volatility of the market prices for equities is negligible to CICL, for which its equity portfolio is only a small proportion of the firm s assets (1.5% of invested assets) Currency To date, changes in the level or volatility of currency exchange rates have been immaterial to CICL as all live policy premiums and liabilities are in GBP. An amount of 15m Subordinated debt has recently been secured creating an exposure to currency risk. CICL s currency position is monitored at least quarterly by the Finance Director and it is currently matched. In the event this situation changes, sterling will be converted to Euros to maintain the firm s position Property CICL possesses a very small property portfolio (three properties) and the impact of changes to market prices are insignificant Spread This is a relatively insignificant risk for CICL in relation to the bonds and structured notes the Company holds (15.5% of overall assets) Concentration CICL s exposure relates to investments in individual counterparties and single name exposures. All of CICL s structured products are held with Credit Suisse however they are A rated. The firm diversifies its investments, with structured products forming 13.2% of overall assets. 23

24 24 C.3 Credit Risk 3.1 In this context, Credit Risk means the risk of loss, or of adverse change, in the financial situation, resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors to which an Insurer is exposed, in the form of counterparty default risk. As noted in Section 2.1 above, the Group s key exposures lie with CICL as CHGL holds a minimum amount of funds in cash deposits with which to operate. 3.2 CICL may be exposed to the following (the following is restricted to those contracts, channels and investment areas where the firm may be exposed, not the marketplace generally, which may include investment of assets in vehicles not utilised by CICL): Risk mitigating contracts such as Reinsurance arrangements CICL will only consider A rated (or higher) Reinsurers on its panel. The panel (which supports the reduction of Contagion Risk exposure), alongside CICL s Reinsurance contract requirements and the panel s performance, are reviewed regularly. Regular Underwriting meetings consider and review claims performance, including Reinsurance recoveries Receivables from Intermediaries and Policyholders The Risk associated with premium debtors is, in reality, very low. CICL attracts very little policyholder debt due to the nature of its policies i.e. a significant number of short term contract durations, plus payment in advance. CICL conducts Intermediary pre-appointment due diligence such as checks related to Credit and Regulatory status. Contracts CICL has in place with appointed Brokers also supports premium collection under all insurance contract types as they are responsible for any customer non-payment. The debt CICL holds with Brokers is tightly managed and actual debt is minimal Any other credit exposures e.g. Cash at Bank CICL deposits are split between a number of large suitably rated banks. There is a significant spread of deposits to manage any potential default. Regular Investment Committee meetings consider, review and comment on Investments held, their performance and adherence to internal policy. Alongside regular oversight by the firm s Finance Director with support from Investment Managers where necessary, CICL manages its obligations towards the Prudent Person Principle whereby assets held for regulatory purposes e.g. to cover expected liabilities and capital requirements ensure the security, quality, liquidity and profitability of investment portfolios as a whole, which includes adequate diversification.

25 C.4 Liquidity Risk 4.1 Liquidity Risk reflects the available resources and capacity of an insurer to manage its financial flows to ensure it is able to meet its responsibilities when they fall due. 4.2 CICL Motor Insurance policies are written with a maximum 12 months duration. The greatest threat to liquidity may occur during a catastrophe when a significantly large single claim or large numbers of multiple claims are received. For these situations, reinsurance cover is in place, with a restricted portion of the risk being retained by CICL. In a number of cases the full amount is not paid for a period after the event anyway (until losses are fully adjusted) giving additional time to liquidate assets and avoiding a liquidity crunch in the short term. Overall, catastrophic events are rare and CICL concentrates on managing vulnerability to such events, thus containing its exposure to Liquidity Risk within Insurance, Investment or Credit Risk. 4.3 As at 31st March 2017, the total amount of expected profit included in future premiums was 1.199m 4.4 Mismatches in the timing of cash flows relating to assets and liabilities could result in an insurer being unable to meet claims under its policies. 4.5 CICL has minimal Appetite for Risks that could affect its ability to meet liabilities of any type, particularly under Contracts of insurance it provides to customers. Its largest liabilities are claims payments under the policies it Underwrites. The firm therefore prices individual Insurance risks according to a defined Underwriting Strategy, investing resultant premium income in secure instruments that are predominantly immediately liquid or may be liquidated at short notice, with no loss of initial capital. Assets are invested in a way that optimises the liability (cash needs) profile of the business. The Finance Director ensures adequate Asset-Liability matching (business type and currency exposure). CICL possesses a larger amount of cash on deposit (sufficiently widely spread across Banking Institutions) than claim Reserves at any given time, thus mitigating Asset-Liability mismatches and Liquidity Risk. 25

26 26 C.5 Operational Risk 5.1 As a Holding Company, and Parent of CICL, CHGL has no direct operational capacity nor does it employ any staff. It s exposure to Operational Risk is therefore negligible. 5.2 CICL s key Operational Risk exposures arise in the following areas but are robustly controlled (individually) as indicated. The Group s wider Risk Management framework ensures Risk exposures are identified, measured, controlled and monitored in accordance with internal policies, with oversight and reporting to the relevant Board. CICL s Board and Sub-Committee structure is set out in Section 1.4 above: (a) Business Continuity/Disaster Recovery, for example loss of systems or a building from which to operate effectively. This Risk includes disruption to Material Outsourced activities as well as internal operations. Incidents naturally arise, for example loss of power, however a robust balance of Controls exist to manage this Risk (Business Continuity and Disaster Recovery Policies that must be periodically tested, alternative sites in which to relocate temporarily and [minimum] quarterly reviews of service and service standards). (b) The loss of key individuals such as those responsible for, and performing, Key Functions, or a lack of ongoing knowledge/expertise in sufficient numbers. A mixture of Controls are in place to prevent or manage Risk Materialisation, for example Remuneration that is commensurate with individual roles and responsibilities, mentoring and a succession Plan. (c) Financial Crime (Fraud), which is Risk for all firms, particularly in a Financial Services environment. A robust mix of Controls ensures the probability and impact of Risk materialisation are mitigated, for example internal Policies, system security, Claim Fraud indicators etc. The above Risks are monitored, recorded and updated within the Risk Register on an ongoing basis. Assurance is obtained through internal Controls testing, regular Management Information MI, responses to live events (for example Business Continuity Incidents), and Internal Audits. C.6 Other Material Risk 6.1 Reputation Risk (the trustworthiness of a firm resulting in loss of revenues or destruction of shareholder value): This is a Risk affecting all firms with a wide variety of permutations in relation to scenarios and results. CHGL and CICL are acutely aware of the importance of the Collingwood reputation and manages Risk materialisation through contractual clauses limiting use of the Collingwood Brand, internal approvals of public material and robust processes for the handling of complaints and subsequent root cause analysis. 6.2 Legal, Political and Regulatory Environment Risk (legislative, political and regulatory changes): The Group employs individuals with appropriate qualifications and significant experience in various legal and regulatory environments. CICL is also a member of various trade organisations such as the Association of British Insurers.