Focused Controlled Scalable. Solvency & Financial Condition Report (SFCR)

Transcription

1 Solvency & Financial Condition Report (SFCR) esure Group plc & esure Insurance Limited for the year ended 31 December 2016 Focused Controlled Scalable

2 Table of Contents Summary... 4 A) Business and performance... 4 B) System of governance... 6 C) Risk profile... 7 D) Valuation for solvency purposes... 7 E) Capital management... 8 Directors Report... 9 Audit Opinion A. Business and performance A.1 Business A.2 Underwriting performance A.3 Investment performance A.4 Performance of other activities A.5 Any other information B. System of Governance B.1 General Information on the systems of governance B.2 Fit and proper requirements B.3 Risk management system including the own risk and solvency assessment ( ORSA ) B.4 Internal control system B.5 Internal Audit function B.6 Actuarial function B.7 Outsourcing B.8 Any other information C. Risk Profile C.1 Underwriting risk C.2 Market risk C.3 Credit risk C.4 Liquidity risk C.5 Operational risk C.6 Other material risks C.7 Any other information D. Valuation for Solvency Purposes D.1 Assets D.2 Technical provisions Solvency and Financial Condition Report 2

3 D.3 Other liabilities D.4 Alternative methods for valuation D.5 Any other information E. Capital Management E.1 Own funds E.2 Solvency Capital Requirement and Minimum Capital Requirement E.3 Use of the duration based equity risk sub module in the calculation of the Solvency Capital Requirement E.4 Differences between the standard formula and any internal models used E.5 Non-compliance with the MCR and significant non-compliance with the Solvency Capital Requirement E.6 Any other information F. Quantitative Reporting Templates F.1 Group QRTs F.2 Solo QRTs G. Glossary of terms Solvency and Financial Condition Report 3

4 Summary Solvency II ( SII ) is the new solvency framework implemented on 1 January 2016 as the capital adequacy regime for the European insurance industry. It establishes a set of EU-wide capital requirements and risk management standards with the aim of increasing protection for policyholders. This document, the Solvency & Financial Condition Report ( SFCR ), is a requirement of the SII Directive. The structure and content follow the Delegated Regulation and supplementary information can be obtained from the Annual Report and Accounts ( ARA ). The SFCR is required to provide information on the solvency and financial condition of esure Group plc ( the Group ) and esure Insurance Limited ( eil or Solo ). Due to the similarities in the risk profile and operation of eil and the Group, the Prudential Regulation Authority ( PRA ) has approved a waiver such that the Group can produce a combined Group and Solo entity SFCR document. The document is divided into nine sections outlining A) the business and performance, B) system of governance, C) risk profile, D) valuation for solvency purposes, E) capital management, F) Quantitative Reporting Templates ( QRTs ), and G) a glossary of terms. The Group and Solo entities are closely aligned in terms of performance, governance and risk. As such, these sections of the report focus on the Group position. The remaining sections disclose information for the Group and Solo entities separately. A brief summary of each section is set out below. A) Business and performance Business The Group is an efficient, customer focused personal lines insurer, founded in 2000 by Chairman, Sir Peter Wood, Britain s foremost general insurance entrepreneur. The Group is one of the UK s leading providers of Motor and Home insurance products through the esure and Sheilas Wheels brands. Strategy The Group s strategy has been designed and implemented to deliver increased value to all our stakeholders through making insurance simple for our customers. Growth Effective claims management Approach The Group targets profitable growth through its focused and controlled approach to underwriting. On a test and learn basis, the Group continues to widen its customer footprint as it looks to grow its market share in Motor and Home insurance. Settling claims is what we are here to do when our customers need us the most and that is why our processes aim to put the customer at the centre. UK-based claims centres, with over 600 specialists; our own approved repair network; and market-leading fraud capabilities help to deliver an excellent customer service while containing costs Update Gross written premium growth of 19% to 655m; in-force policy growth of 9% to 2.2m. Motor customer footprint increased to 70 80% of the market. The Group has increased its market share in Motor to an estimated 5.8% (2015: 5.3%) and an estimated 2.1% in Home (2015: 2.1%). Over 90% of accidental damage claims settled through own repair network. 6 to 1 return on counter fraud investment. Enhanced strategies to mitigate claims inflation. Solvency and Financial Condition Report 4

5 Expense efficiency Contribution Low cost philosophy set from the top and embedded throughout the business. Customer acquisition costs in total flex with the growth of the business through our focus on fixed unit cost price comparison website distribution. The Group s agile, flexible and scalable infrastructure aids this approach. Contribution analytics allow the Group to make value-based decisions on customer acquisition and retention. A diversified suite of additional insurance products and services provide further opportunities to deliver an improved contribution. Cost per policy of 73. Expense ratio of 24.6%. Better use of robotics to drive efficiency. Data-led contribution analysis across customer life cycle. Improved take up rate of additional insurance products. Enhanced renewal pricing Group Financials Gross written premiums ( m) In-force policies (millions) Trading profit from continuing operations ( m) Profit after tax ( m) Combined operating ratio (%) Loss ratio (%) Expense ratio (%) Solvency coverage (%) Review of 2016 Introduction In 2016, the Group increased gross written premiums by 19.0% to 655.0m; increased trading profit from continuing operations by 17.3% to 84.6m; successfully demerged Gocompare.com; and maintained sufficient capital flexibility to deliver its growth ambitions in 2017 and beyond, with solvency coverage of 152% (risk appetite of 130%-150%). At the time of the ARA the estimated solvency coverage ratio was 149%. Following the conclusion of the audit the coverage ratio has increased to 152%. Trading profit from continuing operations, being earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets, is management's measure of the overall profitability of the Group's operating activities. The Group's trading profit from continuing operations of 84.6m (2015: 72.1m) includes Motor underwriting, Home underwriting, Investments and Non-underwritten additional services. Focus 2016 was a year of growth through focused underwriting. The Group added nearly 200,000 in-force policies and momentum continued to build in its footprint expansion programmes with the launch of a further 12 segments in Motor towards the end of the year. Through enhancements to its underwriting capabilities the Group is now able to quote for 70-80% of the Motor market, without materially increasing risk, giving the Group great opportunities to deliver its ambition of 3 million in-force policies by Solvency and Financial Condition Report 5

6 In Motor, customer contribution modelling continued to evolve. Through regular and detailed monitoring the Group is able to make more informed value based decisions on a daily basis. The Group s customer contribution approach allows it to offer competitive prices to customers providing them the opportunity to benefit from the Group s great products and services, while generating value for the business. The Home market remains challenging, in particular the rating environment on price comparison websites, and the Group does not believe market conditions are conducive to growth at this time. Despite this, Home remained a key contributor to the Group in Control The Group remains committed to only growing when it believes it is profitable to do so and its ambition to reach three million in-force policies by 2020 is underpinned by this philosophy. Effective claims management and expense efficiency provide the foundations to deliver increased value and the Group s counter fraud capabilities continue to lead the way across the market. Over the past three years the Group has utilised device profiling with great success and this would not have been possible without its collaborative and innovative approaches. The Group s low risk approach to underwriting and conservative reinsurance programme mitigated much of its exposure to the change in the Ogden discount rate and leaves it well placed within the market. Scale Investment in the Group s infrastructure is ongoing to ensure it has agile, flexible and scalable systems in place to meet ever changing customer preferences. The Group s digital market place remains focused on price comparison website distribution and improvements to its online customer journey improved new business sale conversion and customer experience. People The Group strives to make the business a great place to work as it is its people who are fundamental to its success. In 2016, the Group implemented a new pay & reward framework; invested in its talent; and its first employee sharesave scheme vested allowing its people to share in the success of the business. Summary 2016 was a year of strong growth and the Group is confident that this will deliver value over the coming years. esure Insurance Limited With the exception of the demerger and investment income that the Group receives from its investment in IMe Law Limited, operated by the Group s partner, Irwin Mitchell the performance of eil is materially the same as that of the Group. B) System of governance The Board of Directors is responsible for leading and controlling the Group and has overall authority for the management and conduct of the Group's business, strategy and development. The Board has set a robust risk management strategy as an integral element in its pursuit of business objectives and in the fulfilment of its obligations to shareholders, regulators, customers and staff. The Board is also responsible for ensuring the maintenance of a sound system of internal control and risk management (including financial, operational and compliance controls, and for reviewing the overall effectiveness of systems in place), and for the approval of any changes to the capital, corporate and management structure of the Group. The Group has a framework for the control and management of the business. The Group maintains a risk and internal control management framework that defines, through Strategic Risk Objectives and statements on our risk appetite, the level of business risks that it is able to tolerate or that it chooses to bear. The Group has established internal controls to mitigate material risks. The Group's key functions as defined under SII (Internal Audit, Compliance, Risk Management and Actuarial) have the necessary authority, resources and independence to operate effectively and there is a fit and proper policy in place to make sure that employees have the necessary skills, knowledge and expertise. The Group's risk management framework and Own Risk and Solvency Assessment ( ORSA ) process are Solvency and Financial Condition Report 6

7 proportionate to the risks that we face and are organised around the core elements of risk strategy and appetite, risk governance, and the associated risk reporting. C) Risk profile As an underwriter of insurance for Motor and Home personal lines, the Group is exposed to a number of risks including underwriting, market, credit, liquidity and operational. These risks are monitored and mitigated through the implementation of processes, controls and sensitivity testing. Under SII the Group is required to calculate its Solvency Capital Requirement ( SCR ). The Group s SCR allocation by risk type, based on the undiversified capital requirement, can be seen below: 2016 Underwriting risk 72% Market risk 18% Operational risk 8% Credit risk 2% The main risk driver is underwriting, consisting of premium, reserve and catastrophe risk, reflecting the capital requirements of the core business activities for the Group. The Group purchases reinsurance as a risk transfer mechanism to mitigate risks that are outside the Group s appetite for individual claim or event exposure and to reduce the volatility caused by large individual and accumulation losses. By doing so, the Group reduces the impact that an event can have on its capital position and its underwriting results in both Motor and Home. The Group s reinsurance programmes are reviewed on an annual basis and capital modelling is used to identify the most appropriate structure and risk retention profile. D) Valuation for solvency purposes Under SII assets and liabilities are required to be valued at fair value which is the amount for which they could be exchanged with a third party in an arm s length transaction. This should be derived from active market prices where possible. The valuation principles are broadly the same as those applied under IFRS but there are some notable exceptions including the valuation of deferred acquisition costs, intangible assets, prepayments, land and buildings, plant and equipment, the technical provisions and the valuation of the subordinated loan notes ( the Notes ). Deferred acquisition costs, intangible assets and prepayments do not meet SII valuation principles and as such have no value under SII; Land and buildings are recognised at highest and best use taking into account the market value of rental income if the property was leased out; property, plant and equipment is valued at replacement cost; technical provisions under SII are the best estimate of future insurance cash flows plus a risk margin to allow for the capital cost for a third party to run off the book. Under SII, potential profits on insurance contracts are recognised up front. Also as per the accounting policy claims provisions include a margin above the best estimate. This is not permitted under SII. The resulting technical provisions are therefore lower under SII than IFRS. At 31 December 2016, the Group had SII net assets of 282.7m, compared to IFRS net assets of 271.5m. The increase in SII assets compared to IFRS is driven primarily by a lower valuation of the SII technical provisions compared to IFRS due to the earlier recognition of profit from business existing at the valuation date and an increase in the value of property. This is partially offset by intangible assets, deferred acquisition costs and prepayments which are held as assets under IFRS but hold no value under SII as they are not allowable under SII valuation principles and an increase in the value of the liability relating to the Notes. Solo SII net assets at 31 December 2016 were 231.9m, compared to IFRS net assets of 343.1m. The decrease in SII net assets compared to IFRS is mainly driven by the Notes. These are held by the Group but an adjustment takes place to recognise the liability at the Solo level as well under SII. This is because as at 31 December 2016 the Solo entity generates the majority of the Group s profit. The majority of value of the Notes is allowable as Tier 2 capital as the Notes are subordinated and they rank as creditors after the claims of policyholders. The other valuation differences are broadly the same as the Group. Solvency and Financial Condition Report 7

8 Where it is not possible to value assets or liabilities (excluding technical provisions) using active market prices alternate valuation methods must be used. These include: market approach - using other market observable inputs; income approach, using, for example, future cash flows; and cost or replacement cost approach, using the replacement cost of the asset or liability adjusted for obsolescence. The Group has used alternate valuation methods in the valuation of property, plant and equipment, the Notes and its unquoted equity investment in IMe Law Limited. E) Capital management The Board considers the Group's capital requirements and prospective premium growth expectations over a three year planning horizon. The Group intends to hold capital coverage of its SCR in the region of %. The capital surplus above the SCR provides sufficient headroom to absorb adverse capital events and should enable the Group to continue to meet its regulatory capital requirements. The Group s dividend policy is to target a base dividend of 50% of profit after tax and enhance the base dividend with a further special dividend, if the Group has sufficient capital and distributable reserves, after allowing for an appropriate level of capital coverage of the Group s SCR and future growth opportunities. The Board remains committed to returning excess capital to shareholders where it does not believe it can utilise retained capital for further profitable growth. A summary of the Group capital position, after allowing for the final dividend, as at 31 December 2016 is shown in the table below: 2016 m Tier 1 capital Being SII net assets of 282.7m less foreseeable dividend of 43.9m Tier 2 capital Eligible Own Funds SCR Surplus Coverage ratio 152% At the time of the ARA the unaudited solvency coverage ratio was 149%. Following the conclusion of the SII audit the coverage ratio has increased to 152%. Eligible Own Funds are the sum of Tier 1 and Tier 2 capital. Tier 1 capital comprises IFRS reserves adjusted for all IFRS to SII valuation adjustments ( 282.7m), less foreseeable dividends ( 43.9m). Tier 2 capital relates to the Notes issued by the Group which are allowable as capital as they rank as creditors after the claims of policyholders. Tier 2 capital is capped at 50% of the SCR. The SCR is calculated using the standard formula taking into account underwriting, market, counterparty default and operational risks. Solvency and Financial Condition Report 8

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10 Audit Opinion Report of the external independent auditor to the Directors of esure Group plc ( the Group ) and esure Insurance Limited ( the Company ) pursuant to Rule 4.1 (2) of the External Audit Chapter of the PRA Rulebook applicable to Solvency II firms Except as stated below, we have audited the following documents prepared by the Group and the Company as at 31 December 2016: The Valuation for solvency purposes and Capital Management sections of the Solvency and Financial Condition Report as at 31 December 2016, ( the Narrative Disclosures subject to audit ); and Group templates S , S , S , S and Company templates S , S , S , S , S , S ( the Templates subject to audit ). The Narrative Disclosures subject to audit and the Templates subject to audit are collectively referred to as the Relevant Elements of the Solvency and Financial Condition Report. We are not required to audit, nor have we audited, and as a consequence do not express an opinion on the Other Information which comprises: The Business and performance, System of governance and Risk profile sections of the Solvency and Financial Condition Report; Group templates S , S ; Company templates S , S , S ; the written acknowledgement by the Directors of their responsibilities, including for the preparation of the Solvency and Financial Condition Report ( the Responsibility Statement ). To the extent the information subject to audit in the Relevant Elements of the Solvency and Financial Condition Report includes amounts that are totals, sub-totals or calculations derived from the Other Information, we have relied without verification on the Other Information. Respective responsibilities of directors and auditor As explained more fully in the Responsibility Statement, the Directors are responsible for the preparation of the Solvency and Financial Condition Report in accordance with the financial reporting provisions of the PRA rules and Solvency II regulations which have been modified by the modifications, and supplemented by the approvals and determinations made by the PRA under section 138A of FSMA, the PRA Rules and Solvency II regulations on which they are based. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of a Solvency and Financial Condition Report that is free from material misstatement, whether due to fraud or error. Our responsibility is to audit, and express an opinion on, the Relevant Elements of the Solvency and Financial Condition Report in accordance with applicable law and International Standards on Auditing (UK and Ireland) together with ISA (UK) 800 and ISA (UK) 805. Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Solvency and Financial Condition Report 10

11 Scope of the audit of the Relevant Elements of the Solvency and Financial Condition Report A description of the scope of an audit is provided on the Financial Reporting Council s website at Opinion on the Relevant Elements of the Solvency and Financial Condition Report In our opinion, the information subject to audit in the Relevant Elements of the Solvency and Financial Condition Report of the Group and the Company as at 31 December 2016 is prepared, in all material respects, in accordance with the financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based, as modified by relevant supervisory modifications, and as supplemented by supervisory approvals and determinations. Emphasis of Matter - Basis of Accounting We draw attention to the Valuation for solvency purposes and Capital Management sections of the Solvency and Financial Condition Report, which describe the basis of accounting. The Solvency and Financial Condition Report is prepared in compliance with the financial reporting provisions of the PRA Rules and Solvency II regulations, and therefore in accordance with a special purpose financial reporting framework. The Solvency and Financial Condition Report is required to be published, and intended users include but are not limited to the Prudential Regulation Authority. As a result, the Solvency and Financial Condition Report may not be suitable for another purpose. Our opinion is not modified in respect of this matter. Opinion on other matter prescribed by the PRA Rulebook In our opinion, in accordance with Rule 4.2 of the External Audit Chapter of the PRA Rulebook, the sectoral information has been properly compiled in accordance with the PRA rules and EU instruments relating to that undertaking from information provided by members of the group and the relevant insurance group undertaking. Matters on which we are required to report by exception In accordance with Rule 4.1 (3) of the External Audit Chapter of the PRA Rulebook for Solvency II firms we are also required to consider whether the Other Information is materially inconsistent with our knowledge obtained in the audit of the Group and Company statutory financial statements. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. The purpose of our audit work and to whom we owe our responsibilities This report of the external auditor is made solely to the Company s directors, as its governing body, in accordance with the requirement in Rule 4.1(2) of the External Audit Part of the PRA Rulebook and the terms of our engagement. We acknowledge that the directors are required to submit the report to the PRA, to enable the PRA to verify that an auditor s report has been commissioned by the company s directors and issued in accordance with the requirement set out in Rule 4.1(2) of the External Audit Part of the PRA Rulebook and to facilitate the discharge by the PRA of its regulatory functions in respect of the company, conferred on the PRA by or under the Financial Services and Markets Act Solvency and Financial Condition Report 11

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13 Appendix relevant elements of the Solvency and Financial Condition Report that are not subject to audit Group and Solo standard formula The relevant elements of the Solvency and Financial Condition Report that are not subject to audit comprise: The following elements of Group template S Column C0030 Impact of transitional measure on technical provisions The following elements of Group template S Rows R0410 to R0440 Own funds of other financial sectors The following elements of Group template S Rows R0500 to R0530 Capital requirement for other financial sectors (Non-insurance capital requirements) The following elements of Company template S Rows R0110 to R0130 Amount of transitional measure on technical provisions The following elements of Company template S Rows R0290 to R0310 Amount of transitional measure on technical provisions The following elements of Company template S Column C0030 Impact of transitional measure on technical provisions Elements of the Narrative Disclosures subject to audit identified as unaudited. Solvency and Financial Condition Report 13

14 A. Business and performance A.1 Business A.1.1 General information Name & legal form esure Group plc is incorporated in England and Wales. Its registered office is The Observatory, Reigate, Surrey RH2 0SG. The Company's principal activity is that of a holding company. esure Insurance Limited is incorporated in England and Wales. Its registered office is The Observatory, Reigate, Surrey RH2 0SG. The Company's principal activity is the writing of non-life insurance business. Supervisory authorities Under SII, the Group s supervisory authority is the PRA, Bank of England, 20 Moorgate, London EC2R 6DA. The Group is also regulated by the Financial Conduct Authority ( FCA ), 25 the North Colonnade, Canary Wharf E14 5HS. External auditor The external auditor is KPMG LLP, 15 Canada Square, London E14 5GL. Organisational structure The diagram below shows the Group organisational structure as at 31 December All subsidiaries are owned 100% by the parent undertaking. esure Group plc esure Finance Limited esure Holdings Limited esure Services Limited esure Insurance Limited esure S.L.U. (Spain) Non trading esure broker Limited esure Property Management Limited Non trading esure Property Limited Solvency and Financial Condition Report 14

15 Group subsidiary companies esure Group plc has the following principal subsidiaries as at 31 December 2016: Country of incorporation Class of shares held Principal activity Held directly or indirectly Percentage held esure Insurance Limited esure Services Limited esure Holdings Limited esure Property Limited esure Finance Limited esure Property Management Limited England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Ordinary General insurance Indirect 100% Ordinary Administration and management Indirect 100% Ordinary Holding company Indirect 100% Ordinary Property investment Indirect 100% Ordinary Holding company Direct 100% Ordinary Non-trading Indirect 100% esure S.L.U. Spain Ordinary Non-trading Indirect 100% esure broker Limited England and Wales Ordinary Insurance intermediary Indirect 100% The registered office of all of the subsidiaries above, apart from esure S.L.U., is The Observatory, Reigate, Surrey, RH2 0SG. The registered office of esure S.L.U. is Ronda Sant Pere 17, 2ª plant, Barcelona, Spain. A.1.2 Scope of the Group The scope of the Group used for the consolidated financial statements under IFRS and under SII is the same. However, a different consolidation treatment is applied under SII due to differences between SII and IFRS guidelines. Under IFRS all entities within the Group are fully consolidated line by line in the statement of financial position ( SOFP ). Under SII, insurance companies, insurance holding companies and entities whose sole purpose is to provide ancillary services to those companies are fully consolidated. All entities that do not meet the above definition are treated as participations and consolidated through one line on the SII balance sheet. esure Group plc, esure Finance Limited and esure Holdings Limited are all insurance holding companies. esure Insurance Limited is an insurance company and esure Property Limited and esure Property Management Limited are ancillary service companies. These entities are therefore consolidated line by line. esure Services Limited and esure broker Limited are insurance intermediaries. These along with esure S.L.U. are consolidated through one line as holdings in related undertakings, including participations. The change in consolidation approach has no impact on net assets but does result in a number of reclassifications between balance sheet line items. Solvency and Financial Condition Report 15

16 The diagram below illustrates how the consolidation approach has been applied to the Group structure. Fully consolidated on the SII balance sheet esure Group plc Reported through the "Holdings in related undertakings, including participations" line in the SII balance sheet esure Finance Limited esure Holdings Limited esure Services Limited esure S.L.U. (Spain) Non-trading esure Insurance Limited esure broker Limited esure Property Management Limited Non-trading esure Property Limited A.1.3 Shareholders As a publicly listed company esure Group plc has multiple shareholders. A listing of the substantial shareholdings above 3% at 31 December 2016 is set out in the following table: Shareholder No. of ordinary shares % of total voting rights Sir Peter John Wood 128,609, % Toscafund Asset Management LLP 68,550, % FIL Limited 38,800, % Standard Life Investments Limited 20,759, % Invesco Asset Management 20,507, % Solvency and Financial Condition Report 16

17 A.1.4 Other information Material lines of business and geographical areas The Group's material lines of business are UK private motor and home insurance. The Motor SII lines of business include motor other, motor liability, legal expenses, and miscellaneous financial loss. The Home SII lines of business include fire, theft and other damage, and general liability. The Group and all of its subsidiaries and underwriting risks are located in the United Kingdom, except for esure S.L.U., which is incorporated in Spain and is a non-trading company. Significant business or other events Demerger of Gocompare.com On 7 June 2016 the Board announced a strategic review of Gocompare.com. On 13 September the Board concluded that a demerger of Gocompare.com should be pursued. At a General Meeting on 1 November 2016, the Company s shareholders approved the demerger of Gocompare.com Group plc. On 3 November 2016, the demerger was completed and the shares in Gocompare.com were admitted to the premium segment of the Official List and to trading on the main market of the London Stock Exchange. Gocompare.com is an internet based price comparison website for financial and non-financial products. The demerger was effected by the Group making an interim in-specie distribution of Gocompare.com shares to shareholders. Following approval of the demerger by shareholders, but before the approval of the demerger dividend by the Board, Gocompare.com plc drew down debt of 75m under a term loan facility and paid a cash dividend to the Group of 73.3m. The demerger is considered a distribution of non-cash assets to owners and, as such, falls under IFRIC 17 which requires a revaluation to fair value. A non-cash gain of 213.6m, based on the fair value of the assets at demerger (based on the share price on the date of demerger), is therefore recorded in the statement of comprehensive income. Ogden discount rate change On 27 February 2017, the Lord Chancellor changed the Ogden discount rate from plus 2.5% to minus 0.75%, effective 20 March As at 31 December 2016, the Group s IFRS reserve margin included an allowance for a change in the discount rate to 0%. The table below shows the impact of IFRS profit after tax. Year ended 31 Dec 2016 Discount rate 2.5% to 0% Year ended 31 Dec 2016 Discount rate 2.5% to minus 0.75% Year ended 31 Dec 2017 Impact from 2016 m m m Gross IFRS reserves IFRS Reserves, net of reinsurance IFRS profit after tax nil The Group has not adjusted its 2016 financial position to take into account the discount rate moving to minus 0.75%, beyond the 0% allowed for within its reserve margin as at 31 December The effect is immaterial on profit after tax. As at 31 December 2016, the Group s solvency coverage above its SCR included an allowance of 3m for a change in the Ogden discount rate from plus 2.5% to 0%. As a consequence of the discount rate moving to minus 0.75%, the Group s capital position in 2017 will be reduced by 2m. There has been no adjustment for the potential benefit were PPO propensity to reduce as a result. Solvency and Financial Condition Report 17

18 Group trading profit The table below and sections A.2 A.4 summarise the performance of the Group. The performance of esure Insurance Limited is materially the same with the exception of the demerger referenced in section A.4.1 and investment income that the Group receives from its investment in IMe Law Limited, operated by the Group s partner, Irwin Mitchell referenced in section A.3 which only impact the Group. Group trading profit m m Trading profit from continuing operations Motor underwriting Home underwriting (2.4) 4.2 Investments Non-underwritten additional services revenue Trading profit from discontinued operations Gocompare.com A.2 Underwriting performance Since the Group prepares its financial statements in accordance with IFRS, the underwriting performance information below is on an IFRS basis. Premiums and policies Gross written premiums ( m) Motor Home In-force policies (millions) Motor Home Gross written premiums increased 19.0% to 655.0m (2015: 550.3m) through growth in in-force policies and positive rate increases across the portfolio in Motor. In-force policies increased by 8.6% to million (2015: million) as the Group delivered strong growth in Motor in favourable market conditions. A.2.1 Motor Motor underwriting Gross written premiums ( m) In-force policies (millions) Trading profit ( m) Combined operating ratio (%) Loss ratio (%) Expense ratio (%) Gross written premiums increased 22.3% to 563.7m (2015: 461.0m) through growth in in-force policies and positive rate increases across the portfolio. In-force policies increased by 11.9% to million (2015: million) as the Group s footprint expansion programmes build momentum. Trading profit of 8.9m (2015: 6.7m) has improved as the positive rating environments of 2015 and 2016 start to earn through ahead of claims inflation, albeit this has been largely offset by a lower level of favourable development of prior accident year reserves to 29.4m (2015: 46.4m) which equated to 6.2% of net earned premiums (2015: 11.2%). Solvency and Financial Condition Report 18

19 Reported net loss ratio (%) Prior year reserve releases (%) Current year net loss ratio (%) The Group continued to take a disciplined approach to cost management and delivered an expense ratio of 22.4% (2015: 22.1%) demonstrating the Group s efficient operations. As the Group delivers its growth strategy, an increase in the number of new business customers has and will continue to impact the expense ratio in the near term. A.2.2 Home Home underwriting Gross written premiums ( m) In-force policies (millions) Trading (loss) / profit ( m) (2.4) 4.2 Combined operating ratio (%) Loss ratio (%) Expense ratio (%) Gross written premiums increased 2.2% to 91.3m (2015: 89.3m) and in-force policies remained broadly flat at million (2015: million). In competitive market conditions the Group has remained disciplined in its rating actions against a backdrop of rate reductions on price comparison websites. Adverse weather claims costs totalled 6.6m (2015: 4.0m), 3.2m higher than the Group expected to incur in the year, and costs associated with the Flood Re Levy of 2.9m (2015: nil) caused the Home portfolio to deliver a loss of 2.4m (2015: profit of 4.2m). The current year loss ratio increased as outlined above and the Group continued to benefit from strong favourable development of prior accident year reserves of 9.3m (2015: 10.3m) which equated to 11.0% of net earned premiums (2015: 12.5%) Reported net loss ratio (%) Prior year reserve releases (%) Current year net loss ratio (%) The expense ratio of 36.9% (2015: 32.7%) has been impacted by costs associated with the Flood Re levy introduced in April A.3 Investment performance Investments 2016 m 2015 m Interest income on financial investments Interest income on financial deposits Investment expenses (3.5) (3.3) Fair value losses on derivative financial instruments (25.8) (1.2) Gains / (losses) on financial investments 33.5 (3.3) Rental income Total investment return Investment return gross (%) The Group achieved a gross investment return of 2.2% (2015: 0.8%) and a net investment return of Solvency and Financial Condition Report 19

20 1.8% (2015: 0.5%). The investment return benefitted from a strong performance in the equity portfolio and a fall in the UK Gilt curve which resulted in an increase in fixed income asset valuations. The Group s investment income was 3.5m higher than eil s in the year, primarily as a result of income from the Group s investment in IMe Law Limited, operated by the Group s partner, Irwin Mitchell. A.3.1 Other investing activities Gains recognised directly in equity During the year ended 31 December 2016, 1.9m was credited to other comprehensive income in respect of fair value movements on available for sale ( AFS ) financial assets (31 December 2015: 1.0m), and 0.3m was credited to other comprehensive income in respect of fair value movements on land and buildings (31 December 2015: nil). Investments in securitisation As at 31 December 2016, the Group held no investments in securitisation. A.4 Performance of other activities Additional services revenues 2016 m 2015 m Non-underwritten additional insurance products Policy administration fees and other income Claims income Instalment income Non-underwritten additional services Underwritten additional insurance products Total income from additional services Non-underwritten additional services trading profit Motor Home Total income from additional services increased 3.5% to 106.5m (2015: 102.9m) largely driven by a strong performance in instalment income. Non-underwritten additional services trading profit increased 8.9% to 60.0m (2015: 55.1m) in line with the Group s in-force policy growth. The growth in instalment income is largely driven by an increase in Motor customers and higher average written premiums. A.4.1 Discontinued Operation On 3 November 2016 Gocompare.com demerged from the Group. The Group s share of profit generated by Gocompare.com in 2016 was 24.5m (2015: 20.2m). A.4.2 Leasing arrangements The Group has entered into non-cancellable operating lease agreements in respect of property. Total payments in the year were 3.3m. The most material lease is an intercompany property lease between esure Property Limited (lessor) and esure Services Limited (lessee). Solvency and Financial Condition Report 20

21 Operating lease commitments where the Group is a lessee The future aggregate minimum lease payments under non-cancellable operating leases are as follows: As at 31 Dec 2016 m As at 31 Dec 2015 m Not later than 1 year Later than 1 year and no later than 5 years Later than 5 years Total minimum lease payments payable Operating lease commitments where the Group is a lessor The future aggregate minimum lease payments receivable under non-cancellable operating leases are as follows: As at 31 Dec 2016 m As at 31 Dec 2015 m Not later than 1 year Later than 1 year and no later than 5 years Later than 5 years - - Total minimum lease payments payable See section C.6 for further information. A.5 Any other information No other material information to disclose. Solvency and Financial Condition Report 21

22 B. System of Governance B.1 General Information on the systems of governance B.1.1 Structure of the Board, committees, roles & responsibilities At 31 December 2016, the Group s Board comprised eight members: The Chairman, two Executive Directors and five Non-Executive Directors. The committees which report into the Board are as follows: Audit, Nomination, Risk and Remuneration. The Board is responsible for leading and controlling the Group and has overall authority for the management and conduct of the Group's business, strategy and development. The Board is also responsible for ensuring the maintenance of a sound system of internal control and risk management (including financial, operational and compliance controls, and for reviewing the overall effectiveness of systems in place), and for the approval of any changes to the capital, corporate and management structure of the Group. To assist the Board in carrying out its functions and to ensure there is independent oversight of internal control and risk management, the Board has delegated certain responsibilities to Board Committees, which, except for the Nomination Committee, are composed of independent Non-Executive Directors. The Nomination Committee is composed of a majority of independent Non-Executive Directors. The Chairman of each Board Committee reports to the Board on its proceedings after each committee meeting. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its role. He promotes the highest standards of corporate governance and ensures effective communications with shareholders. The Chairman sets the agenda for Board discussions to promote effective and constructive debate and to support a sound decision-making process, ensuring that the Board receives accurate, timely and clear information, in particular about the Group s performance. He is also Chairman of the Nomination Committee. The Chief Executive Officer is responsible for the performance and management of the Group's business. In addition to membership of the Board, the Chief Executive Officer leads the Group Executive team in running the business and is charged with recommending and then implementing the Board's strategy. He is also responsible for ensuring effective internal controls and risk management systems are in place. The Chairman and the Chief Executive Officer meet regularly and keep in close contact as they are a critical link between the Board and senior management and liaise on strategic and other issues. The Non-Executive Directors bring a very broad level of experience and independent judgement to the Board and make a valuable contribution to achieving our objectives. They provide a strong independent element on the Board and are well placed to challenge constructively and help formulate strategy. The Company Secretary provides administrative and logistical support to the Board. Advice and support are also given on governance, compliance and regulatory matters. The Company Secretary is available to advise all Directors and looks to ensure that Board procedures are complied with. The Directors may also seek independent professional advice at the Company s expense. No such advice was sought during the year. Solvency and Financial Condition Report 22

23 Management Committees including the Reserving, Finance, Investment, Pricing, Financial Risk, Conduct Risk and Customer and Financial Crime Governance Committees report into the Group Executive Committee which reports to the Board through the CEO. B.1.2 Overview of key functions This section provides an overview of the key functions. All of the key functions have the necessary authority, resources and operational independence to carry out their roles and responsibilities. Internal Audit The Internal Audit function is fulfilled by a third-party organisation, Mazars LLP, which has undertaken this function since 2010 and reports directly to the Audit Committee and CEO. The Audit Committee challenges the executive team on the content and reliability of those reports and the Committee has been satisfied that appropriate arrangements, actions or mitigating controls are in place in response to Internal Audit findings. Risk management As part of the independent Risk function led by the Chief Risk Officer ( CRO ) and overseen by the Risk Committee, the Risk Management function performs a second line of defence role, providing independent and objective challenge to the business in the effective operation of the risk management system. It ensures that the material risk exposures are contained within approved strategy and appetite, reports on risk exposure and advises on the administration and management of risk within the first line functions, and draws attention of the Executive and the Risk Committee, as appropriate, to situations in which it believes there are material variances. The operational business areas have primary responsibility for managing risk in line with the defined appetite statements, performing their First Line of Defence role. The responsibility of the Risk Management function is to ensure that First Line of Defence performs its role effectively. The risk management framework and ORSA process are designed to ensure that the Risk Committee receives timely and appropriate reporting on our exposure to existing and emerging risks in each of the core risk categories underwriting, market, operational and credit. Strategic risks and the reputational consequences of these risk exposures are considered within this risk reporting. Compliance As part of the independent Risk function reporting into the Chief Risk Officer ( CRO ) and overseen by the Risk Committee, the Compliance function performs a Second Line of Defence role and is responsible for oversight, challenge, education, embedding and coordination of regulatory risk and compliance activities. To maintain discrete reporting lines, the CRO reports directly to the CEO and Chairman of the Risk Committee. The operational business areas have primary responsibility for managing regulatory risk in line with the defined appetite statements, performing their First Line of Defence role. The responsibility of the Compliance function is to ensure that First Line of Defence performs its role effectively. The Compliance function also provides advice and guidance on regulatory matters ensuring a good understanding of the regulatory landscape by all areas of the business. The Group continues to monitor legal and regulatory developments in the UK and Europe, through its close relationship with its regulators (the FCA and PRA) and other bodies including the Association of British Insurers ( ABI ), as well as the use of risk management tools to mitigate exposure to regulatory risk. Actuarial The Actuarial function is responsible for fulfilling its duties under SII including the calculation of technical provisions and providing opinions on underwriting policy and reinsurance strategy. The Actuarial function analyses and projects historical claims development data and use a number of actuarial techniques to validate assumptions used to calculate technical provisions. The Actuarial function provides an Actuarial Function Report to the Audit and Risk Committees annually setting out the tasks that have been undertaken by the Actuarial function and their results, and any relevant recommendations. Solvency and Financial Condition Report 23

24 The Chief Actuary is a member of the Institute and Faculty of Actuaries. The Chief Actuary reports to the Chief Finance Officer and, to ensure independence, has direct access and bi-annual private meetings with the Audit Committee. Any material changes in the system of governance The following Board changes have occurred: Anne Richards resigned as a Non-Executive Director in February Peter Shaw appointed as a Non-Executive Director in March Alan Rubenstein appointed as a Non-Executive Director in March Peter Ward resigned as a Non-Executive Director in May B.1.3 Remuneration policy Remuneration principles The Group seeks to attract and retain the best talent for the benefit of the business and to align the interests of Executive Directors, senior management and employees with the long-term interests of shareholders and other stakeholders. To that end, the Group s remuneration policies aim to provide appropriate reward for good performance without creating incentives that will encourage excessive risk-taking. In setting the Policy, the Remuneration Committee has regard to the provisions within the FCA s Remuneration Code (even though the Group is not required to comply with that code). In particular, the Remuneration Committee considers carefully the link between remuneration and risk and there is cross-membership of the Risk Committee and the Remuneration Committee. Remuneration policy table Purpose and link to strategy Operation Opportunity Salary To pay Executive Directors at a level commensurate with the size and scope of their role and their contribution to the Group and appropriately set for each individual. Set at a level that maintains an appropriate balance between fixed and variable pay ensuring good risk management and no undue emphasis on variable pay. Annual bonus Incentivises and rewards annual delivery of financial and non-financial objectives. Takes account of individual skills, performance, experience, responsibilities and pay, as well as internal relativities within the wider employee population. Set with reference broadly to mid-market levels and to remuneration generally within the Group and other appropriate comparator companies of a similar size and complexity to the Group. Normally reviewed annually with changes effective from 1 January. Paid in cash. The Remuneration Committee sets the performance measures, targets and the weighting between them annually to reflect the key priorities There is no prescribed maximum annual increase. However, the Remuneration Committee is guided by the general increase for the broader employee population. Larger increases may be awarded where the Remuneration Committee determines it appropriate to take into account a change in role and/or responsibilities, a significant change in the size, composition and/or complexity of the Group, the increased experience or performance in role of the Executive Director or where other exceptional circumstances exist. The maximum bonus opportunity under the Policy has been set at 125% of salary for the Executive Directors for Solvency and Financial Condition Report 24

25 Strategic Leadership Plan ( SLP ) To encourage and reward delivery of the Group s longer-term strategic objectives. Aligns the interests of Executive Directors with the interests of shareholders through the use of share-based awards. for the business for the year ahead and may vary them from year to year. All or a majority of the annual bonus will be weighted to one or more financial measures set on a sliding scale basis. Non-financial metrics, including delivery of strategic and personal objectives, (up to a maximum of 40% of the total bonus) may be set by the Remuneration Committee if it determines it appropriate. At least 30% of the annual bonus will be deferred into an award of shares under the Deferred Bonus Plan ( DBP ) each year, with the deferred portion vesting in equal thirds over a three-year period. The portion to be deferred and the timeframe for deferred awards to be released may be amended, in particular if any such changes are required from a regulatory perspective. The remaining portion of the bonus which is not deferred will be paid in cash. Malus and clawback provisions apply. Furthermore, the Remuneration Committee has overriding discretion to scale back annual bonus payments in the event of, inter alia, risk or regulatory compliance issues and in the event that the level of bonus represents an excessive proportion of the Group s overall profit. Awards normally vest subject to satisfaction of applicable performance conditions measured over at least three years. Typically, a holding period (expected to be two years for awards made in 2016) will apply post-vesting, unless the Remuneration Committee determines otherwise. Performance conditions for 2016 awards are based on absolute (75%) and relative (25%) Total Shareholder Return. The Remuneration Committee may use alternative measures, for example Earnings Per Share, and weightings for future awards if it deems this appropriate. However, at least part of the total award will be determined by a share price-based metric. The Remuneration Committee has an each financial year. No more than 25% of the maximum opportunity is payable for threshold performance. The maximum award limit, except for recruitment awards (see recruitment section), in respect of any financial year under the Policy is 300% of salary (face value at date of grant) being the maximum under the plan rules. The Remuneration Committee may not decide to grant at maximum levels each year. 15% of the award vests for threshold performance with 100% vesting for maximum performance. Solvency and Financial Condition Report 25

26 Pension Provided on a market competitive basis, aids retention and follows the general reward structure. Encourages and assists with responsible provision for retirement. Benefits To provide market competitive benefits. To ensure wellbeing of Executive Directors. To aid retention of our best people. Chairman s remuneration and Non-Executive Director fees To remunerate the Chairman and Non-Executive Directors in an appropriate way, while enabling the recruitment and retention of high calibre individuals. overriding discretion to scale back vesting of the awards in certain events such as where the level of vesting represents an excessive proportion of the Group s overall profit, or where a significant one-off event which affects Group performance occurs during the SLP performance measurement period. Pension contributions and/or a cash allowance of up to 16% of salary may be paid in respect of each year. Benefits include but are not limited to: family private healthcare; death in service life assurance; and participation in HMRC all-employee share plans. The Group may award additional benefits where the Remuneration Committee considers it appropriate (e.g. travel, accommodation and subsistence allowances where an Executive Director is asked to relocate). Chairman The salary and any contractual benefits for the Chairman are determined by the Remuneration Committee. Non-Executive Directors Fees for Non-Executive Directors are determined by the Chairman and the Executive Directors. The Chairman and Executive Directors are guided by market data for similar non-executive roles in other companies of a similar size and complexity as well as the experience and time commitment of its Non-Executive Directors. Non-Executive Directors may also receive a transport, hotel and incidental expenses allowance for their duties for the Group in respect of which the Group may discharge any related tax liability. Maximum is 16% of salary. There is no prescribed maximum value. The cost of the benefits provision is reviewed by the Remuneration Committee on a periodic basis. All employee share plans are subject to maximum limits as set by HMRC. Fees are reviewed on an annual basis and any increases are typically in line with market levels. There is no prescribed maximum annual increase. Total fees will not exceed the amount specified in the Group s Articles of Association of 2m. Supplementary pension or early retirement schemes The Group offers no supplementary pension or early retirement schemes. Solvency and Financial Condition Report 26

27 B.1.4 Material transactions Relationship agreement with controlling shareholder Sir Peter Wood, the Group's Chairman, is a controlling shareholder of the Group with a total holding of approximately 30.85% of the Company's voting rights as at 31 December The Group entered into a Relationship Agreement with Sir Peter Wood on 8 March 2013, which was amended and restated on 29 October The principal purpose of the Relationship Agreement is to ensure that the Group is capable at all times of carrying on its business independently of Sir Peter Wood and certain persons deemed to be connected with him. The following transactions took place with shareholders and related entities: One of the Directors has a beneficial part ownership interest in two companies which leased office space from the Group. The company also charged the Group for travel expenses incurred by employees of the Group. Eight of the Directors hold shares in Gocompare.com post demerger which pays commissions and charges fees for introducing insurance business. One of the Directors has a beneficial part ownership interest in a restaurant which has been used by the Group for corporate events and entertaining purposes. Value of expense for the year: Year ended 2016 m Lease of office space net of travel expenses charged 0.2 Net fees charged by Gocompare.com Ltd (1.6) Restaurants (0.1) Total expense for the year (1.5) Amount payable at the year end: Lease of office space net of travel expenses charged 0.1 Net fees payable to Gocompare.com Ltd (0.7) Restaurants (0.0) Total amount payable at the year end (0.6) B.2 Fit and proper requirements Prior to appointment, Board Members are taken through a comprehensive selection and interview process with a minimum of three stages and against specific role requirements to ensure a person is deemed to be fit and proper. An external search consultant is engaged who has comprehensive experience in the role required and the recruitment process would be overseen by the Chairman and the Senior Independent Director. Initial interviews will be undertaken by the search company who will then agree with the Chairman and/or the Senior Independent Director a short list of candidates who will then meet with the Senior Independent Director and other Board members. The recommended candidates are then seen by the Chairman and the CEO, and any appointment is then approved by the Nomination Committee. A detailed referencing and checking process is also undertaken prior to appointment which will include employment referencing, credit checks, and a disclosure and barring service check. This checking is then repeated on an annual basis for all Board members. The appointment of roles at Group Executive and Senior Leadership level is led by the CEO or the HR Director. A detailed search exercise and external benchmark exercise will be undertaken against an agreed role specification. All candidates for roles at Group Executive level would also be interviewed by the CEO, another Board member, and the Chairman. Candidates for Senior Leadership level are interviewed by members of the Group Executive and the CEO. The same detailed referencing and checking process is undertaken as for Board members and the checking is then repeated on an annual basis. The evaluation of the performance of the CEO and the Group Executive is reviewed annually by the Remuneration Committee and Nomination Committee. The Chairman will provide a full update on the Solvency and Financial Condition Report 27

28 performance of the CEO against key objectives, and the CEO will provide a detailed update on the performance of the Group Executive and Senior Leadership Team. The CRO also provides a report to the Remuneration Committee. The Remuneration Committee, as well as having responsibility for determining the remuneration of the Executive Directors and Group Executive, also has oversight of the remuneration of those staff members identified as Material Risk Takers. All of these staff are included within either the Group Executive or Senior Leadership Team. The Nomination Committee also receives a separate update on a biannual basis of the strength of the company succession plan, overall performance of Senior Leaders, and any development requirements. B.2.1 Board of Directors Board induction and professional development On joining the Board, Directors take part in an induction programme to increase their knowledge and understanding of the Group. Following their appointment, a tailored induction plan will be put together based on the individual Director s previous knowledge and experience, which will have been highlighted through the search process, and with input from the Executive Directors. Alan Rubenstein and Peter Shaw were provided with information about the Group including detailed financial information, the role of the Board, and the matters reserved for its decision. They were also provided with the Terms of Reference and membership of the main Board Committees, as well as corporate governance policies and procedures. Meetings were held with each of the Executive Directors, members of the Group Executive, and senior managers across the Group as part of the induction programme. These meetings allowed a detailed insight into each business area and would allow Directors to request any additional information they would require. More detailed information would be provided to each Director relevant to any committees that they would be members of. Through these meetings the following topics would also be covered: Company structure and governance; Company strategy; Key people and succession plans; Board procedures including the governance framework, Board calendar, minutes from previous meetings, effectiveness reviews, and action plans; Finances, performance, operating plans, capital management, and investments; Operational overview of all business areas; Group risk profile, risk appetite, and regulatory framework; Internal Audit and areas of focus; Share register and voting history; and Remuneration Policy All Board members also attend development sessions to enable them to develop a more detailed knowledge of specific business topics. Evaluation of Board performance The assessment of the Board was conducted in accordance with the guidance set out in the UK Corporate Governance code. An external third party is used to conduct the review every three years and an internal review is undertaken internally by the Chairman and Company Secretary in each of the other years using a comprehensive set of questionnaires. The evaluation was based around a number of key areas: Board composition, role, skills, diversity, balance, and experience; Succession planning; Board leadership and culture; Agenda, information, and papers; Strategic oversight; Governance, regulatory compliance, and support; and Committee performance. The Board also assessed its progress against the action plan from the 2015 external review and concluded that good progress had been made against the plan. Solvency and Financial Condition Report 28

29 The final report on the Board and its Committees was presented and discussed with the whole Board at its meeting in December The Chairman met individually with each Director to discuss the findings. The Senior Independent Director also met with the Directors to review the Chairman s performance. This review was then shared with the Chairman. Having gone through the effectiveness review, the Directors are satisfied that the Board and each of its Committees are operating effectively. The review has identified some actions that will help maintain and improve its effectiveness. Areas for improvement included more contact with senior management below Group Executive level and ensuring the Board and Committee papers are more concise. Overall the evaluation process confirmed that the Board was operating effectively with a culture that supported open and challenging debate and that all Directors individually made valuable contributions and demonstrated commitment to the role. B.3 Risk management system including the own risk and solvency assessment ( ORSA ) The Board is responsible for prudent oversight of the Group, ensuring that it is conducted in accordance with sound business principles and within applicable law and regulation. This encompasses responsibility to set and monitor adherence to strategic risk objectives and risk appetite statements. The Board also ensures that measures are in place to provide effective identification, management controls and acceptance of risk. B.3.1 Risk reporting and governance Risk reporting The risk management framework and ORSA process are designed to ensure that the Risk Committee receives timely and appropriate reporting on our exposure to existing and emerging risks in each of the core risk categories insurance, market, financial and solvency, operational, legal, regulatory and conduct. Strategic risks and the reputational consequences of these risk exposures are considered within this risk reporting. Such reporting is supported by: Updates to the Group s risk registers covering current and emerging risks. Reports on events that have resulted in actual or potential financial or reputational losses to the Group or its customers. The results of stress, scenario and sensitivity testing as well as the modelling of our risks within our economic capital model. The findings, recommendations and management actions arising from reviews conducted by the risk, compliance and Internal Audit functions. Detailed reviews of our key risks. A key strength of the Group's risk management strategy is the integration of risk assessment and evaluation into the Group's business operations, planning and capital management. Risk governance The Group's risk governance is underpinned by a Risk function headed by the CRO, a member of the Group Executive reporting to the CEO, but with independence assured through direct and independent access to the Chairmen of the Board, Audit and Risk Committees. The risk strategy, appetite and framework are articulated in a suite of policies covering material risks that we face. Each of these policies is subject to annual review and approval. The Group operates a three lines of defence governance framework as shown in the below diagram: Solvency and Financial Condition Report 29

30 B.3.2 The Own Risk & Solvency Assessment The ORSA policy outlines the Group s approach to the taking and managing of risk and capital on a forward looking basis. It is supported by a number of processes and procedures. Key elements include: Risk Strategy & Appetite defining how the Group thinks about the risks that it faces in delivering on its strategic objectives; Capital Management maintaining a capital structure consistent with the risk profile and the regulatory and market requirements of the business; and Risk Management and Internal Control Framework confirming that the overall risk management and control framework is operating adequately and effectively, allowing the Group to identify, assess, manage, monitor and report on risks across the business. These processes take into account the nature, scale and complexity of the Group s business. The ORSA policy and processes are owned by the Board. Their role is to set the ORSA approach. There is further challenge and governance provided through the various committees and structures that are in place to ensure that there is appropriate direction and understanding of the risks and capital positions, both on a current and forward looking basis. The Risk Committee takes a key role in supporting the Board in terms of management of the ORSA process. The Board and the Risk Committee take an active part in the ORSA process, including the planning of reviews, how each assessment is performed, the content of the report and challenging the results. There have been discussions with the Board and Risk Committee around key aspects of the process during In normal circumstances, where there is no material change to the capital and risk position the ORSA report is produced on an annual basis the timing of this is linked into the planning cycle and is presented at the Group Executive and Board. An ORSA report is reviewed and approved by the Board at least annually. The report is forward looking and informs the Board s discussions during the annual business planning process. The assessment of new business plans under base and alternative scenarios are supported by the ORSA. The report assists the Board to understand the capital positions under each of these scenarios and ensure that solvency requirements will be met in line with the Board s risk appetite and regulatory requirements. When there is a material change to the capital and risk position and/or major strategic developments an Exceptional ORSA is produced. An Exceptional ORSA was produced, debated and approved at Board level in September 2016 prior to the demerger of Gocompare.com. Solvency and Financial Condition Report 30

31 The key processes that underpin the ORSA in determining solvency requirements include: Stress testing and scenario analysis; Business planning and assessment of the key risks to the Plan; Forward looking assessments of solvency position; Own assessment of solvency based on capital modelling; Assessment of the appropriateness of standard formula for regulatory capital setting; Risk appetite process; Material and emerging risk process; and Reportable event process. The Strategic Risk Objectives and Risk Appetite statements inform business planning and strategic decision-making. This framework underpins the ORSA Process: B.3.3 Strategic risk statements The following are the strategic risk statements which provide the basis of how the Group considers risk. These statements underpin the risk appetite and link into key strategic decisions and have been agreed with the Risk Committee. The statements are split by financial (those directly impacting Earnings, Capital and Liquidity) and non-financial. How these undertaking s interact with the risk management systems is detailed later in the document in Section E.1. Financial: Earnings Our goal is to manage volatility within a cyclical market for our shareholders through targeted growth opportunities, continuous adaptation in our underwriting and a focus on expense management. Capital and liquidity We ensure there are appropriate financial resources in place to deliver on our corporate and policyholder obligations. Non-financial: Reputation Our brands represent our promise to our customers and are central to our continued success. Solvency and Financial Condition Report 31