Sompo Japan Nipponkoa Insurance Company of Europe Limited. Solvency and Financial Condition Report. Year ended 31 December 2017

Transcription

1 Sompo Japan Nipponkoa Insurance Company of Europe Limited Solvency and Financial Condition Report Year ended 31 December 2017

2 Contents Summary...2 Directors Statement...4 Independent Auditor's report...5 Business and Performance...8 System of Governance Risk Profile Valuation for Solvency Purposes Capital Management Annex - Quantitative reporting templates

3 Summary Business and Performance The principal activity of Sompo Japan Nipponkoa Insurance Company of Europe Limited ( SJNKE or the Company ) is to underwrite profitably the general insurance risks of Japaneseowned commercial enterprises located in the European Union and to provide a stable supply of general insurance services to such businesses from its UK headquarters and European branch network. The key financial and other performance indicators during 2017 on a UK GAAP basis were as follows: Gross Written Premium 104.2m 95.3m Net Underwriting Profit 1.3m 3.9m Profit on ordinary Activities Before Tax 2.7m 3.5m Shareholder's funds attributable to equity interests 142.5m 136.3m Net Incurred Loss Ratio 56.4% 50.1% Combined Operating Ratio 85.0% 68.7% System of Governance Under the Company's corporate governance arrangements, overall responsibility for risk management resides collectively with the Board of Directors. Certain activities in relation to risk management are delegated to the Audit & Risk Committee, the Executive Committee, the Risk Management Function, and Functional Leader Units. Each function has a clearly defined Terms of Reference which sets out its respective risk management responsibilities. The Board records its Risk Strategy within its annual Strategy Statement. The Risk Strategy defines the Company's risk appetite. The risk appetites are documented in the Company s Risk Register and actual exposure to risk is regularly monitored against the risk appetites and tolerances defined by the Board. The Risk Management Function, provides a focal point for activities related to the risk assessment, management, and reporting, and is structured using a three lines of defence model. Risk management is also deeply embedded into the first line functional and operational management activities of the Company which are monitored by the third line Internal Audit function. Risk Profile SJNKE s Risk Management Policy sets out the Company s risk strategy and appetite, corresponding to the strategy articulated in the Company s Business Plan. It describes how SJNKE identifies and addresses risks within the risk categories defined below, and in subcategories, according to its functional organisation. The impact of each of the risk categories on the Company s pre-diversified SCR is denoted in brackets: Underwriting Risk ( 10.5m) Market Risk ( 7.2m) Credit Risk ( 15.6m) Liquidity Risk Operational Risk ( 3.7m) 2

4 The governance framework underpinning the Risk Management Framework supports the risk management process to ensure that risks are adequately identified, assessed, monitored, managed and reported. The Board, Executive Committee and the Audit & Risk Committee are responsible for ensuring that the risk monitoring processes are operating effectively. Throughout the process of risk assessment, the current controls addressing perceived risks are maintained or enhanced. Risks identified in the Risk Register form the basis of risks modelled or considered in the context of the SJNKE Own Risk & Solvency Assessment. Valuation for Solvency Purposes On a Solvency II ( SII ) basis the Company had eligible own funds of 143.6m as at 31 December This is represented by assets of 281.4m less Technical Provisions of 126.1m and other liabilities of 11.7m. Eligible Own Funds were 1.1m higher than the UK GAAP net assets reported in the 31 December 2017 financial statements. This is primarily due to the different basis of valuation of Financial Investments and Technical Provisions within UK GAAP and Solvency II as described below. The fair value of financial investments in the Solvency II Balance Sheet was 5.2m higher than the amortised cost reported in the financial statements as at 31 December Tangible fixed assets of 0.6m recognised in the financial statements are revalued to nil in arriving at the SII Eligible Own Funds. Allowing for presentational differences between the UK GAAP and Solvency II Balance Sheets, Solvency II Technical Provisions were 7.7m higher than GAAP Technical Provisions as at 31 December Capital Management The Company is subject to capital requirements enforced by the Prudential Regulation Authority (PRA). Throughout the year the Company has complied with these requirements. The Company has a risk appetite in respect of the available capital resources of at least 130% of the capital requirement over a one year time horizon. At 31 December 2017, the Company had a regulatory surplus of approximately 114.7m above the Solvency Capital Requirement ( SCR ), compared to a surplus of 107.9m above the SCR as at 31 December The Company s solvency coverage ratio of Own Funds above its SCR is 497%. The ratio of Own funds above the Minimum Capital Requirement ( MCR ) is 1,987%. 3

5 Directors Statement We acknowledge our responsibility 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. The Directors are also responsible for such internal control as management determines 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. We are satisfied that: a) Throughout the financial year in question, the Company has complied in all material respects with the requirements of the PRA Rules and the Solvency II Regulations as applicable to the Company; b) The SFCR has been prepared in all material respects in accordance with the PRA Rules and the Solvency II Regulations; and c) It is reasonable to believe that the Company has continued to comply subsequently and will continue so to comply in future. The SFCR was approved by the Board of Directors on 30 April 2018 and was signed on its behalf Shiho Koshikawa Deputy CEO and Director 1 May

6 Report of the external independent auditor to the Directors of Sompo Japan Nipponkoa Insurance Company of Europe Limited ( the Company ) pursuant to Rule 4.1(2) of the External Audit Part of the PRA Rulebook applicable to Solvency II firms Report on the Audit of the relevant elements of the Solvency and Financial Condition Report Opinion Except as stated below, we have audited the following documents prepared by the Company as at 31 st December 2017: The Valuation for solvency purposes and Capital Management sections of the Solvency and Financial Condition Report of the Company as at 31/12/2017 ( the Narrative Disclosures subject to audit ); and Company templates S , S , S , S and 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 elements of the Solvency and Financial Condition Report; Company templates S , S and S ; the written acknowledgement by management 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. In our opinion, the information subject to audit in the relevant elements of the Solvency and Financial Condition Report of Sompo Japan Nipponkoa Insurance Company of Europe Limited as at 31 st December 2017 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. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)), including ISA (UK) 800 and ISA (UK) 805. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the relevant elements of the Solvency and Financial Condition Report section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the Solvency and Financial Condition Report in the UK, including the FRC s Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 5

7 Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: the Directors use of the going concern basis of accounting in the preparation of the Solvency and Financial Condition Report is not appropriate; or the Directors have not disclosed in the Solvency and Financial Condition Report any identified material uncertainties that may cast significant doubt about the company s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the Solvency and Financial Condition Report is authorised for issue. Emphasis of Matter Basis of Accounting & Restriction on Use We draw attention to the Valuation for solvency purposes, Capital Management and other relevant disclosures 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. As a result, the Solvency and Financial Condition Report may not be suitable for another purpose. The Solvency and Financial Condition Report is required to be published, and intended users include but are not limited to the Prudential Regulation Authority. This report is made solely to the Directors of the Company in accordance with Rule 2.1 of External Audit Part of the PRA Rulebook for Solvency II firms. Our work has been undertaken so that we might report to the Directors those matters that we have agreed to state to them in this report and for no other purpose. Our opinion is not modified in respect of these matters. Other Information The Directors are responsible for the Other Information. Our opinion on the relevant elements of the Solvency and Financial Condition Report does not cover the Other Information and, we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the Solvency and Financial Condition Report, our responsibility is to read the Other Information and, in doing so, consider whether the Other Information is materially inconsistent with the relevant elements of the Solvency and Financial Condition Report, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the relevant elements of the Solvency and Financial Condition Report or a material misstatement of the Other Information. 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. Responsibilities of Directors for the Solvency and Financial Condition Report 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 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. 6

8 Auditor s Responsibilities for the Audit of the relevant elements of the Solvency and Financial Condition Report It is our responsibility to form an independent opinion as to whether the relevant elements of the Solvency and Financial Condition Report are prepared, in all material respects, with financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based. Our objectives are to obtain reasonable assurance about whether the relevant elements of the Solvency and Financial Condition Report are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decision making or the judgement of the users taken on the basis of the Solvency and Financial Condition Report. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at: Actuarial-Regulation/Audit-and-assurance/Standards-and-guidance/Standards-andguidance-for-auditors/Auditors-responsibilities-for-audit/Description-of-auditorsresponsibilities-for-audit.aspx. The same responsibilities apply to the audit of the Solvency and Financial Condition Report. Report on Other Legal and Regulatory Requirements. In accordance with Rule 4.1(3) of the External Audit Part of the PRA Rulebook for Solvency II firms we are required to consider whether the Other Information is materially inconsistent with our knowledge obtained in the audit of the Sompo Japan Nipponkoa Insurance Company of Europe Limited 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. Ernst & Young LLP London 2 May 2018 The maintenance and integrity of the Sompo Japan Nipponkoa Insurance Company of Europe Limited web site is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Solvency and Financial Condition Report since it was initially presented on the web site. 7

9 Business and Performance A.1 Business As at 31 December 2017 Sompo Japan Nipponkoa Insurance Company of Europe Limited ("SJNKE") was a wholly owned subsidiary of Sompo Japan Nipponkoa Insurance Inc. ( SJNK ). On 1 May 2018 the entire Ordinary Share Capital of the Company was transferred to Endurance Specialty Insurance Ltd, a fellow wholly owned subsidiary within the Sompo Holdings Group. SJNKE provides general insurance products and services mainly to large commercial clients. SJNKE is fully integrated into the global network of SJNK and its subsidiaries which form the global Sompo Holdings Group. The Sompo Holdings Group operates from 213 locations in 32 countries and regions and SJNKE works closely with other group companies. Together we deliver client-focused products and services through commitment, innovation and expertise. With SJNKE's offices in the UK, Belgium, France, Germany, Italy, Spain and using Sompo Holdings Group owned underwriting agencies in the Netherlands and France, SJNKE is able to provide insurance throughout the Europe Economic Area. SJNKE s financial stability is indicated by an A+ rating for SJNK and A rating for SJNKE from Standard and Poor's. SJNKE offers a wide range of general insurance solutions embracing commercial lines of business such as Property, Casualty, Marine Cargo, and Personal Accident. SJNKE is a Company incorporated under the laws of England and Wales (Registered Company Number ), and is authorised by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Registered Office address is 1st Floor, 6 Devonshire Square, London, EC2M 4YE. The Company s external auditors are Ernst & Young LLP. 25 Churchill Place, London, E14 5EY Simplified Group structure chart as at 31 December 2017 Sompo Holdings Inc 100% Sompo Japan Nipponkoa Insurance Inc 100% Sompo Japan Nipponkoa Insurance Company of Europe Limited Other Sompo Holdings Group Companies (Japan, UK and 30 other countries) 8

10 Group supervision The Company has obtained a Direction from the PRA modifying the Group Supervision provisions set out in the PRA Rulebook. The modification to Rule 20.1 significantly reduces the Company s reporting requirements under the PRA s Group Supervision rules. The modification, which is publicly available on the Financial Services Register, sets out the amended reporting and pre-notification requirements relevant to the Company. A.2 Underwriting Performance The numbers in this section have been prepared on a UK GAAP basis. The underwriting profit for the year to 31 December 2017 is 1.3m (2016: 3.9m) and the combined operating ratio is 85.0% (2016: 68.7%). Premiums The Company has achieved moderate Gross Written Premium growth with 8.9m more premiums being written than in Increases have been achieved in every line of business, in particular in the Property and Marine business written through the European branches. All premiums included in the Profit and Loss Account relate to continuing operations. Written premiums comprise the total premiums receivable for the whole period of cover under contracts incepting during the financial year, together with adjustments arising in the financial year to such premiums receivable in respect of business written in previous financial years. All premiums are shown gross of commission payable to intermediaries and are exclusive of taxes and duties levied thereon. For certain insurance contracts premium is initially recognised based on estimates of ultimate premiums. These estimates are judgemental and could result in misstatements of revenue recorded in the financial statements. The main assumption underlying these estimates is that past premium development can be used to project future premium development. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related inwards business. Claims Gross claims incurred of 74.7m (2016: 58.3m) are favourable to the Company s business plan and equate to a gross ultimate loss ratio of 72.5% (2016: 60.5%). After applying reinsurance, a net ultimate loss ratio of 56.4% has been achieved (2016: 50.1%). The improvement in the gross and net loss ratios is primarily a result of favourable development of reserves established as at 31 December Claims incurred comprise of the estimated cost of all claims occurring during the year, whether or not reported, including related direct and indirect claims handling costs and adjustments to claims outstanding from previous years. The provision for reported claims outstanding is made on an individual case basis and is based on the estimated ultimate cost of all claims notified but not settled by the Balance Sheet date, together with the provision for related claims handling costs. The provision for reported claims outstanding is based on information available at the Balance Sheet date. Significant delays are experienced in the notification and settlement of certain claims, particularly in respect of marine and liability business, and accordingly the ultimate cost of such claims cannot be known with certainty at the Balance Sheet date. Subsequent 9

11 settlements are dealt with in the technical account - general business of later years. The provision also includes the estimated cost of claims incurred but not reported at the Balance Sheet date, based on the application of statistical techniques, which explicitly allow for inflation, settlement trends and claims patterns. Operating Expenses Gross and net operating expenses equate to 25.9m (2016: 25.2m) and 2.5m (2016: 3.4m) respectively. This can be analysed into net commission receivable of 12.4m (2016: 11.5m) and administrative expenses payable of 14.9m (2016: 14.9m). Acquisition costs, comprising commission and other costs related to the acquisition of new insurance contracts are deferred to the extent that they are attributable to premiums unearned at the Balance Sheet date. The below table sets out the Company s underwriting performance, broken down by material line of business and material geographical area Fire & other damage to property 000 Marine, aviation and transport 000 Thirdparty liability 000 Other 000 Total 000 Gross premiums written - UK 12,686 6,355 6, ,764 - France 10,776 11,411 1,170-23,357 - Germany 10,556 12,698 3, ,942 - Other European Countries 16,452 8,032 3, ,167 50,470 38,496 13,830 1, ,230 Gross premiums earned 48,986 38,137 14,444 1, ,984 Gross claims incurred (44,857) (17,283) (11,934) (630) (74,704) Gross operating expenses (12,648) (9,672) (3,536) (129) (25,985) Gross technical result (8,519) 11,182 (1,026) 658 2,295 Reinsurance balance 8,113 (10,130) 1,426 (392) (983) Net technical result (406) 1, ,312 Unexpired risk reserve Balance on technical account (406) 1, ,312 Profit / (loss) before Tax 276 1, ,722 10

12 The table below provides 2016 numbers for comparison Fire & other damage to property 000 Marine, aviation and transport 000 Thirdparty liability 000 Other 000 Total 000 Gross premiums written - UK 11,928 6,765 6, ,380 - France 10,155 9,734 1,146-21,035 - Germany 10,318 12,480 2, ,088 - Other European Countries 10,827 8,265 3, ,813 43,228 37,244 13,572 1,272 95,316 Gross premiums earned 45,456 37,351 12,359 1,281 96,447 Gross claims incurred (20,639) (29,967) (6,800) (939) (58,345) Gross operating expenses (11,635) (10,037) (3,429) (129) (25,230) Gross technical result 13,182 (2,653) 2, ,872 Reinsurance balance (11,910) 4,371 (1,322) (95) (8,956) Net technical result 1,272 1, ,916 Unexpired risk reserve Balance on technical account 1,272 1, ,916 Profit / (loss) before Tax 1,097 1, ,528 11

13 A.3 Investment Performance The Company invests in a well-diversified, high security rated and low risk portfolio which consists of UK & European government & supranational fixed interest bonds and a liquidity portfolio. The table below sets out the investment income achieved in the year to 31 December Interest income 3,707 3,902 Interest expense 170 (724) Net losses on realisation of investments (1,331) (592) Total income 2,546 2,586 Investment management expenses Other listed fixed interest securities and deposits with credit institutions are held to maturity and are accounted for at amortised cost in the UK GAAP financial statements. Unlisted equity shares are classified as financial assets at fair value through profit or loss. Dividends are included as investment income when the investments to which they relate are declared "exdividend". Interest income is recognised on an accruals basis, as are investment expenses. Investment return comprising investment income, realised and unrealised investment gains and losses, and investment expenses are included initially within the non-technical account. Realised investment gains and losses are calculated as the difference between net proceeds on disposal and their purchase price. A.4 Performance of other activities Other income There are no material non-underwriting income streams. Administrative Expenses Administrative expenses for the year to 31 December 2017 total 14.9m (2016: 14.9m). The material components of the Company s expense base are staff costs, legal & professional costs and accommodation costs. Expenses are recognised on an accruals basis. The table below sets out a comparison of the material components of expenses between 2017 and Dividends Staff 9,901 9,783 Legal and professional 2,376 2,570 Accommodation 1,159 1,046 Other 1,464 1,473 14,900 14,872 No dividend was paid in 2017 (2016: nil). 12

14 A.5 Any other information Pension schemes The Company operates a defined benefit scheme for UK employees of the Company which was closed to new members on 1 January As at 31 December 2017 the net defined benefit pension surplus valued in accordance with FRS 102 equated to 238k. Assets of the defined benefit pension scheme are held separately from those of the Company. A full actuarial valuation was carried out at 31 December 2015 by a qualified independent actuary. Employer contributions were paid at the rate of 38.9% of basic salaries (2016: 38.9%) in respect of all eligible employees. New employees joining the Company in the UK can join the defined contribution scheme managed by Aviva. The scheme provides benefits directly determined by the value of the contributions made in respect of each member. Employer contributions during the year amounted to 0.27m (2016: 0.25m). The Company also provides defined contribution pension and social security schemes for its employees in European territories. Deferred Tax The Company had an unrecognised deferred tax asset of 13.5m as at 31 December 2017 which has been calculated using a corporation tax rate of 17%. The Company is currently not projecting sufficient future profits and therefore the deferred tax assets remain unrecognised. Exchange Profit The strengthening of the Euro and US Dollar against the Pound has generated net exchange gains of 0.3m (2016: 2.9m) in the year to 31 December 2017, of which 0.3m (2016: 0.2m) have been realised. 13

15 System of Governance B.1 General information on the system of governance The Company has a well-established framework for the governance arrangements, systems and controls that it (and its stakeholders) will use to ensure that the Company is managed responsibly and effectively with due regard to the risks affecting the Company, in a manner which is proportionate to the nature, scale and complexity of its operations. No material changes to this framework have occurred over the period covered by this report. Overview of the Board and sub-committee structure as at 31 December 2017 Board of Directors Business Development Oversight Committee Audit & Risk Committee Internal Audit Executive Committee Nominations Committee Remuneration Committee Underwriting Committee Reserving Committee Counterparty Credit Risk Committee Data Committee ORSA Steering Committee Changes in Board and sub-committee structure since 31 December 2017 In March 2018 the following refinements were made to the Board and sub-committee structure: The Audit and Risk Committee was divided into two separate committees, being the Audit Committee and the Risk & Compliance Committee; The ORSA Steering Committee was disbanded and its responsibilities were reallocated to the Risk & Compliance Committee; The Counterparty Credit Risk Committee was disbanded and its responsibilities were reallocated to the Underwriting Committee; The responsibilities of the Executive Committee were transferred to a newly created Operations Committee; The Data Committee was disbanded and its responsibilities were reallocated to the Operations Committee; and The outsourced Internal Audit function was bought back in-house. The outsourced service provider continues to be used in a support capacity. 14

16 The information provided in this section describes the allocation of responsibilities during the 2017 financial year and as at 31 December Board Responsibilities The Board is ultimately responsible for the performance and strategy of the Company. By selectively delegating authority and certain functions to various committees, the Board does not absolve itself of its own responsibility for the Company. The Board s responsibilities include, but are not limited to: Providing entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed Setting the Company s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance Developing and executing the business plan in line with the Sompo Holdings Group Strategic Plan Setting the Company s values and standards Ensuring that its obligations to its shareholder and others are understood and met. The Board meets on a quarterly basis with additional meetings held as and when circumstances require. Board Composition The roles of Chief Executive Officer ( CEO ) and Chairman are segregated and allocated to different individuals. The CEOs main responsibilities are to: provide leadership and direction to the Company s executive and to perform or oversee all aspects of the Company s management as well as its long-term strategic direction; ensure compliance with all relevant legal and regulatory requirements; communicate Group Strategy to the Board and those responsible for the formulation of the Company s Business Plans; to oversee the Company s risk management, Compliance and Internal Audit functions; to oversee the Company s control of customer relations and client service; to ensure proper underwriting, claims management and financial control to oversee the Company s Human Resource Management to oversee the Chief Information Officer The Chairman is a Non-executive Director. The Chairman s main responsibilities are to: set the Board s agenda and ensure that adequate time is available for discussion of all agenda items, in particular strategic issues; promote a culture of openness and debate by facilitating the effective contribution of Non-executive Directors in particular; ensure constructive relations exist between Executive and Non-executive Directors; ensure that the Directors receive accurate, timely and clear information; and ensure effective communication with the shareholder. 15

17 Executive Committee The main responsibilities of the Executive Committee encompass, but are not limited to, the following: To recommend to the Board the Company s business plan; To review and monitor the Company s performance against its business plan; To adopt, establish, amend or abolish internal policies, procedures, manuals, systems and controls; To establish whatsoever means of supervision and control are required to ensure compliance with the Company s statutory and regulatory obligations; To review the Company's Own Risk Solvency Assessment ("ORSA"); To prepare and consider terms of engagement of the Statutory Auditor and Internal Auditor, their fees, and the provision by them of any non-audit services and any questions of their resignation; To prepare for Audit and Risk Committee ("ARC") approval the Annual Assurance Activity Plan and Internal Audit and Compliance Verification plans; To review and approve reports and management responses to reports delivered by Assurance Services and implementation of actions and recommendations thereafter; To report to the ARC on progress as to high priority or overdue actions arising out of Assurance Services; To approve recruitment proposals in all units and authorise executives to sign offers and contracts of employment; To ensure and monitor the implementation of the Company s Investment Policy including in particular the management and performance of Company investments, managing exposures to exchange rate fluctuation, credit risk and liquidity risk and always ensuring that the Company remains at all times able to meet its liabilities as and when they fall due; and Audit and Risk Committee The main responsibilities of the Audit and Risk Committee encompass, but are not limited to, the following: to ensure the Company maintains a satisfactory standard of financial reporting; to enable Non-Executive Directors to contribute an independent judgement and play a positive role in ensuring that the executive management controls the business operations appropriately and effectively; to oversee Assurance Services; to advise the Board on risk appetite, tolerance and strategy; to oversee Risk Management Function and Risk Management activities. to consider and advise the Board on the appointment and terms of engagement of the External Auditor and Internal Auditor; to review and approve the Annual Assurance Activity Plan, Internal Audit Plan and Risk & Compliance Review plans; to review the external accounts and UK regulatory returns for their subsequent recommendation to the Board for approval; and to provide a framework within which the External Auditor can assert their independence in the event of a dispute with management. to ensure that the Company maintains a climate of discipline and control, which will reduce the probability of the occurrence of Risk Issues; to ensure that the Company maintains effective and proportionate organisation, systems and controls for the identification, assessment, management, mitigation, monitoring and reporting of material risks affecting, or potentially affecting, the Company; 16

18 to contribute to the design, construction and maintenance of the Company s ORSA, including through validation of the key assumptions; to monitor the Company s Risk Register; and to monitor Risk Issues and quantify their impact. Business Development Oversight Committee The responsibilities of the Business Development Oversight Committee are to Oversee, promote and support the activities of the Business Development function in pursuit of the Company strategy and business development objectives. Ensure that the Company s marketing strategy demonstrates perception and articulation of the Company s target markets, business proposition and unique selling points. Use appropriate management information (MI), monitor the success and performance of the Business Development function and ensure that business development and marketing activities are properly and effectively conducted. Monitor the level and quality of activity of resources dedicated to Business development. Provide a starting point for the identification and research, within the Company s risk appetite, of: potential new marketing and business development opportunities and activities; potential new lines of business or products or enhancement to existing one. Advise the Board on Business Development issues. Raise any concerns which may be felt from time to time about any aspect of the Business Development function with the Board. Nominations Committee The Nominations Committee is established to fulfil the following roles, in accordance with the Company s Fitness & Propriety Policy: On behalf of the Board, to scrutinise the recruitment and/or appointment of candidates for senior positions within the Company with a view to ensuring that the successful appointees are fit and proper, and competent for their roles, having the requisite experience, skill-set, knowledge and integrity to perform their duties (including contractual duties, and the legal and fiduciary duties owed by a director) to the Company; When the Committee has completed its scrutiny to choose, depending upon its deliberations, whether to recommend to the Board a candidate for a given position; Where the appointment requires regulatory approval, the Committee shall have the authority to order the Company Secretariat to apply for the approval; Where the Committee declines to recommend a nominated candidate then they may not be appointed to the post for which they were nominated; The Committee may, entirely at its own discretion, chose to apply certain conditions to the recommendation such as, but without limitation: Specific training requirements; An extended probationary period; A handover period from the previous post holder; and To make all recommendations to the Board in writing providing the rationale for the Committee s decision. 17

19 Remuneration Committee The Remuneration Committee is responsible for applying the Company s decision-making in accordance with the Company s Remuneration Policy, in relation to remuneration of: Directors (Executive and Non-Executive); Significant Management Function Holders; Key Function Holders; and Any other roles which may fall within the scope of the Solvency II remuneration requirements contained in Article 275 of the Delegated Regulation (EU) 2015/35 In accordance with employment contracts with individuals other than those employed within such roles, details of the remuneration of such employees are determined by the Executive Committee in accordance with the Company s Pay Policy and Profit-Related Bonus Policy. Remuneration Policy The objectives of Company s remuneration policy are to ensure that: a transparent process is in place to determine the appropriate level of remuneration for the Company s directors, senior management and regulated roles; the Company is able to attract and retain appropriately qualified and experienced directors, senior management and those employed in regulated roles; the Company directors, senior managers and those in regulated roles are remunerated fairly, having regard to their responsibilities and the objectives of the company; and the overall remuneration policy is in line with its business strategy, risk profile and objectives The Company s remuneration policy requirements are: The Company will remunerate employees and directors in a manner designed to attract and maintain high quality Board members with the appropriate skills required to lead and govern an organisation such as SJNKE. The remuneration levels to be determined under the policy shall be approved by the Board and be based on recommendations made by the Remuneration Committee; Directors and the Company Secretary shall be entitled to such remuneration in accordance with the Company s Articles of Association (Article 83); The remuneration (actual or deemed) of individuals seconded to the Company by the Company s parent company or other group companies is determined in accordance with the Secondment Agreement dated 24 th September 2015, as amended from time to time; and Certain Company decisions relating to remuneration are made by or made subject to the consent of the Company s parent company, whether under the Articles of Association or the Group Approval & Reporting Policy, and Secondment Agreement between the Company and the Parent Company. Where a decision relating to remuneration requires the consent of the Company s shareholder(s), the Remuneration Committee is authorised to approve proposals. All SJNKE employees are primarily remunerated by way of fixed remuneration (salary). The Company also offers variable remuneration by way of annual bonuses. The amount of bonus awarded varies depending on the role and seniority of the individual within the Company and is agreed contractually with each individual. For the majority of employees the amount of bonus awarded is determined by the Company s results in the relevant period. For Executive Directors and certain members of management, both company performance and/or individual performance determine the value of bonus paid. 18

20 The annual bonus is intended to focus employees efforts on key objectives such as customer service, quality and on-time delivery whilst improving employee motivation by establishing a clear link between pay and Company performance. The bonus also supports stakeholder ideals by allowing employees to share in the success of the Company's business. None of the remuneration arrangements reward excessive risk-taking or poor performance. Material changes in the system of governance that have taken place over the reporting period The following directors were appointed in the reporting period: Mr. John Kuhn, 9 November 2017 Mr. Graham Evans, 9 November 2017 Mr. Nigel Frudd, 28 March 2017 Mr. Chris Gallagher, 9 November 2017 Mr. James Giordano, 9 November 2017 Mr. Richard Housley, 9 November 2017 Mr. Takashi Kurumisawa, 9 November 2017 Mr. John Murray, 9 November 2017 Mr. Philip Rooke, 9 November 2017 Mr. Ian Winchester, 9 November 2017 The following directors resigned during or after the reporting period up to the date of this report: Mr. David Broome, 9 November 2017 Mr. John Bithell, 9 November 2017 Mr. Nigel Frudd, 13 April 2017 Mr. John Murray, 29 March 2018 Mr. Andrew Page, 20 April 2018 Mr. Peter Standish, 9 November 2017 Mr Junichi Tanaka, 31 March 2017 Mr Shoichi Takahashi, 31 March 2017 Mr. Paul Wakefield, 9 November 2017 Mr. Michael Watson, 9 November 2017 B.2 Fit and proper requirements Board candidates shall be appointed, subject to regulatory approval, following a screening process performed by the Board s Nominations Committee, and by the shareholder on merit, against objective criteria and with due regard for the benefits of diversity on the Board. The Board is satisfied that plans are in place for orderly succession for appointments to the Board and to senior management, so as to obtain an appropriate balance of skills and experience within the Company and on the Board, and to ensure progressive refreshing of the Board. The Nominations Committee sits, on behalf of the Board, to scrutinise the recruitment and/or appointment of candidates for senior positions within the Company with a view to ensuring that the successful appointees: are fit and proper and competent to perform their roles have the requisite experience, skill-set, knowledge and integrity to perform their duties (including contractual duties and the legal and fiduciary duties owed by a director) to the Company. Assessments as to whether appointees are fit and proper are also made with regard to the criteria set out by the UK Regulators, notably in relation to those persons who are approved to 19

21 perform controlled or key functions or required to be approved under the PRA s Senior Insurance Managers Regime. The scrutiny process may take whatever form the Committee deems to be necessary and which may include (without limitation): Review of the job specification for each position; Review of Fit & Proper Checklist forms evidencing due diligence performed; Review of candidates application forms, curricula vitae; Formal interview before the Committee; References; and Psychometric testing. When the Committee has completed its scrutiny it may choose, depending upon its deliberations, whether to recommend to the Board a candidate for a given position. Where the Committee declines to recommend a nominated candidate, then they may not be appointed for the post for which they were nominated. The Company sets minimum requirements concerning skills, knowledge and expertise applicable to each person who performs one of the key roles within the Company. B.3 Risk management system including the own risk and solvency assessment The Board takes responsibility for setting and implementing the Company s Risk Strategy and risk appetite, and records these in a Risk Strategy Statement. As outlined in the Company s Risk Management policy, the major categories of risk SJNKE is exposed to correspond to those in respect of which risk policies are required of insurers authorised by the United Kingdom s Prudential Regulatory Authority ( PRA ): Insurance Risk, including Underwriting Risk and Reserving Risk including Reinsurance / alternative Insurance Risk Mitigation Credit Risk Market Risk Liquidity Risk including Asset-Liability Management Operational Risk Group Risk Risk appetite and limits approach The Company s risk appetite is central to the delivery of the Company s Risk Strategy. SJNKE s risk appetite is derived from its capacity to bear risk in the context of financial and nonfinancial considerations. A target level of risk appetite has been established on a qualitative basis for all risks contained within the Company s Risk Register. SJNKE s risk appetite statements are the articulation of the amount of risk that the Board is willing to accept, given its philosophy, its attitude towards risk-taking and the organisation s capacity to bear and manage risk. At the annual Strategy meeting the Board agrees any changes to high level risk appetite statements for the coming year, and sets new high level appetite statements aligned to the Group s risk appetite. Following review and preparation, the Board subsequently agrees risk appetite and tolerance statements for individual risk types. 20

22 The Company adopts the three lines of defence governance model: The 1st line of defence: Day-to-day risk management by Function Leader Units by means of systems & controls including functional management reviews; The 2nd line of defence: Risk management and compliance oversight, monitoring and validation provided by the Company s Risk & Compliance Department reporting to the Executive Committee and Audit & Risk Committee; and The 3rd line of defence: Independent verification of the adequacy and effectiveness of the internal risk and control management systems provided principally by the Internal Auditor, also reporting to the ARC. Through this process, the Company seeks to identify, define, quantify, monitor and manage the key risks to its business objectives. Details of the risks identified and the appetite, tolerance, limits, exposures, management information, management controls and required actions are set out in the Risk Register. The Risk Register and other risk management information have been designed to document SJNKE s risk profile arising from the type and nature of business expected to be written as detailed in the business plan. Risk assessment is an iterative process and updates as to the assessment of risks to the business are performed and documented in the Risk Register. SJNKE maintains a detailed Risk Management Policy which describes how SJNKE identifies and addresses risks within the risk categories and sub-categories outlined in the Risk Management Policy. Throughout the process of risk selection, it is assumed that the current controls addressing perceived risks will be maintained or enhanced. The Risk Register is regularly updated, based upon management reports supplemented by internal audit and other assurance reviews. Controls addressing risks are assessed and risk tolerance levels are set for each risk. Currently, the controls in place (having been assessed by the Audit & Risk Committee, and SJNKE s Internal Auditor) are found to be effective, and there are no material Operational risks where the level of residual risk is deemed by SJNKE to be unacceptable. Nevertheless, where improvements are recommended to further mitigate risk, they are being implemented as part of a scheme of continuous risk management. The Risk Management Policy and the associated activity of developing and maintaining the Risk Register demonstrate the extent to which capital management is embedded within SJNKE s day-to-day activities. The risks identified and monitored through the Risk Register form the basis of the risks considered in the ORSA. The Corporate Governance Arrangements and Risk Management Policy set forth how the Board composes and orders itself and the senior executive management appropriately to deliver the Risk Strategy by operating appropriate systems of governance through appropriately skilled and experienced human resources. A Fitness & Propriety Policy is in place setting out how senior management and other key persons are assessed for their respective parts in this. Management Information The Risk Function produces the Risk Dashboard every quarter, in line with the Executive Committee and Audit and Risk Committee meeting cycle. This report is designed to provide the Executive, Audit and Risk Committees and Board with sufficient oversight of the risk framework and risk exposures, focusing on the out of appetite and emerging risks. The outputs of these annual exercises are also captured in the ORSA report which is owned by the Board and reviewed by the Audit and Risk Committee. The ORSA is reviewed and approved at least annually by the Board, or more frequently if a significant event occurs. The ORSA process culminates in an annual ORSA report. The Risk Function coordinates the relevant processes with subject matter experts across the business and pulls it together for consumption by the Executive Committee, Audit and Risk Committee and the Board at various 21

23 points in the year. A full review of the Company s own solvency assessment given the risk profile is performed and compared to the regulatory solvency assessment in order to determine whether additional solvency cover is required. The outcome of this assessment is recorded in the ORSA report and shared with the regulator. ORSA Governance Key features of SJNKE s ORSA governance process are: SJNKE has in place a robust and appropriate ORSA policy and process; Senior management and the Board are aware of the objectives of the ORSA process; Senior management and the Board are aware of the risks SJNKE is currently exposed to or may face in the long term, and the capital needs that arise from that risk exposure; Senior management and the Board have been actively involved in overseeing and reviewing the production of the ORSA report as well as providing challenge as part of the ORSA sign-off process; and SJNKE has in place robust ORSA quality assurance and validation processes. Data used within the ORSA is required to be stored and indexed electronically in a central file, and in accordance with the SJNKE Data Policy. Recommendations from Internal Audit and other valid external review (for example, the PRA) are incorporated into successive ORSA process and reports, and in each cycle a check sheet is maintained to ensure adherence. The following committees and FLUs are involved in the production of the ORSA report, namely: ORSA Steering Committee; Executive Committee; Audit & Risk Committee; Risk & Compliance; Finance; Actuarial (supported by Willis Towers Watson); Underwriting; Data Management Unit. SJNKE s ORSA process was established to manage SJNKE s ORSA submissions, and has been developed through leveraging existing processes and practices to manage risk and capital effectively. It was first approved by the ARC and the Board in 2013 and has been developed and regularly updated since. The ORSA process is designed to provide management with an effective mechanism through which to assess the risks facing the organisation and the capital required to achieve its business objectives. The Company uses the Standard Formula without Undertaking-Specific Parameters to assess the solvency capital requirements. A partial or full internal model is not used. Any material change to SJNKE s business operations or risk factors will result in a fresh appraisal of the appropriateness of application of the Standard Formula. B.4 Internal control system SJNKE s policy is to maintain effective internal control, compliance and risk management systems which have been established to support delivery of the business plan. This is promoted through a three lines of defence model, referred to above, across the business employing risk 22