Legal & General Reinsurance Company Limited. Financial Condition Report

Transcription

1 Legal & General Reinsurance Company Limited Financial Condition Report

2 Table of Contents A. Business and Performance... 4 A.1 Name of insurer... 4 A.2 Name and contact details of the insurance supervisor and group supervisor... 4 A.3 Name and contact details of the Approved Auditor... 4 A.4 Ownership details... 4 A.5 Where the insurer is part of a group, a group structure chart showing where the insurer fits within the group structure... 4 A.6 Insurance business written by business segment and by geographical region during the reporting period... 6 A.7 Performance of investments during the reporting period... 6 A.8 Any other material information... 7 B. Governance Structure... 7 B.1 Board and Senior Executives... 7 B.2 Fitness and Propriety Requirements... 8 B.3 Risk Management and Solvency Self-Assessment B.4 Internal Control B.5 Internal Audit B.6 Actuarial Function B.7 Outsourcing B.8 Any other material information C. Risk Profile C.1 Material risks that the insurer is exposed to, including how there risks are measured and any material changes that have occurred during the reporting period C.2 How risks are mitigated including the methods used and the processes to monitor the effectiveness of these methods C.3 Material risk concentrations C.4 How assets are invested in accordance with the prudent person principle as stated in Paragraph of the Code C.5 The stress testing and sensitivity analysis to assess material risks, including the methods and assumptions used, and the outcomes

3 C.6 Any other material information D. Solvency Valuation D.1 The Valuation bases, assumptions and methods used to derive the value of each asset class D.2 The valuation bases, assumptions and methods used to derive the value of technical provisions and the amount of the best estimate D.3 Description of recoverables from reinsurance contracts D.4 The valuation bases, assumptions and methods used to derive the value of other liabilities D.5 Any other material information E. Capital Management E.1 Eligible Capital E.2 Regulatory Capital Requirements E.3 Approved Internal Capital Model used to derive the ECR F. Significant Event F.1 Description of the significant event F.2 Approximate date(s) or proposed timing of the significant event F.3 Confirmation of how the significant event has impacted or will impact, any information provided in the most recent financial condition report filed F.4 Any other material information Glossary

4 A. Business and Performance Particulars regarding the organisational structure, insurance business activities and financial performance A.1 Name of insurer Legal & General Reinsurance Company Limited ( L&G Re or the Company ) A.2 Name and contact details of the insurance supervisor and group supervisor Insurance Supervisor Group Supervisor Name: Bermuda Monetary Authority Prudential Regulation Authority Jurisdiction: Bermuda United Kingdom Address: amellish@bma.bm Terrence.Venables@bankof england.co.uk Phone Number: +1 (441) (0) A.3 Name and contact details of the Approved Auditor Organisation: PricewaterhouseCoopers Ltd. Jurisdiction: Bermuda Address: pwc.bermuda@bm.pwc.com Phone Number: +1 (441) A.4 Ownership details Number of owners: One Owner Name: Legal & General Re Holdings Limited Ownership Percentage: 100% A.5 Where the insurer is part of a group, a group structure chart showing where the insurer fits within the group structure Below is a structure chart which shows the legal entity and divisional structure of Legal & General Group. L&G Re is part of the Legal and General Retirement ( LGR ) division. As part of the Group, L&G Re is required to comply with Group policy. 4

5 Diagram 1: Division and Entity overview L&G Re has a local governance structure, but items not within the delegated authority of the L&G Re Board are referred to divisional and Group level committees. This is demonstrated in the diagram below: Diagram 2: Local Governance Structure LEGAL & GENERAL GROUP PLC (L&G GROUP) Audit Committee L&G Group Technical Review Comittee L&G Group Board of Directors L&G Group CEO L&G Group Capital Committee Group Risk Committee L&G Group Executive Risk Committee 2 nd line Approval Board Level New product / market Investment initiative Risk event Assumptions & Methods Management Level Non-veto LEGAL & GENERAL REINSURANCE COMPANY LIMITED (L&G RE) L&G Re Investment Committee L&G Re Capital Committee L&G Re Board of Directors L&G Re CEO (Business MD) L&G Re Audit, Risk & Compliance Committee L&G Re Risk Committee 2 nd line LGR Risk Committee LGR Capital Committee 2 nd line LEGAL & GENERAL RETIREMENT (LGR) 5

6 A.6 Insurance business written by business segment and by geographical region during the reporting period Line of Business Gross Premium Written Net Premium Written Longevity 604, ,405 Geographical Location Gross Premium Written 000 Western Europe 604,405 A.7 Performance of investments during the reporting period YE16 YE15 Commentary m m U.S. Government Federal USD Government Exposure to U.S. Government bonds has increased over 2016 due to new business. Non-U.S. Government Corporate Securities - Other Non USD Government (Mainly Gilts) 4,194 3,015 Credit (Non Government & Non Floating Rate Notes (FRNs)) Exposure to Non-U.S. Government bonds largely relates to UK Gilts. Great British Pound interest rates have fallen over 2016 leading to an increase in the market value of UK Gilts. The 2016 new business premiums received have also increased the UK Gilt holdings. Exposure to Corporate bonds has increased over 2016 due to: 1) New Business Premium received over 2016; 2) GBP interest rates falling over 2016 leading to an increase in the market value of UK bonds; & 3) internally rated residential non-subprime investments have been reclassified as Corporate bonds following advice from the BMA. Mortgage-backed Securities: Residential Nonsubprime Following advice from the BMA, internally rated residential non-subprime investments have been reclassified as Corporate bonds. Others (Briefly describe) Floating Rate Notes (FRNs) Approximately 100m of Collateralized Debt Obligations (CDOs) has been restructured and are now classified as Floating Rate Notes (FRNs). Total 5,177 3,860 6

7 Table above shows investment assets for YE15 & YE16 and excludes items such as cash, derivatives, receivables, tradable etc. Details on material income and expenses incurred Investment performance is reported by L&G Re as investment return in the financial statements. The Company earns an investment return from holdings in financial instruments which are held to back insurance contracts on behalf of policyholders and as Company capital. The total investment return for the Company over 2016 was 767m as reported in the financial statements. The reporting of investment return comprises investment income, unrealised gains and losses from financial investments held at fair value through profit and loss ( FVTPL ) and realised gains and losses from all financial assets. Investment income includes dividends, interest and rent. Dividends are accrued on an ex-dividend basis. Interest and rent are included on an accruals basis. Interest income for financial assets which are not classified as FVTPL is recognised using the effective interest method. Investment income is presented net of investment management fees and rebates. There were no material investment performance gains and losses recognised directly in equity all gains and losses recognised directly in equity are disclosed in the Company s report and accounts statement of comprehensive income. None. A.8 Any other material information B. Governance Structure Particulars of corporate governance, risk management and solvency self-assessment frameworks L&G Re s governance framework is intended to ensure that all decision making is appropriate and subject to robust controls and oversight. L&G Re operates a three lines of defence structure to ensure appropriate segregation of responsibilities. B.1 Board and Senior Executives B.1.1 Directors and Officers Directors Name Kerrigan Procter Bryan Blunt Troy Thompson Derek Stapley Thomas Olunloyo Board Position Chairman of the Board, Investment Committee Chairman Board Member, Investment Committee Member, Audit Risk and Compliance Committee Member Board Member, Audit Risk and Compliance Committee Member Independent Non Executive Board Member, Chairman of the Audit Risk and Compliance Committee Board Member, Investment Committee Member, Chief Executive Officer Officers Name Thomas Olunloyo Brendan Kemp Caspar Young Andrew Sooboodoo Neil Burt Board Position Chief Executive Officer and Chief Actuary Chief Financial Officer Chief Business Development Officer Chief Risk Officer Approved Actuary & Head of Actuarial Reporting 7

8 Description of segregation of these responsibilities: There are four primary officers of the Company, the Chief Executive Officer ( CEO ), Chief Financial Officer ( CFO ), Chief Business Development Officer ( CBDO ) and Chief Risk Officer ( CRO ). The Approved Actuary ( AA ) is separate to all of these roles. The CFO leads the finance function which is responsible for all statutory and reporting and also has reinsurance administration responsibilities. The valuation assumptions are owned by the CFO. The CBDO leads the new business function and retains responsibility for the pricing assumptions and all new business related activities. The CRO retains responsibility for the risk and governance framework, and provides independent, second line opinion and challenge on all relevant back-book and front-book activity. The Approved Actuary is independent from the calculation of the Best Estimate Liabilities and the underlying valuation basis. The Approved Actuary is responsible for providing an opinion on the sufficiency of the long-term reserves of the company and supporting the regulatory requirements to the Bermuda Monetary Authority. Only one member of the Board, the CEO, is directly involved with the day to day management of the Company. B.1.2 Description of remuneration policy and practices and performancebased criteria governing the board, senior executives and employees The remuneration policy is set by the L&G Re Board taking into consideration the Group remuneration policies. Senior executives and employees are remunerated in the same way. Base salary is set to be competitive within the local Bermuda market. A housing allowance is paid to compensate non Bermudian employees in respect of the costs incurred in residing in Bermuda. A discretionary performance related bonus is paid annually reflecting the performance of the business as well as that of the senior executive or employee during the calendar year. L&G Re Board members that are employed by the Legal & General Group Plc ( L&G Group or the Group ) are remunerated in line with Group remuneration policies. Non-executive directors are remunerated consistent with local market practice. Compensation is not made in the form of shares in the Company or parent company. B.1.3 Description of the supplementary pension or early retirement schemes for members, the board and senior executives The Company provides the option to all employees to participate in a defined contribution pension plan in line with local Bermuda market practice. The Company does not have additional supplemental pension schemes nor any early retirement schemes. There is no pension plan for non-executive Board members. B.1.4 Any material transactions with shareholder controllers, persons who exercise significant influence, the board or senior executives There are no material transactions with Board members or senior executives outside of the Company's remuneration policies. B.2 Fitness and Propriety Requirements B.2.1 Description of the fit and proper process in assessing the board and senior executives Application of the Policy The L&G Group has in place a fit and proper policy, the purpose of which is to set out the procedures required by regulated firms within the L&G Group to assess the fitness and propriety of individuals who run these undertakings or who hold other key functions in them. 8

9 Key Requirements In summary the policy requires that each insurance regulated entity shall establish, implement and maintain documented policies and adequate procedures to ensure that all persons who are responsible for running the entity or are responsible for other key functions are at all times fit and proper. The assessment of fitness and propriety covers the following factors: Honesty, integrity and reputation Competence and capability Financial soundness L&G Re Assessment Procedures In support of the Group policy, defined processes are in place to ensure that the fitness and propriety of applicants is carefully considered before an application to the regulators to grant approval is submitted. An assessment will also be made before a notification is made to the regulators in relation to the appointment of a key function holder. L&G Re will not support an application for approval or a notification if it is believed that the candidate fails to meet any element of the fit and proper test. Each application will be looked at on its own merits, on a case-by-case basis, but the following principle generally applies to all applications: Has the candidate been open and honest with L&G Re and disclosed all relevant matters. If the candidate has disclosed any incidents pertaining to their fitness and propriety, the following will be considered: The seriousness of the issue and the relevance to the specific role applied for; The passage of time since the incident occurred; Whether the issue relates to an isolated incident or whether there is a pattern of adverse behaviour. Fit and proper assessment criteria have been developed and each application will be considered against these criteria, regardless of the current approved status of individual. L&G Re s assessment of an individual s competence and capability will be based around the following factors: knowledge does the individual have generic knowledge of the industry sector and specific knowledge of the firm; qualifications does the individual have prerequisite or supporting relevant qualifications; skills does the individual demonstrate the appropriate level of business and interpersonal skills; behaviour does the individual demonstrate the appropriate attitudes and standards of ethical behaviour; and expertise does the individual achieve positive and fair outcomes and meet performance standards expected of the post. The assessment criteria for each of the three key factors are also relevant in assessing the continuing fitness and propriety of approved persons. From time to time, individuals will be required to certify that there has been no change to the information provided at the point of approval and consequently, the fitness and propriety status is unchanged. 9

10 Maintaining Fitness and Propriety L&G s Group Policies and Procedures place an obligation on approved persons to notify the Group Conduct Risk and HR Director in the event of any pending or actual criminal, civil or other disciplinary charges, judgements, petitions for bankruptcy, or other actions or disciplinary measures whatsoever, against them or any entity, body or other entity with which he / she is, or has been associated. Should such a notification occur, L&G Re will assess the information to decide whether the individual remains fit and proper. If the assessment ultimately concludes that the individual can no longer remain as an approved person, a notification will be made to the regulators in line with the regulatory requirements. L&G Re s performance management process is the primary mechanism for tracking ongoing competency. L&G Re will take appropriate steps to monitor an individual s financial soundness on an ongoing basis. B.2.2 Description of the professional qualifications, skills, and expertise of the board and senior executives to carry out their functions Board Members Kerrigan Procter (Chairman of the L&G Re Board) Kerrigan Procter has been Managing Director of Legal & General Retirement, a division of L&G Group, since January He oversees a retirement business that helps over one million customers achieve financial security in retirement and invests nearly 40bn of assets to back the Group's promises to pensioners. He was previously Head of Solutions at Legal & General Investment Management from 2006 to 2012 where he was responsible for Liability Driven Investment and multi-asset funds for defined benefit and defined contribution pension schemes across Europe and the US. Prior to joining L&G Group, Kerrigan worked at RBS in the financial markets division where he held several roles including Head of Pensions Advisory, Head of Credit Risk Measurement and Director of Interest Rate Derivative Structuring. Kerrigan started his career in 1994 with Ernst & Young Corporate Finance before moving to Mercer where he was both an investment consultant and responsible for asset liability management ( ALM ) in Europe. He is a Fellow of the Institute of Actuaries and has a PhD in number theory from King's College, London. Troy Thompson (L&G Re Board member) Troy Thompson is a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries. Troy studied a BS Mathematics and received High Honors at the University of Texas. Troy joined Legal & General America in July 2014, initially as the Vice President of Product Management but most recently promoted to SVP Product Management and Interim Chief Actuary. Prior to this Troy has held various actuarial and senior management positions with USAA, Genworth, American National Insurance Company and Columbia Universal Life Insurance Company. In these roles he has developed plans to deliver life insurance product portfolios to achieve targeted growth and profitability, product development, valuation, financial reporting, pricing and capital management. Bryan Blunt (Board member) Bryan is currently CFO for Legal & General Retirement, with responsibility for managing the financial performance of the division, delivering statutory, regulatory and management financial reporting, and overseeing the pricing framework for pension risk transfer business. He was responsible for Legal & General Retirement s ( LGR ) Solvency II submissions to the Prudential Regulation Authority ( PRA ), including the matching adjustment applications across the division. Prior to this role, Bryan held a variety of roles within the Group functions at Legal & General, with a focus on risk based capital models and reporting. This included the design and implementation of the Group Economic Capital and Solvency II models, and the embedding of capital management in decision making. Bryan has been with the L&G Group for 11 years; before this he worked at PricewaterhouseCoopers and Zurich Financial Services. Bryan is a Fellow of the Institute of Actuaries in the UK, and has an MA in mathematics from Cambridge University. 10

11 Derek Stapley (Non-Executive Board member) Derek is a Chartered Accountant with thirty years experience in the Financial Services Industry. Derek currently serves as an independent director on the boards of several private or listed investment funds, insurance companies and private client structures. He chairs the Audit and Risk Committee for several of these companies. Derek is a former partner in Ernst & Young s Financial Services Office. He spent 20 years with Ernst & Young, Bermuda holding a number of positions including several years as the leader of the Investment Funds Practice. In 2006 he joined Ernst & Young s Global Asset Management Group where he specialized in the Alternative Investment Industry before leaving the Firm in Derek, who is Scottish and Bermudian, holds a Bachelor of Arts degree in Accounting from the Caledonian University in Glasgow and is a member of the Institute of Chartered Accountants of Scotland, the Chartered Professional Accountants in Bermuda and the Canadian Institute of Chartered Accountants. Thomas Olunloyo (CEO and Board member) Thomas Olunloyo is currently the CEO of L&G Re having previously served as Chief Actuary and Chief Investment Officer with responsibility for pricing, structuring and investments. Prior to joining L&G Re, Thomas was the Pricing and Product Development Actuary at MetLife Assurance Limited in the UK, a specialist provider of Bulk Purchase Annuity solutions. He was responsible for the management of the pricing systems and controls, the development of the pricing Terms of Trade as well as the management of the product development process. Thomas was also responsible for new business origination, contract negotiation and client management. Thomas studied Mathematics and Philosophy at the University of Oxford and is a Fellow of the Institute of Actuaries. Primary Officers Brendan Kemp (Chief Financial Officer) Brendan is the Chief Financial Officer and Principal Representative of L&G Re and also acts as the Segregated Accounts Representative of Legal & General SAC Limited. Initially Brendan held a dual role of Chief Financial Officer and Chief Risk Officer during a 12 month startup of the Company. He is responsible for the full finance function, compliance and control policies as well implementing good control processes. Prior to this, Brendan was VP of Finance at Northstar Financial Services Bermuda Limited, a provider of investment contracts to high net worth individuals including direct life, fixed annuity, variable annuity and other long term insurance products ( UL/VUL ), including segregated accounts. Prior to Northstar, Brendan worked for PricewaterhouseCoopers in Bermuda and BDO South Africa. Brendan is a Chartered Accountant in both South African and Bermuda and has a Bachelor s of Commerce - Honours & Certificate in the Theory of Accounting Science. Caspar Young (Chief Business Development Officer) Caspar Young is the Chief Business Development Officer responsible for new market strategy and business expansion in carefully selected geographies. Prior to working at L&G Re, Caspar worked at Aurigen Reinsurance Limited (Bermuda) for seven years as the Managing Director and Chief Risk Officer. Caspar was also National Partner at Mercer in Toronto, Canada. Caspar holds a Chartered Enterprise Risk Analyst ( CERA ) Certification. He is also a Fellow of the Canadian Institute of Actuaries ( FSA/FCIA ). In addition, he holds a Bachelors in Math, Double Major in Actuarial Science and Statistics from the University of Waterloo. Neil Burt (Head of Actuarial Reporting and Approved Actuary) Neil Burt is the Approved Actuary and Head of Actuarial Reporting for L&G Re. He is responsible for reporting the actuarial liabilities of the Company, working closely with the financial function. As Approved Actuary, he is responsible for providing an opinion on the sufficiency of the long-term reserves of the company and supporting the regulatory requirements to the Bermuda Monetary Authority. 11

12 Prior to L&G Re, Neil transferred from within the L&G Group in the UK where he worked within the Legal & General Retirement Finance team. In the UK, Neil supported the development of the Solvency II reporting, strategic planning and the international expansion of the Retirement division. Prior to L&G Group, Neil was an actuarial manager at Deloitte working on a number of Solvency II and M&A projects. Neil is a Fellow of the Institute of Actuaries ( FIA ) and has a First Class Honours degree in Mathematics. Andrew Sooboodoo (Chief Risk Officer) Andrew has worked at L&G Group since 2008 and qualified as a Fellow of the Institute of Actuaries in Between 2008 and 2014 Andrew gained experience in pricing and Solvency II across the Individual protection and Annuities products, in the UK and US. In 2014 Andrew joined L&G Re as a Pricing and Capital Actuary and was instrumental in the pricing of Project Servo, an intragroup quota share reinsurance deal, and Project Energy, the Company s first Dutch PRT deal. Andrew has since moved into the Risk function and has assumed the role of CRO. B.3 Risk Management and Solvency Self Assessment B.3.1 Description of the risk management process and procedures to effectively identify, measure, manage and report on risk exposures Risk management system L&G Re follows a three lines of defence risk governance model which is in line with the L&G Group policy, whereby: L&G Re is responsible for risk taking within the parameters of the approved risk appetite and accountable for managing risks in line with the Company s risk policies; Risk functions led by the Chief Risk Officer provide objective challenge and guidance on risk matters; with Group Internal Audit providing independent assurance on the effectiveness of business risk management and the overall operation of the risk framework. Risk appetite L&G Re s risk appetite statements set out the Company s overall attitude to risk, and the ranges and limits of acceptable risk taking. The L&G Re Audit, Risk and Compliance Committee leads an regular review of the risk appetite, assessing the continued appropriateness of the Company s key measures and tolerances relative to the risk exposures of the Company. Additionally, as part of the planning cycle, assessment is made of the level of risk taking proposed in the plan and the capacity for risk taking within the overall appetite framework. The risk appetite is approved by the Board on the recommendation of the Risk Committee and the Chief Executive Officer ( CEO ). The regular management information received by Board and Risk Committee includes a risk appetite dashboard setting out actual positions relative to the key targets and limits set in the risk appetite. Risk taking authorities The parameters of acceptable risk taking defined within the risk appetite are cascaded to senior managers through the LGR Risk and Capital Mandate and LGR Delegated Authority Schedule, empowering the CEO and his management team to make decisions that are consistent with appetite for risk. Mandates articulate the product types and features that may be written; the asset classes that may be held; the target capital positions and ranges of earnings volatility within which the overall profile of risks should be managed; and tolerances for specific risk exposures. Activities that would result in a business operating outside agreed parameters require formal approval. Risk control L&G Re sets formal policies for the management of market, insurance, credit, liquidity and operational risks. The policies specifies the overall strategies for ensuring each risk type is managed in line with the Company s risk appetite and the minimum control standards that should be applied in managing significant risk exposures. 12

13 Risk mitigation The Company deploys a range of risk management techniques to manage and mitigate risks, so as to control risk exposures in line with approved risk limits. For example, derivatives are used to hedge unrewarded risks as part of L&G Re s asset liability management activity; and reinsurance programmes to transfer significant aggregations and concentrations of insurance risk exposures. The framework of controls includes documented underwriting policies and structured delegated pricing and underwriting authorities. It also includes investment policies which take into account the nature of the liabilities, guarantees and other embedded options given to policyholders. Risk identification and assessment Review process L&G re operate a risk identification and assessment process under which the Company regularly consider changes in the profile of existing and emerging risks. The assessment process evaluates the risks that are inherent in all products as well as those that are presented from changes in the environments that the Company operates in. Own risk solvency assessment The risk identification and assessment process forms part of the Company s broader own risk and solvency assessment process, the ongoing assessment of the risks to which L&G Re is exposed and an evaluation of the sufficiency of resources to sustain the business strategy over the horizon of the Group plan. Risk management information The risk management information framework is structured to report and support the review of ongoing and emerging risks and assess actual risk positions relative to the risk limits and targets that are set. Risk oversight The Chief Risk Officer ( CRO ) supports the Board and its Risk Committee in articulating acceptable risk taking and ensuring the effective operation of the risk and capital framework. This includes ongoing assessment of the Company s capital requirements to confirm that they meet regulatory solvency requirements. The CRO also provides objective challenge and guidance on a range of risk matters to business managers, including the risks implicit in product developments, business transactions and new asset classes, and strategies for managing risks in line with the Company s overall risk appetite. Risk committees The L&G Re Board has ultimate responsibility for the risk management framework. The Audit, Risk and Compliance Committee, supported by the CRO, serves as the focal point for risk management activities. The Board: Owns the overall risk management system Owns the risk appetite statements Is the ultimate owner of the regulatory relationships The Risk and Compliance Committee ( RCC ) ensures the effectiveness of the overall risk management system and recommends to the Board material changes in risk appetite. The RCC meets on a quarterly basis. The Executive Directors are accountable for: The implementation and operation of the risk management system Identifying, measuring, managing, monitoring and reporting risks within the business Ensuring all business decisions are informed by risk-based measures by reference to the agreed risk appetite statements wherever appropriate Ensuring appropriate risk taking and risk assurance resources are in place The CRO leads the risk management function for the Company which provides the second line of defence. 13

14 Group Internal Audit provides the third line of defence across the Group. It provides assurance to the Group Audit Committee, Executive Directors and risk management function that the design and operation of the risk management system is appropriate for all risk types. B.3.2 Description of how the risk management and solvency selfassessment systems are implemented and integrated into the insurer s operations; including strategic planning and organizational and decision making process This item has been included in B.3.1. above. B.3.3 Description of the relationship between the solvency selfassessment, solvency needs, and capital and risk management systems The purposes of the Commercial Insurer s Solvency Self-Assessment ( CISSA ) is to assess the Company s risks and to evaluate whether there is sufficient financial resources to sustain the business strategy over the plan horizon. L&G Re s CISSA process brings together the underlying risk and capital management processes by which the Company assesses, monitor and measure the Company s risks, review the business against risk appetite and tolerances and project the solvency position over the business plan. L&G Re has continued to integrate the CISSA with business as usual risk and capital management. The CISSA cycle is aligned with the strategic and business planning process so that the key elements can interact and inform forward looking decision-making. Integration of CISSA processes Regular CISSA processes are aligned with the strategic and business planning process, providing key CISSA inputs in line with the plan. Throughout the year, the Company monitors its performance against the current plan as well as monitoring risk and capital management information ( MI ). B.3.4 Description of the solvency self assessment approval process including the level of oversight and independent verification by the board and senior executives Governance of the internal model The L&G Re Board is ultimately responsible for ensuring the continuous appropriateness of the design and operation of the internal model ( the Internal Model ) for use within the CISSA. This responsibility is discharged through the Group Internal Model Committee ( GIMC ) which oversees Internal Model activities for the wider L&G Group, including L&G Re. The overall appropriateness and effectiveness of the Internal Model depends upon the effective operation of the Group s established internal control system. First line business management are responsible for implementing adequate and effective controls over the Internal Model as well as the Company s material product risk exposures, with the ongoing application and effectiveness of these overseen by second line risk teams and by Group Internal Audit in the third line of defence. Material concerns are escalated to operational and senior management for resolution. The status of remediation activity is monitored by risk teams, with significant issues escalated to the GIMC and where necessary to the Group Risk Committee. Group Internal Audit provide independent oversight of the effectiveness of the internal control system. This approach has ensured the implementation of adequate controls to ensure the ongoing appropriateness of the design and operation of the Internal Model, and these controls are subject to effective governance and oversight. 14

15 The Groups Internal Model Governance Policy sets out the governance framework in place for Group s partial Internal Model designed to mitigate model risk. This complements the Company s existing system of governance, highlighting specific requirements in respect of the Internal Model to ensure that it operates properly on a continuous basis, including ensuring that controls relating to the Internal Model are implemented in accordance with the Group Internal Control Policy and are adequate and effective at all times. The Group Internal Model governance framework is outlined in the table below: Board / Committee Group Board Legal entity boards Group Risk Committee (GRC) Group Internal Model Committee (GIMC) Group Board Responsibilities Ensuring the ongoing appropriateness of the design and operation of the Internal Model. This responsibility is discharged through the Group Risk Committee, subject to certain matters being reserved for its direct attention. Ensuring the ongoing appropriateness of the design and operation of their parts of the Internal Model; discharged by use and challenge of the model in decision making; ensuring that the model s scope remains appropriate; and ensuring that appropriate validation is performed. Monitoring the performance and appropriateness of the Internal Model, including ensuring that related controls are adequate, effective, and implemented in line with the Group s Internal Control Policy. Primarily, the Group Risk Committee discharges these responsibilities through acting on the receipt of recommendations, analysis and reports from the Group CRO team and the Group Internal Model Committee ( GIMC ) Overseeing the design, development and operation of the Internal Model to ensure that it operates as expected on a continuous basis to meet the Group s regulatory and economic requirements for risk-based capital management. This includes reviewing the effectiveness of internal controls as they relate to the Internal Model through the receipt of relevant reports and MI. Ensuring the ongoing appropriateness of the design and operation of the Internal Model. This responsibility is discharged through the Group Risk Committee, subject to certain matters being reserved for its direct attention. The Company is responsible for operating a robust control framework and appropriate controls to manage exposures and mitigate unacceptable outcomes (per the Company s risk appetite). Senior management is responsible for implementing robust controls to mitigate key risks associated with processes they are responsible for, and to ensure that these are regularly reviewed and remain fit for purpose. Day to day responsibility for ensuring that robust internal controls are in place and are operating effectively over Internal Model related processes is delegated to Internal Model Controllers ( IMCs ). IMCs provide first line management coverage of the internal model across all relevant legal entities and business units. Key responsibilities include ensuring compliance of their area with the requirements of the Group Internal Model Governance Policy and Internal Control Policy. Oversight of the internal control system is provided by the Group Risk and Divisional risk teams. Solvency II regulations necessitated the implementation of additional financial reporting and governance processes, and 2016 was the first year of full live operation of these processes. There has been close scrutiny by the second and third line teams to ensure that the processes are fully embedded in the Company s governance and that they are being operated robustly and effectively. The Company has responded to supervisory requirements to provide greater levels of evidence in areas such as model change and validation. Internal model validation Reliance is placed on Group for the validation of the internal model. 15

16 The Group s validation policy and associated standards define the Group s validation framework. The framework requires an annual validation cycle for the Group s Internal Model. For L&G Re s parts of the Internal Model, this has been performed as part of the production of the Economic Capital Requirement ( ECR ) as at 31 December The objective is to produce a robust, proportionate and demonstrably complete approach to validation overseen by the CRO and, ultimately, the Group Chief Risk Officer. There is an annual assessment of which aspects of the Internal Model must be independently validated. Independent validation is carried out mainly by the second line, sometimes by a first line team from a different business division, or sometimes by an external party. Independent validators must demonstrate how independence is met and state any limitations on independence. Requirements for each annual cycle are specified in the Validation Terms of Reference. Respective validators outline approach, activities, tools and aspects of the model in Validation Work Programmes. The results, conclusions and consequences including remediation are detailed in independent validation reports or validation reports prepared by the first line. These are presented to GIMC for approval but ultimate responsibility for internal model results rests with the Company. Validation Activity Internal Model validation activity for the reporting period covered the whole of the Internal Model. The level of validation undertaken was consistent with the level of risk incurred. Independent validation was performed on those areas identified as most material to the Internal Model s operation and results. The outputs are validation reports, highlighting key findings, strengths, weaknesses, limitations and remediation actions. B.4 Internal Controls B.4.1 Description of the internal controls system Internal control system The system of internal controls seeks to ensure that: An organisational structure is defined, with clarity of roles, responsibilities and reporting lines Appropriate management information and reporting processes are defined Frameworks for decision making (including the delegation of authority) are articulated Clear segregation of duties is in place Conflicts of interest are managed Administrative and accounting procedures are aligned with requirements Personnel have sufficient skills, knowledge and expertise to discharge their responsibilities (including those relating to the regulatory environment) Adequate and orderly records of business are maintained The security of customer data and other internal records is ensured Business procedures combat financial crime Processes are in place to deal with policyholder claims and complaints The integrity of manual and computerised business systems is ensured Processes ensure assessment of the possible impact of any changes in the legal environment The Audit, Risk and Compliance Committee oversees the adequacy and effectiveness of the internal control framework, primarily through the receipt of reports from Group Internal Audit, external auditors, and risk teams in the second line of defence. 16

17 B.4.2 Description of how the compliance function is executed The L&G Re CRO retains all compliance responsibilities, including fraud, anti-money laundering and anti-terrorist financing ( AML/ATF ), and anti-bribery and corruption ( ABC ) responsibilities. L&G Re compliance policies have been approved by the Board and are reviewed periodically. All local policies comply with Group compliance policy and consider regulatory requirements. The L&G Re CRO ensures that: All staff have annual training on compliance policies All staff read and sign the compliance policies upon commencement of their employment Company policies are kept in-step with Group and regulatory requirements All compliance activity is reported to the Audit, Risk and Compliance Committee, which is a Board level committee. B.5 Internal Audit Description of how the IA function is implemented and how it maintains its independence and objectivity when conducting its functions L&G Group s Internal Audit function carries out the Company s internal audit role and reports to the Audit Risk and Compliance Committee. The Group Internal Audit ( GIA ) provides the ARCC with an internal audit plan on an annual basis for consideration and receives direction from the ARCC. All business areas are within scope for an audit if GIA chooses to do so. The GIA team carries out: independent reviews and audits of the controls mitigating the key risks in all areas of the business, prioritised according to the relative risk of each assignment as determined by the Group Chief Internal Auditor ( GCIA ) in conjunction with senior management; reviews of major business change initiatives; and reviews of the risk management and internal control processes. Internal control objectives considered by GIA include: consistency of operations or programmes with the risk appetite, objectives and goals; effectiveness and efficiency of operations, and use of resources; compliance with policies, plans, procedures, laws and regulations; reliability and integrity of management and financial information processes, including the means to identify, measure, classify, and report such information; and safeguarding of assets. The GCIA reports functionally to the Chair of the Group Audit Committee and administratively to the Group Chief Executive Officer. The internal audit activity remains free from interference by anyone within L&G Re or the wider Group. This includes the choice of business areas to audit, procedures, frequency, timing, or the content of Group Internal Audit reports. This ensures that the Group Internal Audit can maintain a necessary independent and objective perspective. Internal auditors have no direct operational responsibility or authority over any of the activities audited. Accordingly, they will not implement internal controls, develop procedures, install systems, prepare records, or engage in any other activity that may impair internal auditors judgement. 17

18 Internal auditors are expected to exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. Internal auditors will make a balanced assessment of all the relevant circumstances and will not lose their objectivity when forming judgements. B.6 Actuarial Function Description of how the actuarial function is implemented L&G Re have their own actuarial team but are supported by the wider Group Actuarial Function for its Solvency II reporting. The Solvency II Best Estimate Liability ( BEL ) is currently used as the best estimate liability which forms part of the Technical Provisions for L&G Re s Economic Balance Sheet ( EBS ). The Approved Actuary presents an annual report to the L&G Re Board providing an opinion on the reasonableness of the calculation of the technical provisions ( TPs ) and its compliance with Bermuda Regulations. The requirements covering TPs calculations were addressed through various activities, including, in particular, actuarial function review of the calculations and the membership of oversight committees. A number of reports during the year were provided to the Board on the data, models, methodologies, assumptions and results of the EBS TP calculations. The actuarial function contributed to the effective implementation of the risk management system through various activities and the membership of a number of key Committees with risk and financial reporting responsibilities. Areas of focus, both within the responsibility of the risk function and more generally, with significant levels of actuarial function involvement include: the Internal Model and the Bermuda Solvency Capital Requirement ( BSCR ); the CISSA; identifying, measuring and monitoring risks; Asset Liability Modelling (including Matching Adjustment and liquidity management); product pricing; financial reporting and business plans. B.7 Outsourcing B.7.1 Description of the outsourcing policy and information on any key or important functions that have been outsourced L&G Re houses the outsourcing policy within the Operating Guidelines of the Company. The Company follows the Legal & General Group s Outsourcing and Essential Supplier Services Policy ( outsourcing policy ). The outsourcing policy sets out the framework and minimum standards of control and governance that L&G Re expects to be applied in the management of risks associated with outsourced and essential supplier service arrangements in line with regulatory requirements. The policy specifies that an activity should not be outsourced where it would materially impair the quality of the Company s system of Governance; unduly increase the Company s exposure to operational risk; impair the ability of supervisory authorities to monitor the Company s compliance with its obligations; or undermine continuous and satisfactory service to the Company s policyholders. The policy requires that for all outsourced arrangements a rigorous evaluation and supplier selection process is undertaken having regard for the financial stability, expertise, ability and capacity of the supplier to deliver the required service. The policy also specifies that a written contract must be in place which must include: a service level agreement; the conditions under which the arrangement may be terminated; provision for the orderly transition of services to another provider or Legal & General if the contract is terminated; a defined mechanism to resolve disputes arising out of/or relating to the contract; appropriate contingency plans should the supplier be unable to provide the required service; and provision for the continued availability of any software upon which Legal & General is reliant. Contracts must also ensure access to the providers premises, business management and any data relating to the outsourced activity, by Legal & General s Internal Audit, Risk and Compliance functions, its external auditors and Supervisory Authorities; and appropriate warranties that Legal & General and client data is adequately protected against unauthorised access at all times. All outsourced arrangements must be managed under the direction of a named Legal & General relationship manager. The risk function maintains oversight of the management of outsourcing arrangements established by the first line 18

19 business operations. The following external outsourcing arrangement is considered to be critical or important operational functions or activities and is monitored in line with the policy. Service providers Goods/services Jurisdiction ACT - IT Support Services Bermuda L&G Re partners with Applied Computer Technologies ( ACT ) for management of their IT platform. ACT has been responsible for providing L&G Re with services to support the infrastructure in Bermuda and the disaster recovery site in Canada. Included in this agreement is support of the IT platform, network/telephony, cyber security and collaboration. B.7.2 Description of material intra group outsourcing ( insourcing ) Insourcing is the use by one Legal & General Group company of another company within the Group for the supply of business facilities or services. The Group s core insourced relationships are as follows: investment management services provided by Legal & General Investment Management Limited ( LGIM ); treasury services by Legal & General Finance Plc; and the provision of employees and procurement services by Legal & General Resources Limited, this incorporates mortality advice, legal advice, risk advice and investment advice as required. B.8 Any other material information None. C. Risk Profile Particulars on exposures on underwriting risk, market risk including off balance sheet exposures, credit risk, liquidity risk, operational risk and other material risks C.1 Material risks that the insurer is exposed to, including how these risks are measured and any material changes that have occurred during the reporting period The L&G Re risk-based capital model (the Internal Model ) seeks to provide a quantitative assessment of the Company s risk exposures. It forms part of the suite of tools that are used to evaluate the Company s strategic plans, set risk appetite, allocate capital and evaluate product pricing. Capital models are also used to assess significant transactions, including large pension risk transfer deals. The key output from the capital model is the generation of capital requirements. The model is calibrated to a 99.5% value at risk confidence level over one year, equivalent to ensuring that sufficient capital is held to survive an assessment of a worse case 1-in-200 year event. In terms of capital requirement, credit and insurance (longevity) risks remain the most significant risks. Market risk, which includes equity, property and interest rate risks, includes other more material risks for which capital is held. 19