SOLVENCY AND FINANCIAL CONDITION REPORT DOMESTIC & GENERAL INSURANCE PLC

Transcription

1 SOLVENCY AND FINANCIAL CONDITION REPORT DOMESTIC & GENERAL INSURANCE PLC Company Registration Number: FCA Firm Reference Number: For the year ended 31 March 2017

2 Contents DIRECTORS REPORT... 1 AUDIT REPORT... 2 SUMMARY... 6 A. BUSINESS AND PERFORMANCE (unaudited)... 7 A.1 Business... 7 A.2 Underwriting Performance... 8 A.3 Investment Performance... 9 A.4 Performance of other activities... 9 B. SYSTEM OF GOVERNANCE B.1 General Information on the system of governance B.2 Fit and proper requirements B.3 Risk management system including the own risk and solvency assessment B.4 Internal control system B.5 Internal audit function B.6 Actuarial function B.7 Compliance B.8 Outsourcing C. RISK PROFILE C.1 Underwriting risk C.2 Market risk C.3 Credit risk C.4 Liquidity risk C.5 Operational risk C.6 Other material risks C.7 Any other information D. VALUATION FOR SOLVENCY PURPOSES D.1 Assets and Liabilities D.2 Technical provisions D.3 Alternative methods for valuation D.4 Any other information E. CAPITAL MANAGEMENT E.1 Own funds E.2 Solvency Capital Requirement and Minimum Capital Requirement E.3 Use of the Duration-Based Equity Sub-Module in the calculation of the Solvency Capital Requirement. 30 E.4 Differences between the Standard Formula and any Internal Model used E.5 Non-compliance with the Minimum Capital Requirement and non-compliance With the Solvency Capital Requirement E.6 Any other information ANNEX QUANTITATIVE REPORTING TEMPLATES... 32

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6 Legislation in the United Kingdom governing the preparation and dissemination of Solvency and Financial Condition Reports may differ from legislation in other jurisdictions. 4

7 Appendix relevant elements of the Solvency and Financial Condition Report that are not subject to audit Solo standard formula The Relevant Elements of the Solvency and Financial Condition Report that are not subject to audit comprise: Elements of the Narrative Disclosures subject to audit identified as unaudited. 5

8 SUMMARY Domestic & General Insurance PLC ("DGI" or "Company") is a wholly owned subsidiary of Domestic & General Group Limited, the EU insurance holding company, a company that is a wholly owned subsidiary of Domestic & General Acquisitions Limited (Jersey) ("DGA"), the non-eu insurance holding company, and is a UK regulated insurance company. DGI is the leading specialist provider of appliance care services for domestic appliances and consumer electronic products in its home UK market and a leading specialist provider in several international markets, with international operations in Germany, Spain, Portugal, France, Belgium, Netherlands and Australia. In fiscal year 2017, the Company generated 57% of revenues from the UK division and 43% from the International division, which includes operations at various stages of development. The principal activity of DGI is the provision of appliance care products in the UK, continental Europe and to a lesser extent Australia. DGI is an authorised United Kingdom insurance company, authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority ("PRA"). There have been no changes to DGI's principal activity during the year. Business review The Company's profit and loss account shows gross premiums written in the year of 290.3m (2016: 255.5m). Earned income in the year was 291.2m (2016: 278.5m). Investment income has decreased to 1.1m (2016: 1.7m), reflecting the even lower interest rate environment. Profit after tax for the year was unchanged at 40.6m (2016: 40.6m). The UK GAAP balance sheet shows that the Company's financial position at the year-end continues to be strong with net assets of 83.4m (2016: 72.2m). Capital Structure and Solvency The purpose of this report is to satisfy the public disclosure requirements under the Europe wide regulatory regime for Insurance Companies, the Solvency II directive. Sufficient capital is retained to ensure financial stability of the Company and to meet regulatory requirements. The capital structure is kept under review to ensure these requirements are met and to maintain an efficient balance sheet. The Board regularly reviews the capital position of DGI under the European Solvency II directive. The Company s capital position as at 31 March 2017 is as follows: Eligible own funds 112,403 Solvency Capital Requirements (SCR) 46,358 Capital Surplus 66,044 Ratio of Eligible own funds to the SCR 242% DGI makes use of Undertaking Specific Parameters (USPs) in its application of the Solvency II standard model. Based on this model, and on its assessment of risk and solvency requirements, it remains well capitalised. 6

9 A. BUSINESS AND PERFORMANCE (unaudited) A.1 Business The Company is a public limited company incorporated in 1950 in the United Kingdom. The registered office address of the Company is Swan Court 11 Worple Road, Wimbledon, London, SW19 4JS. The principal activity of DGI is the provision of appliance care products in the UK, continental Europe and to a lesser extent Australia. Simplified legal group structure CVC Funds + Management Shareholders / Management 100% Galaxy Topco Limited Ultimate controlling party, Jersey 100% Various Holding Companies Jersey 100% Domestic & General Acquisitions Limited Non-EU insurance holding company, Jersey 100% Domestic & General Group Limited EU insurance holding company 100% Domestic & General Insurance PLC UK Insurance company International branches in: Germany, Spain, France, Italy and Australia Legend: UK regulated entity The Directors regard Galaxy Topco Limited, an entity whose principal shareholders are Funds managed and advised by subsidiaries and affiliates of CVC Capital Partners SICAV-FIS S.A, as the ultimate controlling party. Domestic & General Acquisitions Limited is the ultimate non-eu insurance holding company and Domestic & General Group Limited is the immediate parent undertaking and EU insurance holding company. Supervision DGI is a United Kingdom insurance company, authorised by the Prudential Regulation Authority ( PRA ) and regulated by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority, and trades through a number of branches in Germany, Spain, Italy and France, which operate under EU Freedom of Establishment regulations. It also writes business on a passported basis in Portugal, Netherlands, Belgium, Ireland, Poland, Sweden and Austria. DGI also has a branch in Australia which is regulated by the Australian Prudential Regulation Authority (APRA) and which is required to hold capital locally to cover its Australian liabilities. 7

10 Contact details of the PRA, FCA and APRA can be found on the respective websites: PRA FCA - APRA - External Auditors The Company s statutory annual financial statements and the SFCR are audited by KPMG LLP, who can be contacted at 15 Canada Square, London E14 5GL A.2 Underwriting Performance We have identified key performance indicators (KPIs) measuring the financial performance and strength of the Company. Year on year KPIs are: Company s KPIs Gross Premiums Written 290, ,533 Earned Income 291, ,505 Claims Incurred 96,555 96,003 Technical account 50,594 48,152 Investment Income 1,068 1,742 Profit before tax 51,662 49,894 Claims ratio 33.2% 34.5% Technical ratio 17.4% 18.8% Gross Premiums Written (GPW) - consists of amounts invoiced in respect of warranty insurance business net of cancellations and exclusive of Insurance Premium Tax (IPT). This has increased by 13.6% and is largely driven by the International business - with continued growth in Iberian retail accounts as well as favourable exchange rate movements in the year, following the UK vote to leave the EU on 23 June 2016 and the subsequent fall in the value of the sterling compared with the Euro and Australian Dollar. There is modest (2%) growth in the UK. Earned income - represents the amount of premium recognised in the current year relating to insurance business, net of cancellations, in accordance with the earnings patterns applied to each contract. Earnings commence when the policy goes "on-risk". This has increased in line with GPW but is partially offset by the declining impact of a client book in run-off in Germany (Media Saturn), which contributed much more in 2016 than Claims Incurred/Claims Ratio expressed as a proportion of earned income, claims incurred have decreased by 1.3 percentage points to 33.2% due to a benign year for claims. Technical ratio Technical result reflects the profitability of the general business before direct costs. The technical ratio is calculated as the technical account result relative to GPW. The above factors result in an improvement in technical account performance of 1.4% to 17.4%. 8

11 A.3 Investment Performance The Company s investment strategy is to invest in cash, money market funds or short term bonds within guideline approved by the Investment Committee Deposits with credit institutions 28,073 32,547 Money market funds 22,402 12,720 Available for sale financial instruments 101,585 99,240 Other investments , ,516 Investment income comprises interest income and realised and unrealised gains and losses on financial instruments at fair value through profit or loss. Investment income decreased to 1.1m (2016: 1.7m) due to lower interest rates. The overall interest return on the deposit, cash and fund portfolio has been at an annual rate of 0.8% (2016: 1.2%). A.4 Performance of other activities In the year ended 31 March 2017, the Company incurred significant one-off expenditure totalling 0.8m as a result of organisational changes. There was no other material income or expense incurred during the reporting period. 9

12 B. SYSTEM OF GOVERNANCE B.1 General Information on the system of governance Governance structure The Governance Structure operated within DGI can be summarised as follows: Governance Function DGI Board Audit and Risk Committee Internal Audit Compliance and Risk Function Governance Role & Responsibilities - Sets the Company s Corporate Governance Policy & Agenda - Ensures that that Company s strategy and policy are in accordance with PRA/FCA & general corporate governance and risk management requirements and guidance. - Reviews and acts on the audits undertaken by the External Audit, Internal Audit and Compliance & Risk - Allocates appropriate resource to meet Governance obligations - Monitors the integrity of financial statements, and the effectiveness of the Company s internal controls and risk management systems. - Audit Programme reviews the effectiveness of the systems & controls in meeting the Governance & Risk Management objectives - Reports its findings to the DGI Board & the Audit and Risk Committee. - Monitoring Programme reviews the effectiveness of the systems and controls in meeting the requirements of the FCA and PRA - Reports its findings to the DGI Board & the Audit and Risk Committee In addition to the governance structure above, our external auditors review the integrity and accuracy of the statutory financial reporting and also the effectiveness of the systems & controls in meeting the Governance & Risk Management objectives and requirements, as part of the annual audit in accordance with Companies Act requirements. The Audit and Risk Committee monitors the findings from the external audit. Board of Directors and Approved Persons The Company s Board comprises of Directors and Non-Executive Directors who are responsible to the shareholder and other stakeholders for ensuring that the Company is appropriately managed and that it achieves its objectives. The Board meets at least 6 times per year to determine the Company s strategic direction, to review the operating and financial performance and to oversee that the Company is adequately resourced and effectively controlled. The directors of DGI who served in the year were: A. Crossley B. Merry D. Tyler I Mason (Appointed 23 September 2016) M. Berryman (Resigned 30 March 2017) D. Keeling (Resigned 15 December 2016) The table below summarises the Approved Persons of DGI (who are also Board members of Galaxy Finco Limited) and their respective controlled functions: Name Function Description of controlled function (at DGI) David Alan Tyler SIMF9 Chairman Barbara Merry SIMF14 Director Ian Mason SIMF1 Chief Executive Officer function 10

13 Name Function Description of controlled function (at DGI) Andrew Crossley SIMF2 Chief Finance Officer function SIMF5 Head of Internal Audit function SIMF20 Chief Actuary function Robin Peveril Hooper SIMF7 Group Entity Senior Insurance Manager Function Peter William James Rutland SIMF7 Group Entity Senior Insurance Manager Function David William Wells SIMF7 Group Entity Senior Insurance Manager Function Committees Audit & Risk Committee (ARC) The Audit & Risk Committee is a key governance committee which oversees and manages risk (including regulatory risk). Under its terms of reference, the ARC should meet at least three times a year and in the current year met six (2016: five) times. The Committee has an established annual plan of work, and its responsibilities include: the review of the annual and quarterly financial statements (including the reasonableness of areas of judgement); review of the appropriateness of the Company s accounting principles and procedures; review of the effectiveness of the audit process and the relationship of the Company with its external auditors including the level and nature of non-audit services; review of the effectiveness of the internal audit function; and review of the effectiveness of the Company s internal controls, in particular, regulatory compliance and risk management. Executive Committee The Board delegates the day to day operations of the business to the Executive Committee. The Executive Committee (ExCo), chaired by the CEO, comprises the CEO, CFO and other members of the senior management team as designated by the CEO. The ExCo meets weekly and its purpose is to generally manage the business of the Group according to the strategy set by the Board from time to time. Subject to those matters which are reserved to the Board (or Board committees), the ExCo has operational authority for: the day-to-day management of the Company s strategy, operations and business development; reviewing company risks and issues and incorporating considerations within the planning and budgetary process; monitoring the Company s adherence to regulation and compliance; reviewing key people risks and issues; ensuring strategic transformation programmes are aligned to the organisation s strategy; and acting as an escalation point for issues raised from the Company. Remuneration Committee The Group Remuneration Committee covers all Group companies including DGI. Under its terms of reference, the Remuneration Committee should meet at least once a year and in the FY2017 met three (2016: three) times. The Committee has responsibility for determining the overall framework and policy for remuneration of the Chairman, the independent non-executive directors, the executive directors and senior executives of the Group. The remuneration policy for executive directors and senior management is to ensure they are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Group. The Committee also: approves the design of, and determine targets for, any performance related pay and bonus schemes; reviews and approves the appointment or termination of employment of any employee whose base salary is in excess of 120,000; 11

14 determines the policy for and scope of pension arrangements, service agreements for the Executive Management, termination payments and compensation commitments; reviews and approves the establishment of any pension, retirement, death or disability or life assurance scheme; and oversees any major changes in employee benefit structures. Data Security Council (Data Security arrangements) The Data Security Council, chaired by the Group Chief Information officer (CIO), comprises the CIO, the Chief Information Security Officer (CISO), the Group Privacy officer (GPO) and senior managers from relevant functions. Its role is to oversee data security within Group, including promoting data security awareness, monitoring data compliance with security standards and contractual requirements, acting as the appropriate governance body for ISO and investigating frauds & security incidents. Group Investment Committee The Investment Committee, which is chaired by the CFO and includes a non-executive director and the Group Treasurer, determines the policy for investment, including setting investment class, asset allocation, counterpart limits and investment horizons. Conduct Standards Committee The Conduct Standards Committees (CSCs) UK and International - chaired by the CFO, comprise the CFO, Director of Standards, Group Head of Legal, CRO and relevant senior managers. The CSC s role is to oversee and monitor customer treatment throughout the organisation to ensure our employees adhere to conduct standards across all of the business. In particular, the CSCs are responsible for: setting the Company s conduct standards and policies in relation to customers; agreeing principles; promoting conduct standards culture throughout the organisation; ensuring processes and controls are in place and properly monitored; recommending actions and improvements to the business for implementation; and reporting to the Board and Audit & Risk Committee. Data Governance Committee The Data Governance Committee is responsible for the following:- Providing appropriate oversight over the application of the data policy; Ensuring that the data policy, associated procedures, and standards including the responsibilities and accountabilities of the various stakeholders across the firm, the quantity and quality of data metrics reported to management, the data directory, and the risk and impact assessment are kept under regular review; Ensuring appropriate assurance is carried out and received for validating the quality of data used in the Technical Provisions (TP) and Undertaking Specific Parameters (USP); Data governance processes and controls are understood by the business and embedded into business as usual; and Ensuring that stakeholders, including data owners, are aware of their responsibilities in relation to data used in the TPs and USPs provisions and that DGI staff comply with the data policy. 12

15 Product Governance Committee The Product Governance Committees UK and International chaired by the CFO, comprise the CFO, Director of Standards, Group Head of Legal, CRO and relevant senior managers. Their role is to oversee the activity of designing new products or modifying or developing existing products within Domestic & General and ensure Domestic & General s standards are understood and applied when carrying out product development. The primary objectives of the PGCs are to: oversee the implementation of and adherence to Domestic & General s product development policies and procedures; ensure product development meets the standards set by Domestic & General including the Brand Standards; ensure all product development carried out by Domestic & General Insurance PLC (DGI) meets the standards required by the relevant regulators (eg. FCA in the UK); escalate up to the appropriate governance body (eg. DGI Board) certain product design matters which are outside of the PDC s delegated authority; and undertake periodic reviews of D&G products to ensure they continue to meet the standards set by Domestic & General including the Brand Standards and, in the case of DGI, the standards required by the relevant regulators. B.2 Fit and proper requirements DGI is committed to ensure that all persons who effectively run the Company or have other key functions are at all times fit and proper within the meaning of Article 42 of directive 2009/138/EC in accordance with the applicable rules of national competent authorities. DGI is also committed to ensure that all persons who effectively run the Company or have other key functions are fit and proper within the regulatory requirements (SYSC). Definition Fitness and Propriety is known as the assessment (prior to undertaking a role) to ensure the appropriate fitness and propriety of an individual to perform the particular function. The assessment considers aspects such as the individual s honesty, integrity and reputation, competence and capability and financial soundness. Requirements General DGI implements appropriate and proportionate processes and procedures to ensure that: persons who effectively run the Company or have other key functions are fit and proper within the meaning of Article 42 of Directive 2009/138/EC, as required by the rules of the PRA/FCA and/or other national competent authorities; the members of the management or board collectively possess appropriate qualification, experience and knowledge about : - insurance and financial markets - business strategy and business model - system of governance, financial and actuarial analysis and - regulatory framework and requirements. Assessment The assessment of whether a person is fit & proper includes, where appropriate: 13

16 an assessment of the person s professional and formal qualifications, knowledge and relevant experience; an assessment of the person s honesty and financial soundness based on evidence regarding their character, personal behaviour and business conduct including any criminal, financial and supervisory aspects relevant for the purpose of the assessment. The assessment of the fitness and propriety of the persons, who effectively run the Company or have other key functions, when being considered for the specific position, is carried out. The Relevant Regulator must be satisfied as to the person s honesty, integrity and reputation, competence and capability for the role that the person is to assume in the firm and their financial soundness. Pre-employment checks are also undertaken including: References from previous employers, all roles Criminal Record Checks, all roles Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) requirements, particularly for Approved Persons, including evidence of qualifications Professional qualifications and membership checks Highest education verification Medical questionnaire The assessment of the fitness and propriety of the persons who effectively run the Company or have other key functions, on an on-going basis is also carried out. A periodic re-assessment of ongoing fitness and propriety may, where appropriate, be carried out through e.g. completion of an appropriately worded form and declaration documenting and, where appropriate, reporting and acting on any changes to an individual s fitness and propriety from that previously reported. In the case of outsourcing of key functions in accordance with Article 42 and 49 of Solvency II Directive, DGI complies with the requirements of the FCA and/or local regulators where relevant to: apply similar fit and proper procedures in assessing persons employed by the service provider or sub service provider to perform an outsourced key function and (where required) designate a person within DGI with overall responsibility for the outsourced key function who is fit and proper and possesses sufficient knowledge and experience regarding the outsourced key function to be able to challenge the performance and results of the service provider. B.3 Risk management system including the own risk and solvency assessment The Company has established a risk management and control framework which seeks to protect the business from events that hinder achievement of its objectives and financial performance, including failure to exploit opportunities. The Board of Directors/ARC identifies potential risks and uncertainties that could have a material impact on performance and puts in place internal processes and controls designed to mitigate each risk. Proper and ethical business conduct is embedded into the day-to-day business. There is a strict business framework which senior management and the Board ensure pervades all activities. The Company has established appropriate controls and monitoring over product design, selling processes, customer service and complaints which underpins low complaints rates and high customer satisfaction. The Company has Conduct Standards Committees for both UK and international businesses, chaired by the Chief Financial Officer, which meet monthly and have a specific mandate to set and monitor the Company s conduct standards and policies in relation to customers and promote the Company s conduct standards culture throughout the organisation. The Board is focused on corporate conduct related matters including 14

17 comprehensive management information and reporting in board packs that are considered in board meetings to ensure the highest standards are maintained and the agenda is set at the very top of the organisation. Own Risk and Solvency Assessment (ORSA) As part of the Solvency II regime DGI has implemented an Own Risk and Solvency Assessment (ORSA) process which is used to assess the level of capital that should be retained by the company. This process considers all the material risks faced by DGI and includes stress tests applied to business plan financial projections by varying assumptions for future experience. DGI makes use of Undertaking Specific Parameters (USPs) in its application of the Solvency II standard model. Based on this model, and on its assessment of risk and solvency requirements, it remains well capitalised. B.4 Internal control system The Board has the overall responsibility for maintaining the systems of internal control of the Company and for monitoring their effectiveness, while the implementation of internal control systems is the responsibility of the executive management. The Company s systems of internal control are designed to minimise the risk of failure to achieve business objectives. The systems are designed to: Safeguard assets; Maintain proper accounting records; Provide reliable financial information; Identify and manage business risks; Maintain compliance with appropriate legislation and regulation; and Identify and adopt best practice. The Company has an established governance framework, the key features of which include: Terms of Reference for each of the Board s Committees and other governance committees; A clear organisational structure, with documented delegation of authority from the Board to executive management; A policy and procedures framework, which sets out risk management and control standards for the Company s operations; Defined procedures for the approval of major transactions; and Regular MI and reporting. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. The Company s risk management and control framework is designed to support the identification, assessment, monitoring, management and control of risks that are significant to the achievement of its business objectives. The Company has a set of formal policies which govern the management and control of both financial and non-financial risks. B.5 Internal audit function The Internal Audit function is outsourced to Grant Thornton LLP, which reports to the Chairman of the Audit and Risk Committee. Internal Audit is an independent, objective assurance and consulting function designed to add value and improve the Company s operations. It helps the Company accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, internal control, and 15

18 governance processes. The Internal Audit Function delivers increased risk coverage and measurable value to the business by identifying and performing assurance and consulting engagements. The function produces a three-year Risk-Based Internal Audit Plan based on an extensive risk assessment of all identified auditable units. The Internal Audit findings and recommended appropriate courses of action for the enhancement of risk management, internal control, and governance are communicated to management and the Audit and Risk Committee. On an annual basis, the Internal Audit Function declares its independence and objectivity to the Audit and Risk Committee. The declaration is based on two key factors, namely the organisational independence of the Internal Audit function and the objectivity of its staff. Organisational independence is effectively achieved as the function is outsourced, and reports to the Audit and Risk Committee. Furthermore, the Internal Audit function is free from executive management interference in determining the scope of internal auditing, performing work, and communicating results. Based on the results of the risk assessment, the auditable units are ranked into priority areas. The risk assessment is enhanced with the feedback of the key stakeholders and the use of the risk register compiled by the Compliance and Risk Function. Also, the Internal Audit plan is approved by the Audit and Risk Committee and revisited regularly to allow flexibility should the risk environment change. Moreover, the Internal Audit function promotes action on audit recommendations and reinforces staff commitment to results through application of sound monitoring and follow-up systems. Accordingly, there is a quarterly follow-up process to monitor and ensure that management actions have been effectively implemented thus maintaining a periodic process of following up on the issues until these are resolved. None of the Internal Audit staff is employed by the Company. B.6 Actuarial function The Company s actuarial function is outsourced to Milliman. Reporting to the Board it carries out the formal role of the actuarial function under Article 48 of the Solvency II Directive, which is to report formally on technical provisions, reinsurance and underwriting policy. B.7 Compliance The Company has an in-house Compliance and Risk function to identify relevant regulatory requirements and ensure that the Company implements the necessary arrangements, systems and controls so as to facilitate adherence to these obligations. The ARC agrees the annual Compliance Monitoring schedule and all findings from the periodic reviews are reported back to the ARC. The findings may contain recommendations which are closely monitored and closed by the Compliance and Risk function. B.8 Outsourcing This section sets out the requirements that are addressed in any outsourcing arrangement. The policy aims to ensure that in respect of outsourcing, DGI has undertaken appropriate due diligence and has in place appropriate contractual arrangements and standards. When entering into an outsourcing arrangement, due consideration is given to the following matters, where appropriate: a risk assessment is undertaken to consider whether and how activities can be appropriately outsourced, considering the experience and resources of proposed outsourcer and assess any necessary mitigations to put in place; appropriate due-diligence is carried out in selecting outsource providers, including information security due-diligence; 16

19 conflict of interest is declared if exists or has arisen; new contracts and renewals of existing contracts are approved in accordance with D&G s delegated authority framework; the relationship is governed by appropriate contracts, service level agreements and business standards the outsourcing agreement: - requires compliance with any regulatory obligations regarding outsourcing including, where relevant, ensuring that the material outsourcing arrangements continue to meet D&G s obligations to customers, stakeholders or regulators, - provides for an appropriate level of governance and ongoing management of the outsource provider; - ensures that D&G customer records are appropriately protected and confidential; - includes appropriate procedures, controls, management information, including contingency planning and disaster recovery; - ensures that D&G has appropriate supervision, oversight and rights of audit to satisfy itself of the good management of the third party; - ensures that the outsource provider adheres to the same operational standards as D&G so as to protect D&G against legal or reputational risks; where necessary, the Compliance team is consulted to check whether notification is made to the relevant regulatory bodies of significant outsourced arrangements as they arise or change there is an ongoing assessment process in place to ensure the outsource provider continues to be appropriate and meet D&G s requirements. Outsourcing arrangements Domestic & General Services Limited (DGS), a group company, provides DGI with services to support the promotion and administration of its insurance policies to consumers. DGS is an Appointed Representative of DGI. The services provided by DGS include general policy administration, sales and sales administration, pricing, network repair management services, telephone services and mailing and fulfilment services. Jurisdiction: United Kingdom DGI sources repair and replacement services directly from manufacturers or through 3rd party repair companies using manufacturer-accredited service engineers. These arrangements are managed by clear contractual responsibilities, service level agreements and monitoring of performance. The majority of repair rates are contractually fixed on an annual basis. Jurisdiction: All countries we operate in - United Kingdom, Germany, Spain, Portugal, France, Italy, Netherlands, Belgium, Poland, Sweden, Austria, Australia and New Zealand. DGI s products are sold directly or through retailers and manufacturers Jurisdiction: All countries we operate in - United Kingdom, Germany, Spain, Portugal, France, Ireland, Italy, Netherlands, Belgium, Poland, Sweden, Austria, Australia and New Zealand. DGI outsources some Call Centre functions, including sales claims and post sales administration to third party providers subject to quality monitoring and service level agreements. Jurisdiction: United Kingdom, Germany, France, Italy, Poland and Australia Internal Audit Jurisdiction: United Kingdom Actuarial function Jurisdiction: United Kingdom 17

20 C. RISK PROFILE Description of Risk Management System DGI operates a three lines of defence model. Risk management is embedded within the first line of defence from a top-down perspective through the articulation and communication of the Board s risk appetite and from a bottom-up perspective through the operation of risk registers. Risk owners are clearly identified across the business and take responsibility for the risks in their areas A suite of Key Risk Indicators ( KRIs ) is in place and continues to be developed to support the capture of existing and emerging risks, with areas such as controls testing, event reporting and project risk reporting regularly reviewed. The second line of defence consists of the Compliance and Risk function overseen by the CRO who ultimately reports into the CFO and also has a reporting line into the Chair of the DGI ARC, who is an Independent Non- Executive Director of DGI, to ensure appropriate independence of the function. The second line function reviews and challenges outputs from the first line of defence set out above. The third line of defence consists of an outsourced Internal Audit Function provided by Grant Thornton. The Internal Audit Function reports to the CFO and the Chair of the ARC. The second line function is subject to periodic audit from the independent third line. Milliman has been appointed as external actuary and has assisted with the development of DGI s USP, SCR and technical provision calculations and with its Solvency II reporting requirements. Current Risk Profile DGI performs an ongoing process of risk assessment and reporting to the ARC, based on the risk reporting through the risk management support software, Magique. The Company s risk appetite is reviewed by executive management and the Board to ensure it remains appropriate to the business as it grows. A summary of the principal risks and uncertainties facing the Company is shown below: C.1 Underwriting risk The underwriting risk is the main component of the Company s risk profile as shown in section E.2.1. Underwriting risk is the potential adverse financial impact that combined claims and repair, acquisition and administration costs, exceed the estimated costs built into the pricing models applied. Underwriting risk is managed through underwriting controls, pricing policies, approval procedures for new products, regular review of performance and monitoring of emerging issues. C.2 Market risk Market risk is the potential adverse financial impact of changes to interest rates. The Company s greatest risk to changes in interest rates arises from its investment portfolio. Interest rate risk within the investment portfolio is managed actively by the Company's Treasury function. Interest rate risk on cash balances is not hedged unless of strategic importance to the underlying business. Interest rate risk on available for sale investments is managed by investing within strictly controlled investment criteria that specify, amongst other things, maximum durations. 18

21 C.3 Credit risk Credit risk is the potential adverse financial impact of loss in value of financial assets due to counterparties failing to meet all or part of their obligations. The largest credit risks to the Company are in relation to deposits with credit institutions, money market funds, available for sale investments and trading debtors. The Company structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty, or groups of counterparties. Deposits can only be placed with banks or building societies having credit limits approved by the Board. Counterparty exposure is subject to constant review. Available for sale investments are managed by an external fund manager within investment management terms that specify, amongst other things, minimum credit ratings and maximum duration. Internationally there are a number of contracts with major clients, with exposure on the monies owed to DGI at any one time. However, DGI closely monitors outstanding debt and is in constant dialogue with the clients and is therefore in a position to act swiftly to mitigate any loss in the event of a major client running into financial difficulties. Trading and insurance debtors are amounts receivable from policyholders and are by their nature high volume but low value. Credit risk exposure is minimal; if the instalment debtor lapses DGI cancels the cover provided. Credit ratings of significant classes of financial assets A rated (or above) B rated (or below) Institutions Institutions Unrated Total Cash and cash equivalents 9, ,916 Money market funds 22, ,402 Available for sale investments carried at 82,053 19, ,585 fair value Deposits with credit institutions 28, ,073 Debtors , , ,444 19, , ,543 A rated (or above) B rated (or below) Institutions Institutions Unrated Total Cash and cash equivalents 7, ,238 Money market funds 12, ,720 Available for sale investments 71,207 28,033-99,240 Deposits with credit institutions 32, ,547 Debtors , , ,712 28, , ,305 19

22 The Company has implemented policies that require appropriate credit checks on potential trade partners before sales commence. The amount disclosed in the balance sheet for financial assets represents the Company's maximum exposure to credit risk. Past due or impaired financial assets The table below sets out an analysis of the Company's assets (see below), showing those which are past due, or impaired. Categories of financial assets for which there are neither past due or impaired balances have not been included below. Assets Total Not past due 159, , Past due (days) Greater than Provision (135) (135) Carrying amount 159, ,071 Assets Total Not past due 141, , Past due (days) Greater than Provision (168) (168) Carrying amount 141, ,820 The Company s assets (as shown on the face of the balance sheet) include: Debtors 120, ,560 Accrued interest and rent Other prepayments and accrued income 38,250 19, , ,820 The Company considers notified disputes and collection experience in determining which assets should be impaired. C.4 Liquidity risk Liquidity risk is the possibility that we do not have sufficient available liquid assets to meet our obligations as they fall due. 20

23 An important aspect of the Company's management of assets and liabilities is ensuring that cash is available to settle liabilities as they fall due. The most significant payments are claims and repair costs. The profile of claims and repair cost payments are highly predictable. The Company maintains cash and liquid deposits to meet demands on a daily basis. Contractual maturity analysis: The table below summarises the maturity profile of the Company's financial liabilities based on remaining undiscounted contractual obligations where the maturity profile is an analysis by estimated timing of the amounts recognised in the balance sheet. Claims & repair costs Creditors Total days 12,516 71,607 84, days - 1 year - 1,123 1, years years Greater than 5 years Total 12,516 73,374 85,890 Claims & repair costs Creditors Total days 9,610 60,626 70, days - 1 year - 1,975 1, years years Greater than 5 years Total 9,610 63,132 72,742 C.5 Operational risk Operational risk arises as a result of inadequately controlled internal processes or systems, human error or from external events. Operational risks are usually more difficult to quantify, so their materiality is assessed using a likelihood/impact scoring approach. This allows risks to be ranked in order of their potential impact and so to focus risk management activities on those risks warranting the greatest attention. Detailed risk registers show that appropriate risk controls exist for the core insurance and financial risks (i.e. underwriting, claims, financial and investment) and established business areas within the UK. These are regularly monitored and updated. C.6 Other material risks Environmental risk reflects the continuing challenging economic environment of the UK and its consequent impact on demand for the Company's services. This is mitigated by a resilient business model, expertise in chosen markets and product development and innovation. 21

24 Information systems risk is the risk of failure of IT hardware and software, networks and communications, including failure to implement new systems effectively. This risk is mitigated by investment in appropriate technology and staff, and by business continuity planning. Conduct risk is the risk of non-compliance with relevant laws, regulations and standards in the UK and overseas. This risk is mitigated by appropriate first line controls, a dedicated compliance and legal team and active monitoring of product development and treatment of customers to ensure DGI meets all applicable regulations; involvement of appropriate legal resource and expertise in contract negotiations and dispute resolution; training and competence programmes for staff; strong product design, sales and customer marketing standards; and specialised expertise in local markets. Given its plans to grow in Europe, DGA recognises the potential risks to the strategy presented by a Brexit. The mains risks can be summarised as follows: DGI currently writes insurance in the EU using EU freedom of establishment and service pass-porting rights. There is significant uncertainty as to whether these rights will continue post Brexit. Whilst it is possible that arrangements, transitional or permanent, will be agreed at some point during the Brexit negotiations that would enable DGI to continue to write and service insurance business using passporting, the length of the timelines for the mitigating actions DGA will need to undertake over the next 18 months is such that its base plan needs to be on the basis that pass-porting will not survive. DGA is therefore planning to put in place alternative arrangements to enable it to continue offering insurance products in the EU post March 2019, irrespective of any transitional (or permanent) arrangements that may ultimately be agreed. C.7 Any other information DGI has established processes to undertake stress and scenario testing on an ongoing basis, with testing undertaken at least annually. The stress testing process involves a number of senior and operational management and the results of the tests improve the Board s understanding of risk, influence business decisions and form a key part of the risk management framework. Stress tests carried out in the year include tests on loss ratios, lapse risks, interest rates, credit spreads and currency risk. The tests validated that DGI maintains sufficient capital to withstand these shocks. 22

25 D. VALUATION FOR SOLVENCY PURPOSES Section D focuses on the Solvency II balance sheet and the valuation of assets and liabilities and shows where these valuations differ to the value in the statutory accounts. For each material class of assets, technical provisions and other liabilities where there are differences, the following information is provided: a description of the bases, methods and main assumptions used in arriving at the valuation for solvency purposes quantitative and qualitative explanations of material differences between the bases, methods and main assumptions used for the valuation for solvency and financial statement purposes. The Solvency II balance sheet is derived from the Company s UK GAAP Statement of Financial Position, adjusted for valuation differences where required. The UK GAAP financial statements ( financial statements ) are prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework ("FRS 101") and with the provisions of Section 396 of the Companies Act 2006 including applying the requirements set out in Schedule 3 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 relating to insurance companies. In preparing the financial statements, the Company applies the recognition, measurement and disclosure requirements of International Financial Reporting Standards as endorsed by the EU ("Adopted IFRSs"), but makes amendments where necessary in order to comply with Companies Act THE GAAP financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, available for sale financial assets and financial instruments held at fair value through profit or loss. Under Solvency II, assets and liabilities should be valued on a market consistent basis, which is deemed equivalent to fair value under IFRS. Therefore for assets and liabilities which are at fair value under GAAP, these are the same values used for Solvency II. For assets and liabilities that are not stated at fair value under GAAP, adjustments are made to bring these in line with Solvency II where necessary. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marked participants at the measurement date. It is measured using assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. The material classes in the solo entity Solvency II balance sheet are shown in the table below. 23

26 Summary Solvency II Balance Sheet Solvency II value Statutory accounts value Difference '000 '000 '000 Assets Deferred acquisition costs 0 111, ,207 Property, plant & equipment held for own use 2,932 2,932 Investments (other than assets held for index-linked and unit-linked contracts) 154, , Property (other than for own use) 9 9 Holdings in related undertakings, including participations 1,047 1, Bonds 101, ,389 Government Bonds 26,098 26,098 Corporate Bonds 70,452 70,452 Collateralised securities 4,840 4,840 Collective Investments Undertakings 23,783 23,783 Deposits other than cash equivalents 28,074 28,074 Insurance and intermediaries receivables , ,431 Receivables (trade, not insurance) Cash and cash equivalents 9,915 9,915 Any other assets, not elsewhere shown 31,142 37,329-6,187 Total assets 199, , ,966 Liabilities Technical provisions non-life 18, , ,259 Technical provisions non-life (excluding health) 18, ,960 Best Estimate 14, ,761 Risk margin 4, ,199 Deferred tax liabilities 7, ,813 Debts owed to credit institutions Financial liabilities other than debts owed to credit institutions 2,622 2,622 Insurance & intermediaries payables 35,901 35,901 Payables (trade, not insurance) 11,263 23,826-12,564 Any other liabilities, not elsewhere shown 10,324 10,324 Total liabilities 87, , ,010 Excess of assets over liabilities 112,403 83,359 29,044 D.1 Assets and Liabilities Material Class Deferred Acquisition Costs (DAC) Deferred acquisition costs are valued at nil for Solvency II purposes. Any future cashflows relating to acquisitions costs are either included in the best estimate technical provisions or under insurance and intermediaries payable in the balance sheet Investments and cash Investments are held at Fair Value where level 1 inputs can be obtained. Level 1 refers to the first level of the Fair Value hierarchy which categorises valuation inputs into three levels. The hierarchy gives the highest priority (Level 1) to quoted prices in an active market, and the lowest priority to unobservable inputs (Level 3). Level 1 inputs Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 inputs Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable from the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). In line with our policy for assessing securities we deem corporate bonds which are quoted but not actively traded in relation to trading volumes to be level 2. As a result, the Company s entire investment portfolio is categorised as Level 2. The Company has no investments which are Level 3. Cash and cash equivalents comprise cash balances, call deposits and term deposits with 24