SOLVENCY AND FINANCIAL CONDITION REPORT 2017

Transcription

1 SOLVENCY AND FINANCIAL CONDITION REPORT 2017 This report is the Solvency and Financial Condition Report ( SFCR ) of for the reporting period ended 31 December 2017, pursuant to article 51 of Directive 2009/138/EC (the Directive ) and articles 290 to 298 of Delegated Regulation 2015/35 (the Regulation and, together with the Directive, the Solvency II Regulations ). CERTAIN PRELIMINARY INFORMATION ABOUT THIS SFCR REPORT Presentation of the information In this Report, unless provided otherwise, (i) the Company and AXA Insurance refer to AXA Insurance UK plc, a public limited company under the Companies Act 2006, which is incorporated and domiciled in the United Kingdom ( UK ), and (ii) AXA Group, the Group and AXA refer to AXA SA together with its direct and indirect consolidated subsidiaries. The Company is part of the AXA Group as an indirect subsidiary of AXA SA, a société anonyme (public limited company) incorporated in France, which is the publicly traded parent company of the AXA Group. 1

2 SUMMARY In recent years, the European Union developed a new regulatory regime for European insurers which became effective on 1 January 2016, following the adoption of the 2009 Solvency II Directive on the taking-up and pursuit of the business of insurance and reinsurance, as amended in 2014 by the 2014/51/EU Directive ( Omnibus II ). The regime is designed to implement solvency requirements that better reflect the risks that insurance companies face and deliver a supervisory system that is consistent across all European member states. The Solvency II framework is based on three main pillars: (1) Pillar 1 consists of the quantitative requirements around own funds, valuation rules for assets and liabilities and capital requirements; (2) Pillar 2 sets out qualitative requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers including the requirement for insurers to submit an Own Risk and Solvency Assessment ( ORSA ) which will be used by the regulator as part of the supervisory review process; and (3) Pillar 3 focuses on enhanced reporting and disclosure requirements. The Solvency II framework covers, among other matters, valuation of assets and liabilities, the treatment of insurance groups, the definition of capital and the overall level of required capital. / Key Figures (In m except Solvency II ratio data) Profit and Loss Account under FRS 101 Total gross written premiums 2,261 2,276 Underwriting result (14) 2 Investment result Profit on ordinary activities before tax Solvency II Balance Sheet Data Total assets 6,984 6,708 Available Financial Resources (AFR) 2,388 2,187 Capital Requirement Data Solvency Capital Requirement (SCR) 1,703 1,776 Solvency II ratio 140.2% 123.1% 2

3 SYSTEM OF GOVERNANCE BUSINESS AND PERFORMANCE / Key Highlights The profit before tax in 2017 is 285m, an increase of 53m from the 2016 result. This consists of a 69m increase in the investment result and a 16m decrease in general business underwriting. The underwriting loss for the year is 14m (2016: profit 2m). The loss ratio deteriorated due to the impact of the change in discount rate used to calculate lump sum payments in respect of bodily injury claims, which was reduced from 2.5% to minus 0.75% effective from 20 March There was a further deterioration due to adverse experience on Escape of Water and Theft perils within the Property classes, offset by relatively benign weather experience. An Unexpired Risk Provision and Onerous Contract Provision have also been booked to recognise expected losses under an onerous contract. During the year, gross written premiums have decreased by 15m, or 0.7%, to 2,261m (2016: 2,276m). The combined operating ratio has deteriorated by 0.7%, compared with The investment return for the year, recorded within the Profit and Loss Account, is a profit of 299m (2016: 230m). An improvement in the investment return compared to prior year is mainly due to the dividend received from subsidiary AXA PPP healthcare limited, a dividend of 50m was received in addition to a dividend of 100m relating to 2016, this is partially offset by various decreases including a decrease in loan income due to an exceptional receipt in 2016 of 21m. There has been a large fall in foreign exchange gains of 466m, which is primarily offset by a corresponding decrease in losses on derivatives of 416m, due to the foreign exchange forwards used to hedge the currency exposure. Prior year foreign currency movements were unusually large due to the Brexit vote in June. Since 1998, AXA Insurance has operated with a unitary Board of Directors, with a Chairman and a Chief Executive Officer. The Board of Directors has delegated authority to three specialised AXA UK Committees: the AXA UK Audit Committee, the AXA UK Remuneration and Nomination Committee (for certain remuneration and nomination matters as set out in the Corporate Authorities and in the Terms of Reference of the Committee), and the AXA UK Investment Committee. In addition, the Board of Directors established an AXA Insurance Board Risk Committee in 2017, following the disbandment of the AXA UK Risk Committee as well as several sub-committees, which previously had oversight duties over all AXA UK entities. The Board Risk Committee assists the Board in its responsibility for the oversight and management of risk. As further described in Section B.1 of this report, AXA Insurance has four key functions, in compliance with Solvency II Regulations: 1) risk management; 2) compliance; 3) internal audit and 4) actuarial. Each of these functions has a direct link to one of the persons who effectively run the Company, and each of these functions has direct access to the Board of Directors. AXA Insurance is engaged in the Property & Casualty ( P&C ) business, and as such, it is exposed to a very wide variety of risks, including insurance risks, market risks, credit risks, operational risks and other types of risks. 3

4 SYSTEM OF GOVERNANCE (CONTINUED) As an integrated part of all business processes, Risk Management is responsible for the definition and the deployment of the Enterprise Risk Management ("ERM") framework within AXA Insurance, including the conduct of the Own Risk and Solvency Assessment ("ORSA"). This framework is based on the following four pillars, cemented by a strong risk culture: 1. Risk Management independence and comprehensiveness: the Chief Risk Officer is independent from operations ( first line of defence ) and Internal Audit Department ( third line of defence ). The Risk Management Department, together with the Compliance and Internal Financial Control Departments, constitutes the second line of defence the objective of which is to develop, coordinate and monitor a consistent risk framework across the Company; 2. Risk appetite framework; 3. Systematic second opinion on key processes; and 4. Robust Internal Model. In order to manage these risks, AXA Insurance has put in place a comprehensive system of internal controls designed to ensure that executives are informed of significant risks on a timely and continuing basis, have the necessary information and tools to appropriately analyse and manage these risks, and that the Company s financial statements and other market disclosures are timely and accurate. These mechanisms and procedures principally include: The Company s corporate governance structures, designed to ensure appropriate supervision and management of AXA Insurance s business as well as clear allocation of roles and responsibilities at the highest level; Management structures and control mechanisms designed to ensure that executives have a clear view of the principal risks the Company faces and the tools necessary to analyse and manage these risks, including implementation of the AXA Group Internal Controls Program; and Disclosure controls and procedures designed to ensure that executives have the necessary information to make fully informed disclosure decisions on a timely basis and that the Company s disclosures on material information (both financial and non-financial) to the markets are timely, accurate and complete. These mechanisms and procedures, taken together, constitute a comprehensive control environment that executives believe is appropriate and well adapted to AXA Insurance s business. 4

5 RISK PROFILE The AXA Group internal model offers a concrete and powerful tool to control and measure exposure to most risks, in line with the Solvency II framework. The risks faced by AXA Insurance can be summarised as follows: P&C Insurance risks These comprise reserving risks from prior year reserves, premium risk for future underwriting business and catastrophe risk from accumulation of claims from insurance events such as natural weather events. AXA Insurance writes a mix of long-tail and short-tail P&C insurance contracts in Personal and Commercial lines, the latter weighted more towards small businesses, but with a growing portfolio in the mid-corporate market. The profile also has a small element of life insurance risk relating to claims involving Periodic Payment Orders. Risks relating to the financial markets and financial position AXA Insurance is exposed to financial market risks through its core business of P&C insurance and reflecting its investment strategy. A wide variety of risk management techniques are used to control and mitigate the market risks to which AXA Insurance is exposed. These techniques include: Asset and Liability Management ("ALM"), disciplined investment process, hedging strategies and regular monitoring of the financial risks to the economic and solvency position. The key risks faced on a Solvency II basis for AXA Insurance are: Spread, real estate and equity risk; Credit risk; and Liquidity risk. There is also Pension Scheme risk, following the attribution of a part of the AXA UK Group Pension Scheme obligations to AXA Insurance, most notably in respect of corporate bond spread exposure. Risks relating to the evolving regulatory environment In addition to risks that bear a capital charge through the Solvency Capital Requirement calculation, AXA Insurance also considers liquidity risk, reputational risk, strategic risk and regulatory risk as well as emerging risks (under all categories) and risks arising from its relationships (financial or nonfinancial) with Group and other related parties. There is also an element of Operational Risk inherent in doing business in a P&C Insurance environment. 5

6 CAPITAL MANAGEMENT VALUATION FOR SOLVENCY PURPOSES The AXA Insurance Solvency II balance sheet is prepared as of 31 December. The balance sheet is prepared in compliance with the Solvency II Regulations. Assets and liabilities are valued based on the assumption that the Company will pursue its business as a going concern. The Solvency II balance sheet only includes the value of business in force and therefore only presents a partial view of the value of the Company. Technical provisions are recognised with respect to all insurance and reinsurance obligations towards policyholders and beneficiaries of insurance or reinsurance contracts. The value of technical provisions corresponds to the current amount that the Company would have to pay if it were to transfer its insurance and reinsurance obligations immediately to another insurance or reinsurance undertaking. Other assets and liabilities are recognised in compliance with Financial Reporting Standard 101 'Reduced Disclosure Framework' ( FRS 101 ), provided that those standards and interpretations include valuation methods that are in accordance with the following market consistent valuation approach set out in Article 75 of the Solvency II Directive 2009/138/EC: Assets shall be valued at the amount for which they could be exchanged between knowledgeable willing parties in an arm s length transaction; and Liabilities shall be valued at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm s length transaction (without adjustment to take account of the Company s own credit standing). As at 31 December 2017, the Company and its subsidiary undertaking, AXA PPP healthcare limited, included 50% of the AXA UK plc FRS 101 pension scheme surplus less the PPP scheme deficit net of deferred tax in their balance sheet. The net asset amounted to 42m (2016: deficit 167m). Solvency II ratio at 31 December amounted to 140.2% (2016: 123.1%), this is driven by: Available Financial Resources increased by 201m to 2,388m (2016: 2,187m) during the year driven by the investment and technical performance, partially offset by a foreseeable dividend of 240m; and Solvency Capital Requirement decreased by 73m to 1,703m (2016: 1,776m), due to a reduction in the volume of technical reserves and associated capital requirements and improvements in the pension scheme deficit. The drivers are explained in Section E Solvency Capital Requirement. 6

7 A BUSINESS AND PERFORMANCE A.1 Business General information Information on the Company Major shareholders and related parties Business overview Significant business and other events A.2 Underwriting Performance Aggregated underwriting performance Underwriting performance by geographical area Underwriting performance by product line A.3 Investment Performance Net investment result Gains and losses directly recognised in equity Investments in securitisation A.4 Performance of other activities Profit and loss account Leasing arrangements A.5 Any other information 7

8 A.1 BUSINESS / General information The Company is a subsidiary within the AXA Group, a worldwide leader in financial protection. The Group operates primarily in Europe, North America, the Asia-Pacific Region and, to a lesser extent, in other regions including the Middle East, Africa and Latin America. The Company s principal and ongoing activity is the writing of general insurance business in the UK. The business conducted is principally property and motor in both commercial and personal lines, together with liability insurance and other commercial lines insurance products (commercial) and travel and other personal lines insurance products (personal). / Information on the Company The Company is a public limited liability company under the Companies Act 2006 and is incorporated and domiciled in the UK. The address of its registered office is 5 Old Broad Street, London, EC2N 1AD; and the registered number is Supervisory authority The Company s principal supervisors are (i) the Prudential Regulation Authority ( PRA ) (firm reference number ) and (ii) the Financial Conduct Authority ( FCA ). Prudential Regulation Authority 20 Moorgate, London, EC2R 6DA, United Kingdom +44 (0) Financial Conduct Authority 25 The North Colonnade, London, E14 5HS, United Kingdom +44 (0) AXA Group is engaged in regulated business activities on a global basis through numerous operating subsidiaries, and the Group s principal business activities of insurance and asset management are subject to comprehensive regulation and supervision in each of the various jurisdictions where the Group operates. Given that the AXA Group is headquartered in Paris, France, this supervision i s based to a significant extent on European Union directives and on the French regulatory system. The AXA Group s principal supervisor is the French Autorité de Contrôle Prudentiel et de Résolution ( ACPR ). AUTORITE DE CONTROLE PRUDENTIEL ET DE RESOLUTION 61, rue Taitbout Paris Cedex, 9, France +33 (0) Statutory auditors Incumbent auditors Mazars LLP, Chartered Accountants and Statutory Auditor, Tower Bridge House, St Katharine s Way, London, E1W 1DD Mazars LLP is a limited liability partnership registered in England with registered number OC Mazars LLP is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales under reference number C

9 / Major shareholders and related parties Capital ownership On 31 December 2017, the Company s fully paid up and issued share capital amounted to 122,264,150 divided into 489,056,602 ordinary shares, each with a par value of 25 pence and eligible for dividends as of 1 January The Company s immediate parent is AXA Insurance plc, a company incorporated and domiciled in the UK. Related companies AXA SA, a société anonyme (public limited company) incorporated in France, directly held 53.1% of the issued shares in AXA UK plc and a further 46.9% via a 99.9% owned subsidiary company, AXA Equity & Law plc. They were entitled to act in concert to exercise 100% of voting power attached thereto, at any Annual General Meeting of AXA UK plc. In turn, AXA UK plc owns 100% of the issued share capital of Guardian Royal Exchange plc which owns 100% of the issued share capital of AXA Insurance plc., itself a wholly-owned subsidiary of AXA Insurance plc, owns 100% of the issued share capital of AXA PPP healthcare limited. This is illustrated in the structure chart to follow; however, this is a simplified structure and does not include all the AXA UK group entities. 9

10 / Business overview MATERIAL LINES AND GEOGRAPHICAL AREAS OF BUSINESS AXA Insurance aims to remain competitive by controlling costs and improving efficiency. The Personal Lines business will focus on profitable growth in the core lines of Motor, Household and Travel whilst actively managing exposure in non-core lines. There will also be a strong focus on use of data for developing customer propositions and enhancing the claims experience. At the same time AXA Insurance will continue to invest for the long term to support the vision of being Trusted Market Leader, this will provide a strong foundation for the future. Commercial Lines will continue to target growth with further investment in strategic priorities offset by expense savings, thereby enabling sustainable profitability. The UK insurance market is highly competitive and the Company has endeavoured to maintain strong positions in the selected markets through developing a far greater customer understanding and focus. The Company has increased its use of e-enabled systems, which allow brokers to interact directly with these systems and improve the overall broker experience. The Company continues to look at ways of improving claims management within an overall risk management approach. During the year a new claims handling system was launched, designed to simplify and improve the claims process for both staff and customers. / Significant business and other events There were no significant business or other events that had a material impact on the Company during the period. 10

11 A.2 UNDERWRITING PERFORMANCE / Aggregate underwriting performance The aggregate underwriting performance on a FRS 101 basis is as follows: Gross written premium 2,261m 2,276m Claims incurred, net of reinsurance 1,504m 1,444m Loss ratio (67.0%) (65.6%) Ratio of claims incurred net of reinsurance, to earned premiums net of reinsurance including other operating income Net operating expenses 745m 738m Combined operating ratio (100.6%) (99.9%) Ratio of claims incurred net of reinsurance including acquisition costs, administration expenses, operational income and expenses; to earned premiums net of reinsurance including other operating income Underwriting result ( 14m) 2m Result of insurance activities reflected in technical account, and operational income and expenses The underwriting loss for the year is 14m (2016: profit 2m). The combined operating ratio deteriorated by 0.7% to 100.6% (2016: 99.9%). The deterioration in the loss ratio is in line with the underwriting loss, due to the change in discount rate used to calculate lump sum payments in respect of bodily injury claims and due to adverse experience on Escape of Water and Theft perils, partly offset by relatively benign weather experience. An Unexpired Risk Provision and Onerous Contract Provision have also been booked to recognise expected losses under an onerous contract. / Underwriting performance by geographical area Substantially all gross written premiums in respect of direct and reinsurance business are written in the United Kingdom. 11

12 / Underwriting performance by product line The tables below sets out the FRS 101 results by major product: Gross written premiums Gross earned premiums m m m m Direct and reinsurance accepted Motor 1, Accident and health* Third party liability Fire and other damage to property Marine, aviation and transport Miscellaneous Total 2,261 2,276 2,267 2,227 Gross claims incurred Net operating expenses m m m m Direct and reinsurance accepted Motor (781) (836) (231) (223) Accident and health* (116) (108) (57) (35) Third party liability (174) (144) (94) (104) Fire and other damage to property (397) (406) (341) (357) Marine, aviation and transport 2 (4) (4) (8) Miscellaneous (27) (17) (18) (11) Total (1,493) (1,515) (745) (738) m m Reinsurance outwards Motor (39) 33 Accident and health* - - Third party liability (6) 1 Fire and other damage to property (77) (56) Marine, aviation and transport (1) 6 Miscellaneous 2 (28) Total (121) (44) *Accident and health is primarily Travel insurance. During the year, gross written premiums have decreased by 15m, or 0.7%, to 2,261m (2016: 2,276m). Personal lines premiums are adverse to the prior year due to Household with a focus on improving profitability through targeted rating and underwriting actions. Commercial lines showed strong growth during 2017, with favourable performance across the portfolio, but particularly on Motor Fleet where market conditions have allowed strong tariff increases to be carried. Direct lines premiums reduced in comparison to the prior year due to tariff increases in Motor implemented to focus on profitability and to mitigate the impact of the change in discount rate. This was more than offset by falling volumes. 12

13 A.3 INVESTMENT PERFORMANCE / Net investment result The investment return for the financial year increased by 69m (30%) to 299m (2016: 230m). 31 December 2017 (In m) Net investment income Net realised and unrealised gains and losses Change in investment impairment Net investment result Investment management expenses Investment in real estate properties Debt instruments 118 (95) - 23 (9) Equity instruments 9 16 (7) 18 (2) Participations* Investment funds 34 (22) (2) 10 (1) Loans Derivative instruments (1) Other - (1) - (1) - TOTAL 329 (8) (9) 312 (13) 31 December 2016 (In m) Net investment income Net realised and unrealised gains and losses Change in investment impairment Net investment result Investment management expenses Investment in real estate properties (1) Debt instruments (8) Equity instruments 8 25 (17) 16 (1) Participations* Investment funds (1) 108 (1) Loans (1) Derivative instruments 10 (283) - (273) (1) Other (1) (2) - (3) - TOTAL (16) 243 (13) *Participations Investment income relates to a dividend from the subsidiary undertaking, AXA PPP healthcare limited. 13

14 Net investment income is presented net of impairment charges on directly-owned investment properties, and net of amortisation of debt instruments premiums/discounts. All investment management fees are also included in the aggregate figure. Net realised gains and losses relating to investment at cost and at fair value through shareholders equity include write back of impairment following investment sales. Net realised gains and losses and change in fair value of investments designated as at fair value through profit or loss consists mainly of: Changes in the fair value of investments designated as at fair value through profit or loss; and Changes in fair value of underlying hedged items in fair value hedges (as designated by IAS 39, Financial Instruments: Recognition and Measurement). The changes in investments impairment for available for sale assets include impairment charges on investments and releases of impairment only following revaluation of the recoverable amount. Write back of impairment following investment sales is included in the net realised capital gains or losses on investments aggregate. / Gains and losses directly recognised in equity Gains and losses directly recognised in equity comprise of: Changes in the fair value of investments designated as available for sale: 14m gains on debt instruments (2016: 130m gain), 1m gains on equity instruments (2016: 8m gain) and net nil gains on investment funds (2016: 4m gain); and Changes in the fair value of derivatives used in cash flow hedges (as designated by IAS 39, Financial Instruments: Recognition and Measurement): 2m loss (2016: 15m loss). / Investments in securitisation Investments in securitised instruments are closely monitored by different analyses performed at Group level by issuer, sector and geographic region, in addition to local procedures and by a set of Group and local issuer limits. As of 31 December 2017, the economic breakdown of the total value of Asset Backed Securities ( ABS ) was as follows: m % m % Collateral Loan Obligations (CLO) Residential Mortgage Backed Securities (non US) Non Conforming Residential Mortgage Backed Securities (non US) Prime Residental Mortgage Backed Security (PRMBS) TOTAL The variance from the prior year is due to decreased investment of 4m into the overall portfolio, and 2m foreign exchange movement and unrealised gain/losses. 14

15 As of 31 December 2017, ratings of underlying investments were the following: m % m % AAA AA A NR TOTAL

16 A.4 PERFORMANCE OF OTHER ACTIVITIES / Profit and loss account The profit for the financial year increased by 68m (35.6%) to 259m (2016: 191m). The following table presents the profit and loss of the Company for the periods indicated m m Balance on the technical account for general business (92) (70) Investment return Investment income Unrealised gains on investments at fair value through profit and loss Investment expenses and charges (150) (373) Unrealised (losses) on investments at fair value through profit and loss - - Other operating income Other operating expenses (11) (16) Total balance on the non-technical account Profit on ordinary activities before tax Tax on profit on ordinary activities (26) (41) Profit for the financial year Other operating income increased by 1m (1.1%) to 89m (2016: 88m), included in which are finance charges on policies settled through instalments 69m (2016: 75m) m m Other income Foreign exchange gains 9 4 Other operating income Other operating expenses decreased by 5m (31.3%) to 11m (2016: 16m) primarily driven by decrease in foreign exchange losses m m Other expenses (11) (1) Foreign exchange losses - (15) Other operating expenses (11) (16) Tax expenses decreased by 15m (36.6%) to 26m (2016: 41m). The standard rate of tax applied to reported profit on ordinary activities is 19.25% (2016: 20.0%). During 2017 the deferred tax balances were re-measured as a result of the changes to the UK corporation tax rate that were enacted in the Finance (No.2) Act The UK corporation tax rate reduced from 20% to 19% with effect from 1 April 2017 and will be further reduced from 19% to 17% with effect from 1 April

17 / Leasing arrangements Please refer to Leasing arrangements in Section D.1 Assets. A.5 ANY OTHER INFORMATION Not applicable. 17

18 B SYSTEM OF GOVERNANCE B.1 General information on the system of governance Governance Compensation policy LTI Directors Fees Executive Officer Benefits Material transactions with shareholders, persons who exercise a significant influence on the Company and corporate officers or executives Assessment of the adequacy of the system of governance B.2 Fit and proper requirements Fit and Proper assessment process for persons who effectively run the Company and key function holders B.3 Risk management system including the Own Risk and Solvency Assessment Risk management system AXA Group internal model Own Risk and Solvency Assessment B.4 Internal control system Internal control objectives and organisational principles Corporate governance structures Management structures and controls Financial reporting, disclosure, controls and procedure B.5 Internal audit function Internal audit function B.6 Actuarial function Actuarial function B.7 Outsourcing Outsourcing arrangements B.8 Any other information 18

19 B.1 General information on the system of governance / Governance Board of Directors ROLE AND POWERS Since 1998, AXA Insurance has operated with a unitary Board of Directors, with a Chairman and a Chief Executive Officer. The Board determines the strategic orientation of the Company s activities and ensures their implementation. Subject to the appropriate legal and regulatory constraints, the Board is responsible for considering all material questions and taking all material decisions related to the Company and its business. The Board exercises the following powers in particular: Helping to develop high-level Company-specific strategies, plans and objectives; Reviewing those plans and other financial targets / performance indicators from a regulated entity perspective; Approving the Company s Risk Appetite and associated limits; Monitoring and reviewing the control and governance frameworks; Monitoring solvency through the application of the Internal Model; Reviewing and signing off public reporting, and approving the annual reports and financial statements; and Embedding Treating Customers Fairly ( TCF ) effectively into the culture of the business so that customers are consistently treated fairly and the six TCF outcomes are delivered by the development of appropriate processes, controls and standards. The Board has ultimate responsibility for the Internal Control and Risk Management Systems, regularly monitoring their comprehensiveness, functionality and efficiency (including those in respect of outsourced activities), and for satisfying both the general obligations placed on it by the applicable legislation and its regulatory requirements. The Board ensures that the risk management framework allows the Company to identify, assess and monitor, in a forward-looking approach, the risks the Company is exposed to, in order to maintain an adequate level of its solvency in a medium to long-term view. The Board is also required to approve certain types of material transactions including extension of the Company s activities into new business or geographic areas not contemplated in the Strategic Plan and M&A activity by the Company in excess of 10m (including deferred consideration) or which is otherwise of a material nature, unless contained in the agreed strategic plan or annual budget. OPERATING PROCEDURES The guidelines governing the operation and organisation of the Board of Directors (and its Committees) are set out in the AXA Insurance Corporate Authorities (incorporating Board Terms of Reference and Schedule of Matters Reserved). The Corporate Authorities detail, in particular, the powers, missions and obligations of the Board of Directors and its Committees. The Board meets at least quarterly, and at the request of any Director. Prior to each meeting, the Board members receive documentation concerning matters to be reviewed. 19

20 COMPOSITION OF THE BOARD The members of the Board of Directors are appointed by resolution of the Board, in line with its Terms of Reference and following the recommendation of the AXA UK Remuneration and Nomination Committee. As with any Director in the UK, appointments are not for a fixed period. On 31 December 2017, the Board of Directors was comprised of eight members. Two Board members were citizens of countries other than the United Kingdom, and four of them were independent. The Board members were as follows: Mrs. A. J. Blanc (Group Chief Executive, AXA UK CEO, AXA UK & Ireland), resigned on 10 April 2018 Mr. K. G. Gibbs (Chief Executive, AXA PPP healthcare) Mr. P. F. Hazell (Non-Executive Director, AXA UK) Mr. M. R. Jackson (Non-Executive Director) Mr. W. U. Malik (Chief Financial Officer, AXA Insurance), resigned on 31 March 2018 Mr. H. M. Posner (Non-Executive Director, AXA UK) Mr. B. Poupart-Lafarge (Group Chief Financial Officer, AXA UK) Mr. T. J. P. Sciard (Non-Executive Director) BOARD OF DIRECTORS COMMITTEES The Board of Directors has delegated authority to four specialised Committees: the AXA UK Audit Committee, the AXA UK Remuneration and Nomination Committee, the AXA UK Investment Committee and the AXA Insurance Board Risk Committee. The role, organisation and operating procedures of each Committee are set out in the Committee Terms of Reference. Each Committee issues opinions, proposals or recommendations to the Board of Directors, and is empowered to undertake or commission specific studies or reviews on matters within the scope of its documented responsibilities. The Committees may request external consulting expertise if necessary. Save for the AXA UK Remuneration and Nomination Committee, minutes of these Committees are circulated to the Board and the summaries of key matters are shared at each Board meeting as these arise. The following tables detail the key activities, responsibilities and composition of the respective Committees in

21 Board of Directors Committees Principal responsibilities Principal activities in 2017 AXA UK Audit Committee Composition on 31 December 2017 (all AXA UK Non-Executive Directors): Peter Hazell (Chairman) Michael Jackson (Non- Executive Director) How ard Posner (Non- Executive Director) Thierry Sciard (Non- Executive Director) The Board of Directors review ed the qualifications of all Audit Committee members in terms of their financial expertise and business experience and believes that all members have the requisite expertise, experience and qualifications to fulfil their duties as Audit Committee members. The scope of the Audit Committee s responsibilities is set out in its Terms of Reference w hich are reviewed and approved each year by the AXA UK plc Board of Directors. The Committee assists the Board in oversight of the: Adequacy and effectiveness of the internal control and risk management framew orks; Financial reporting process and the integrity of the publicly reported results and disclosures made in the financial statements; and The effectiveness, performance and independence of the internal and external auditors. It considers, in particular: The results of management s testing of internal controls over financial reporting; The quality and clarity of the draft FRS 101 financial statements; and The reconciliation betw een FRS 101 financial statements and the financial statements reported for consolidation by the AXA Group. Among other topics, it also considers the risk of overpayment of remuneration. The Audit Committee met eight times in The average attendance rate w as 97%. The Committee focused on: Risk management and internal control; Financial statements and reporting processes; and External and internal audit. 21

22 Board of Directors Committees Principal responsibilities Principal activities in 2017 AXA UK Remuneration and Nomination Committee Composition on 31 December 2017 (all AXA UK Non-Executive Directors): Scott Whew ay (Chairman) Peter Hazell (Non- Executive Director) This Committee establishes the principles and parameters of remuneration policy for the AXA UK Group, overseeing remuneration policy and outcomes regarding executive remuneration generally. The Committee is authorised by the Board of AXA UK plc and also has delegated authority from. The Committee determines the participation of the executive directors and Senior Executives in any discretionary employee share or other incentive schemes. Other duties of the Committee focus on performance-related payments, pension arrangements, termination payments, and benefits of executive directors and Senior Executives. The Committee also oversees the governance of remuneration matters concerning Remuneration Code Staff and/or Solvency II Identified Staff along w ith any other relevant regulatory requirements, ensuring that associated policies and procedures are complied w ith. The Remuneration and Nomination Committee met four times in 2017 (approving a number of matters by w ritten resolution). The average attendance rate w as 100%. The Committee focused on: Application of the AXA Group Remuneration policy to AXA UK; Participation of executive directors/senior executives in any discretionary employee share or other incentive schemes; Determining targets for performancerelated payments for senior executives; Determining policy and scope of pension arrangements and termination payments; Ensuring contractual terms on termination and payments made to senior executives are fair to the individual and company; Determining the provision of benefits under the terms of service agreements or otherw ise of senior executives; and Determining fees of companyappointed directors of AXA UK Pension Trustees Limited and review AXA Group Remuneration Policy. 22

23 Board of Directors Committees Principal responsibilities Principal activities in 2017 AXA UK Investment Committee Composition on 31 December 2017: Scott Whew ay (Chairman) Peter Hazell (Non- Executive Director) Thierry Sciard (Non- Executive Director) Amanda Blanc (Group Chief Executive, AXA UK) Bertrand Poupart-Lafarge (Group CFO, AXA UK) Matthieu Bonte (Group CIO, AXA UK) Laurent Clamagirand (Group CIO, AXA SA) Evan Waks (CRO, AXA UK) The Committee determines, monitors and maintains the investment strategy w ithin risk appetite guidelines approved separately by the Board, taking into account the nature and liquidity requirements of the liabilities, and considers such other investment matters that may arise from time to time in light of internal and external developments. The duties of the Committee include recommending the strategic asset allocation to the Board, monitoring and agreeing the annual Investment Plan, recommending SCR limits, approving financial risk appetite, agreeing the Investment Approval Process ("IAP") and monitoring investment and market risk taken. The Investment Committee met six times in The average attendance rate w as 92%. The Committee focused on: Recommending to the Board the strategic asset allocation to support the achievement of financial objectives regarding capital and earnings w ithin approved risk appetite, taking account of AXA Group guidance or requests, w here appropriate. Monitoring and agreeing the annual Investment Plan. Approving the financial risk appetite including appropriate alerts and limits on asset classes and financial risk. Approving any financial risk appetite breach resolution. Approving the framew ork for managing investment risk. Agreeing the Investment Approval Process ( IAP ) and approving investment proposals brought to the Committee in accordance with the IAP or w hich are otherwise sensitive, material in nature or w hich the Committee or any of its members decide require full scrutiny by the Committee, including approval of commitment programmes w hich lead to long-term contractual obligations (e.g. private equity, infrastructure). Approving new and existing investment manager or custodian proposals and material change to existing mandates on the recommendation of the Chief Investment Officer, AXA UK plc. Taking account of AXA Group Central Investment, ALM and GRM teams advice/recommendations. Agreeing the Company view regarding the AXA UK Group Pension Scheme investments (including strategic asset allocation and IAPs). 23

24 Board of Directors Committees Principal responsibilities Principal activities in 2017 AXA Insurance Board Risk Committee Composition on 31 December 2017: Thierry Sciard (Non- Executive Director) Chair Peter Hazell (Non- Executive Director) Evan Waks (CRO, AXA UK) The scope of the Risk Committee s responsibilities is set out in its Terms of Reference w hich are reviewed annually by the Committee and any changes approved by the Board of Directors. The Risk Committee met six times in The average attendance rate w as 100%. The Committee focused on: The Committee s purpose is to: Risk Management Framew ork; Monitoring of operational, insurance, Assist the Board in its responsibility for the conduct and market risks; oversight and management of risk; Consideration of strategic and Provide advice, oversight and challenge necessary emerging risks; to embed and maintain a supportive risk culture Compliance issues; throughout the AXA Insurance business; Reinsurance arrangements; Review the AXA Insurance risk profile; Brexit impact; Review the effectiveness of the AXA Insurance risk General Data Protection Regulation management framew ork; ("GDPR") implementation; and Monitor prudential, conduct, financial crime, data Cyber Risk management. protection, health and safety and other relevant regulatory requirements; and Report its conclusions and, w here appropriate, make suitable recommendations to the Board of Directors. EXECUTIVE MANAGEMENT AXA Insurance Executive Management is constituted by the Chief Executive Officer, who effectively runs the Company. An Executive Committee also supports the operational management of the Company. THE CHIEF EXECUTIVE OFFICER Amanda Blanc was appointed as AXA UK Group Chief Executive by the AXA UK Remuneration and Nomination Committee on 27 May This appointment is not for a fixed period of years. Amanda is also CEO, AXA UK & Ireland. AXA Insurance is organised according to the principle of separation of the powers of Chairman of the Board of Directors and Chief Executive Officer. The Chairman of the Board of Directors organises and directs the Board of Directors work. He ensures the proper operation of the Company s bodies. The General Management of the Company is the responsibility of the Chief Executive Officer, under the control of the Board of Directors and subject to the guidelines approved by the Board of Directors. The Chief Executive Officer is appointed by the Board of Directors and is granted full authority for the running of the business, including authority to make changes to the management and control structure, authority to approve agreements (including the novation, extension and/or variation of such agreements), and accept risks, rights and obligations on behalf of the Company, other than those matters reserved by the Board for its decision and subject to defined limits of authority. The CEO is also authorised to sub-delegate such authority as he/she sees fit, including the power to further subdelegate, provided that any such sub-delegation is within the limits of authority and evidenced in writing. The Chief Executive Officer of the Company is, under the Regulation, deemed to be a person who effectively runs the Company and must fulfil the requirements for a fit and proper assessment, as set forth in the Company s internal procedure, and their appointment is required to be notified to and approved by the PRA and FCA. 24

25 Main roles and responsibilities of key functions The Solvency II Regulations, which became effective on 1 January 2016, require AXA Insurance to have in place a comprehensive system of governance, which provides for sound and prudent risk management. This governance system is based on a clear separation of responsibilities and must be proportionate to the nature, extent and complexity of the Company s operations. AXA Insurance has established four key functions in accordance with the Solvency II Regulations: The risk-management function, which is responsible for the definition and the deployment of the Enterprise Risk Management ( ERM ) framework within AXA Insurance. In particular, it is in charge of the design, implementation and validation of the Internal Model, the documentation of this model and any subsequent changes made to it as well as the analysis of the performance of this model and the production of summary reports thereof; The compliance function, which is, in particular, responsible for advising on compliance with the laws, regulations and administrative provisions regarding insurance and reinsurance activities, as well as ensuring that compliance is effective; The internal audit function, which is, in particular, responsible for performing an evaluation of the adequacy and effectiveness of AXA Insurance s internal control system and other elements of the system of governance. The internal audit function must be objective and independent from the operational functions; and The actuarial function, which is, in particular, responsible for overseeing the calculation of technical provisions (including ensuring the appropriateness of the methodologies and underlying models used as well as the assumptions made in the calculation of technical provisions), assessing the sufficiency and quality of the data used in the calculation of technical provisions and comparing best estimates against experience. Within AXA Insurance, the Solvency II Key Function Holders are: The AXA Insurance UK Chief Risk Officer, who is the Risk Key Function holder; The AXA UK Chief Risk Officer, who is the Compliance Key Function holder; The Director Group Internal Audit, who is the Internal Audit Key Function holder; and The Chief Actuary, who is the Actuarial Key Function holder. The PRA Senior Insurance Managers Regime ("SIMR"), in addition to the Solvency II Key Function Holders, introduces other firm specific key functions. The firm specific Key Function Holders identified by AXA Insurance include: Investment Key Function; Claims Management Key Function; IT Key Function; Reinsurance Key Function; and Underwriting Key Function. Each person in charge of a key function must, as for the Chief Executive Officer, fulfil the requirements of the fit and proper assessment mentioned herein above, as set forth in the Company s internal procedure, and each key function s appointment must also be notified to and approved by the Prudential Regulation Authority and the Financial Conduct Authority. As required by Solvency II Regulations, AXA Insurance has established procedures whereby the key function holders have direct access to the Board of Directors. To secure the operational independence of the key functions, the key function holders also have direct access to the Chief Executive Officer. To ensure the necessary authority and resources to carry out their tasks, the key function holders have a right to report to the Board of Directors directly and at their own initiative when events of a nature to justify such report occur, and have the same direct access to the Executive Committee, the AXA UK Audit Committee, the AXA UK Investment Committee and the AXA Insurance Board Risk Committee. In addition, the key functions have sufficient staff and other resources to fulfil their remits. 25

26 Material changes in the system of governance in 2017 In November 2016, the AXA UK plc Board decided to change the AXA UK risk governance structure by disbanding the AXA UK Risk Committee and a number of risk sub-committees. The AXA UK Board also recommended that regulated entity risk committees were reformulated to comprise Non-Executive Chairmen, together with Non-Executive Members, with revised and extended duties to cover the entire risk spectrum associated with the activities of each entity. On 1 March 2017, the Board established a Board Risk Committee to assist the Board in its responsibility for the oversight and management of risk. The Board Risk Committee has adopted a forward-looking approach, anticipating changes in business conditions as well as reviewing the Company s risk profile, the effectiveness of its risk management framework, use of the capital model and relevant regulatory requirements. / Compensation policy AXA Insurance applies the AXA Group Remuneration policy. AXA Group s global executive compensation policy is designed to align the interests of the Company s executives with those of its shareholders while establishing a clear and straightforward link between performance and compensation. In this context, its main objective is to encourage the achievement of ambitious objectives and the creation of long-term value by setting challenging performance criteria. AXA Group s executive compensation structure is based on an in-depth analysis of market practices in the United Kingdom and abroad, within the financial services sector (including insurance companies, banks and asset managers) and compared to the compensation practices of other international groups. AXA Group s overall policy on executive compensation focuses on the variable part of the compensation package, which is the compensation at risk for beneficiaries. The structure of AXA s executive compensation is composed of a variable portion which represents a significant portion of the aggregate remuneration. This is designed to align executive compensation more directly with the operational strategy of the Group and the interests of the shareholders while encouraging performance: Both on an individual and collective level; and Over the short, medium and long term. Principles The AXA Group Remuneration policy became applicable to all AXA Group companies and their employees as of 1 January This compensation policy is designed to support the Group s long-term business strategy and to align the interests of its employees with those of the shareholders by (i) establishing a clear link between performance and remuneration over the short, medium and long term; (ii) ensuring that the Group can offer competitive compensation arrangements across the multiple markets in which it operates while avoiding potential conflicts of interest that may lead to undue risk taking for short -term gain; and (iii) ensuring compliance with Solvency II Regulations and any other applicable regulatory requirement. The AXA Group compensation policy is designed to: Attract, develop, retain and motivate critical skills and best talents; Drive superior performance; Align compensation levels with business performance; Ensure that employees are not incentivised to take inappropriate and/or excessive risks and that they operate within AXA s overall risk framework; and Ensure compliance of our practices with all applicable regulatory requirements. It follows three guiding principles: Competitiveness and market consistency of the remuneration practices; Internal equity, based on individual and collective performance, in order to ensure fair and balanced compensation reflecting employee s individual quantitative and qualitative achievements and impact; and 26