Irish Life Assurance plc. Financial Statements Year ended 31 December 2012

Transcription

1 Financial Statements Year ended 31 December 2012

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3 Contents Page Company Information 1 Operational and Financial Review 2 Risk Management 8 Directors' Report 17 Corporate Governance 19 Statement of Directors Responsibilities 22 Independent Auditor s Report 23 Financial Statements - Statement of Financial Position 24 - Income Statement 25 - Statement of Comprehensive Income 26 - Statement of Changes In Equity 27 - Statement of Cash Flows 29 - Notes forming part of the Financial Statements 30

4 Company Information Directors: Alan Cook (Chairman) Tom Barry (Independent Non-Executive) Brian Forrester (Independent Non-Executive) David McCarthy (Finance Director) Kevin Murphy (Chief Executive) Bernard Collins (Independent Non-Executive) (appointed on 20 April 2012) Cecil Hayes (Independent Non-Executive) (appointed on 31 July 2012) Annette Flynn (Independent Non-Executive) (appointed 7 January 2013) Pat Ryan (Independent Non-Executive) (resigned 29 June 2012) Secretary: Barry Walsh (appointed on 21 February 2012) Ciarán Long (resigned on 21 February 2012) Appointed Actuary: Dervla Tomlin Audit Committee: Cecil Hayes (Chairman) Tom Barry Annette Flynn Registered Office: Irish Life Centre Lower Abbey Street Dublin 1 Independent Auditor: KPMG, Chartered Accountants and Registered Auditor 1 Harbourmaster Place International Financial services Centre Dublin 1 Company Registration Number:

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6 Operating and Financial Review (Continued) Overview The market conditions for financial services companies in Ireland remain difficult. Although the economy has returned to modest growth on the back of solid export performance, domestic demand declined in 2012 but the pace of the decline slowed appreciably compared to The improving trend is expected to continue into 2013 with a return to modest positive growth in domestic expenditure in Unemployment remains high at 14.6%. On the positive side, yields on Irish sovereign bonds have fallen sharply in 2012 reflecting growing international confidence in the management of the macroeconomic situation and the austerity measures implemented. Reflecting this improvement in confidence, during the second half of the year Ireland made a successful return to the international capital markets with the NTMA issuing both Treasury Bills and long-term bonds. However, it is likely that any sustained recovery in Ireland will be dependent on a resolution of the wider Eurozone crisis. The Company The company is the largest life and pensions group in Ireland, servicing circa one million customers. The Irish Life brand is one of the best known and most recognised financial brands in Ireland. Its brand strength is based on broad distribution, product innovation and flexibility and strong investment performance. Irish Life Assurance ( ILA ), operates through two main divisions, Irish Life Retail ( Retail Life ) and Irish Life Corporate Business ( Corporate Life ). Irish Life Retail is focused on individual life assurance, pensions and investments and Irish Life Corporate Business is focused on life assurance and pension products for employers and affinity groups. ILA increased its market share to 29.6% in 2012 (2011: 27.6%). Irish Life Investment Managers ( ILIM ), a sister company of ILA, manages policyholder fund assets of 13.6bn on behalf of Irish Life Retail and Irish Life Corporate Business. Retail Life Retail Life provides life, pensions and investment products to personal and small business customers in Ireland. It is a market leader with a comprehensive product range spanning protection, pensions, investment and regular savings products. It has the largest and most diverse distribution network of any life assurance company in Ireland including the largest direct sales force. The division follows a multi-channel distribution strategy, with sales of its new business APE roughly evenly split between (i) independent brokers and independently regulated tied agents and (ii) tied agents in bank branches and its employed and self-employed sales force. Retail Life has bancassurance arrangements with four of Ireland s leading bank networks (AIB, Ulster Bank, EBS and permanent tsb). Three of these relationships are long-standing, while early in 2012 it secured a distribution agreement with AIB which will see Irish Life distribute its products through a nationwide retail banking network of 267 branches bringing to circa 450 the total number of bank branches through which Retail Life distributes its products. The AIB distribution of Retail Life products commenced in April 2012 and activity here is expected to increase further in Retail completed the transfer of a portfolio of the Quinn Life Direct policies in September 2012 which added approximately 100m to unit linked assets. Total sales on a present value of new business premiums ( PVNBP ) basis were 12% ahead of the same period in 2011 at 1,049m (2011: 934m). A significant increase of 27% in pension single premium sales to 572m (2011: 448m) was offset by a reduction of 8% in sales of investment bonds to 199m (2011: 217m). Retail new business earnings were lower despite the additional sales reflecting a very competitive market with significant price discounting and higher distributor costs in protection and pension products. Retail persistency experience improved in 2012 over 2011 and in the second half of 2012 aggregate experience was equal to the long term embedded value assumptions. Positive market returns in 2012 improved embedded value earnings significantly in comparison to Retail Life measures customer service using a customer service index based on a survey of a sample of customers. The customer service index score for the year of 81.3% was 1.4% ahead of the same period last year (2011: 79.9%). 3

7 Operating and Financial Review (Continued) Corporate Life Corporate Life sells pensions and risk products to employers and affinity groups in Ireland. Business is primarily distributed through pension consultants and brokers, including Cornmarket (a specialist affinity broker and a wholly owned subsidiary of the company s parent, Irish Life Group Limited). The key drivers of sales growth are employment and salary growth in the Irish economy, with the trend away from defined-benefit pension provision towards defined contribution also representing a major growth opportunity. On a PVNBP basis, sales were down by 8.8% to 759m (2011: 832m), principally due to a reduction in sales of Personal Retirement Bonds and no bulk annuity market activity in the year. The decline was somewhat offset by strong DC and risk sales. Total annuity sales (individual and bulk purchase) fell by 34% to 145m (2011: 219m) as the market for bulk purchase annuities stalled while trustees awaited the publication of the new funding standard for defined benefit pension schemes in order to determine their future strategies. The new standard was issued on 1 June In the light of the provisions in the standard, there is likely to be significant activity benefiting providers of savings and annuities including Irish Life. The customer service index score for the year in Corporate Life of 95.1% was 1.0% ahead of the same period last year (2011: 94.1%). Significant developments Prior to 29 June 2012, the company, through its parent Irish Life Group Limited, was part of the permanent tsb Group (formerly the Irish Life & Permanent Group). Under the Financial Measures Programme ( FMP ) agreed between the Government and the EU, IMF and ECB troika in November 2010, the Central Bank of Ireland completed a Prudential Capital Assessment Review and a Prudential Liquidity Assessment Review ( PCAR/PLAR ) of the permanent tsb Group in These exercises, which were completed in March 2011, determined that the permanent tsb Group required additional regulatory capital of 4.0bn. In July 2011, the Government contributed 2.7bn of the requirement and the balance of 1.3bn was to be raised from the sale of Irish Life. In late 2011, an extensive disposal process was undertaken to sell the Irish Life Group and this attracted significant interest from a broad range of potential purchasers. However, the very challenging market conditions, particularly the perceived worsening of the financial crisis and stability of the Eurozone, resulted in the sale process being suspended in November Following the suspension, the State committed to acquire the Irish Life Group from the permanent tsb Group for a consideration of 1.3bn to meet the PCAR/PLAR capital shortfall. On 29 June 2012, the Group s former parent, permanent tsb Group completed the sale of its 100% holding in the Group to the Minister for Finance for 1.3bn. The completion of this sale marked the legal separation of the businesses of permanent tsb bank and Irish Life Group. The Irish Life Group, post 29 June 2012, was 100% owned by the Minister for Finance on behalf of the Irish State. In advance of the sale, the operational separation of the life and banking businesses of the Group was substantially completed. In particular, a separate board and management team for the Irish Life Group was put in place. On 19 February 2013, the Group welcomed the announcement of an agreement between Great-West Lifeco of Canada and the Irish Government on the acquisition of the business by the Canadian company. Following the transaction the Irish Life name will be retained and the life and pensions operations of Great-West Lifeco s Irish subsidiary Canada Life (Ireland) Limited will be combined with the operations of Irish Life. The customers of both organisations will have continuity of products and customer services under Irish Life. Great-West Lifeco is one of the outstanding global players in the life and pensions business with 417 billion assets under administration and an AA rating from rating agencies Fitch and Standard & Poor s. Through Canada Life, Great-West Lifeco has a long association with Ireland stretching back over 100 years. Their financial strength and longstanding commitment to the Irish market makes them a wonderful fit for Irish Life. They will underpin the Group s position as the leading force in the life, pensions and investment management business in Ireland. The transaction will have no impact on the terms and conditions of policies held by Irish Life customers nor any change to the current business arrangements for Corporate and Institutional customers. The transaction, which is expected to close in July 2013, is subject to the necessary regulatory approvals. 4

8 Operating and Financial Review (Continued) Financial review Summary operating profit analysis ( m) IFRS Accounting Basis m m Investment contracts income Insurance contracts income Expected return on shareholder assets 8 13 Operating income Acquisition costs and other administrative expenses (279) (259) Changes in deferred acquisition costs (6) (8) Amortisation of purchased interest in long-term business (3) (3) Finance costs (10) (12) Operating expenses (298) (282) Operating profit Short term investment fluctuations 49 (26) Effect of economic assumption changes (16) (35) Other 6 (20) Profit before taxation Taxation (15) (2) Profit after taxation Profit after tax increased from 57m in 2011 to 113m in 2012 mainly due to positive short term investment fluctuations and economic variances, more than offsetting reduced operating profits. Operating profit The reduction in operating profit before tax from 140m for 2011 to 89m for 2012 is mainly due to lower insurance contracts income, and higher exceptional and corporate costs. In 2011 there was a one-off reserve release of 12m resulting from the repayment of a 100m loan facility secured on the VIF in Operating income Investment contracts income of 162m is 6m lower than 2011 due to the impact of negative persistency experience and also includes the impact of lower sales of tracker investment products through the bancassurance distribution channels. In 2011, strong margins were earned on Retail Life bond sales (through permanent tsb) which were not repeated in 2012 and allocation rates on single premium pension business written in 2012 increased. The decline was somewhat offset by the addition of the AIB distribution channel. Insurance contracts income of 217m is 24m lower than in The adverse variance was mainly due to a lower new business contribution and lower risk experience in Corporate Life (although still positive) and a one-off positive in 2011 for release of a closed to new business reserve not being repeated. Acquisition costs and other administrative expenses Costs of 279m are 8% ahead of 2011 ( 259m). This is mainly due to higher project and one-off costs. Baseline operational costs increased 5% in 2012 primarily due to new client costs in the third party administration business and a higher proportion of costs retained post separation. 5

9 Operating and Financial Review (Continued) Short term investment fluctuations Short term investment fluctuations in 2012 of 49m positive (2011: 26m negative) reflect positive excess unit returns on shareholder investment and insurance assets and lower investment financial options and guarantee (secure performance fund) costs as a result of strong fund performance on the back of recovery in investment markets and reduced volatilities since year end Effect of economic assumption changes The effect of economic assumption changes, was a negative 16m in 2012 compared to a negative 35m in 2011 as a result of a reduction in the sovereign default risk reserves and positive policyholder fund results being offset by an increase in financial options and guarantee costs as a result of interest rate falls and a revision of the risk discount rate basis from 1.3% to 0.75%. Other The 6m costs incurred in 2012 were mainly due to the project and one-off costs being offset somewhat against the 3m gain from the acquisition of 100m investment contracts from Quinn Life Direct. Included in 2011 is the value of in-force ( VIF ) loan financing costs of 18m which includes 4m for early repayment interest, 9m for amortisation of upfront interest and 5m for interest on the loan up to when it was repaid (in 2010, the Group sourced a 100m loan facility secured on the VIF and repaid this facility in May 2011). Capital The following table details the drivers of the capital generated by the company for the year ended 31 December The figures show the increase in the available capital as measured on the regulatory basis for ILA. It is the Group s policy to periodically transfer excess capital from the operating companies to the parent company for management at group level Expected inforce & New business strain Experience variances & Operating capital generated Operating capital generated investment return assumption changes m m m m m Total Operating Profit 143 (60) STIFs (42) Economic (28) Other Capital Flows (9) Total 143 (60) Operating capital generated The operating capital generated within the company fell from 144m in 2011 to 116m in This reduction was due to higher new business strain in 2012, lower exceptional positive risk experience after tax (2012: 15m, 2011: 21m), and a once-off reserve release after tax during 2011 of 10m which was not repeated in Short term investment fluctuations Short term investment fluctuations led to a positive capital generation of 1m in 2012, including a positive variance of 2m relating to property holdings. The negative in 2011 included a negative variance of 17m from directly held property assets, and reflects the impact of market falls in that period. Effect of economic assumption changes The effect of economic assumption changes principally reflecting the impact of interest rate and credit default reserve movements. There was a positive variance of 1m in 2012 compared to a negative 28m in The 2011 negative variance principally related to an increase in the reserves relating to investment guarantees as a result of lower interest rates. Other capital flows Other capital flows include strategic costs and movements in inadmissible assets. For 2011, other capital flows reflects the VIF loan financing costs. 6

10 Operating and Financial Review (Continued) Capital Management ILA has maintained a strong capital position throughout the financial and economic crises. The solvency ratio for ILA as at 31 December 2012, before any dividend requirement, was 2.0 times (31 December 2011: 1.9 times) the minimum EU capital requirement of 416m (31 December 2011: 402m). The Central Bank capital requirement is 1.5 times this minimum. Based on ILA s current risk exposures, ILA s target is to maintain a solvency ratio of 1.75 times the EU minimum. Solvency cover ( m) Minimum capital Regulatory capital Net worth Subordinated debt Inadmissible assets (90) (106) Capital available Solvency cover 2.0 times 1.9 times The company s capital is invested mainly in deposits, property (including owner occupied property) and debt securities. Outlook The company has proven to be extremely resilient during the economic crisis and has remained both profitable at an operating level and generated dividends as demonstrated by the table below: Year ended IFRS total profit before tax Dividends paid m m m The robust financial performance through the financial crisis reflects the low risk nature of the business and the conservative manner in which it is run. In particular, the company seeks to minimise policyholder guarantee exposure and the company follows a conservative investment strategy for shareholder assets. For life non-linked exposures, the duration of assets held closely matches the duration of the liability and the assets are principally held in high quality sovereign bonds. While economic conditions remain challenging both in Ireland and the Eurozone, the company is well-positioned to benefit from a stabilisation in the Eurozone and a recovery in the Irish economy. The markets for life assurance and pensions and investment products in Ireland are highly concentrated and the company continues to hold a leading position in these markets. As noted previously, on 19 February 2013, Great-West Lifeco, the parent company of Canada Life (Ireland), announced its intention to acquire the Group, subject to the necessary regulatory approvals. The acquisition by Great-West Lifeco will provide Irish Life with a parent with financial strength and stability. It will combine the businesses of Irish Life and Canada Life (Ireland) representing a transformational deal in the Irish market and it is expected that the combined business will continue to set the pace in the life and pensions industry in Ireland. 7

11 Risk Management The Board of Irish Life Group Limited (the parent company of the group) ( the Group ) is ultimately responsible for the governance and oversight of risk throughout the Group. The Board of Irish Life Assurance plc ( ILA ) ( the Board ) is responsible for risk management within the company with oversight and support provided by the Group. The Board adopts group policy or approves ILA-specific risk policy in relation to the types and level of risk that the company is permitted to assume in the implementation of the strategic and business plans of the Group. The effectiveness of risk governance in ILA is dependent on the strength of the corporate risk culture. Risk culture is supported by shared corporate values, a common approach to risk classification and management, clear lines of risk responsibility, and timely and transparent communication. Principal Risk Factors The principal risk factors encapsulating the material risks to the company are set out below. The company defines risk as unexpected future events leading to variability in performance and damage to earnings capacity, capital position, business reputation or cash flows; or any unexpected future event damaging the business ability to achieve its strategic, financial, or overall business objectives. Definition Appetite Risk Source Risk Management Insurance Risk The risk associated with the variability in cash flows caused by fluctuations in demographic and other risk factors such as rates of policyholder mortality, disability, morbidity inception, recovery, and persistency as well as expense rates. The company has an appetite for accepting insurance risks. The company expects that the acceptance of such insurance risks is value additive given its cumulative knowledge and understanding of the risks. The company recognises that policyholder lapse and expense risks are inherent in its business model and adheres to best management practices to control the risks within acceptable levels. The company s results and capital position depend to a significant extent on actual insurance risk experience versus the assumptions used in underwriting, product pricing and the estimation of liabilities for policy benefits and claims. Expected future rates of customer persistency are a key assumption in product pricing and the calculation of financial results. Adverse persistency experience in recent years has seen high levels (on a historical basis) of policy lapses in the company s in-force life assurance book. The company maintains underwriting standards which incorporate strict underwriting limits and risk assessment throughout the underwriting cycle from business acceptance to claims settlement. In addition, the level of risk cover retained on any individual policy issued by the company, or on any group of exposures, is restricted through the use of retention limits. Risk cover in excess of these limits is reinsured by the company. The company s adherence to internal underwriting and retention standards is subject to regular review with results reported periodically to senior management. The company actively monitors actual risk experience against its long-term insurance risk assumptions and refines product pricing and reserving assumptions in the light of this experience. This ensures that such assumptions reflect current demographic and economic developments. Current persistency assumptions reflect recent lapse experience by allowing for further adverse persistency over a number of years, reducing to the long-term assumptions thereafter. The projected improvement from recent experience is supported by significant commercial initiatives undertaken by the business in recent years which include changes to operational process and commission structures, designed to encourage increased persistency rates. Definition Appetite Market Risk The risk associated with changes in the level or volatility of balance sheet values (and revenue) due to market movements. Market risk includes the risk of adverse returns on all asset classes, including due to currency rate movements, and adverse movements in interest rates. The company has no appetite for market risk exposure, except where it arises as a consequence of core strategic activity. For example, the company will accept the risk to management fees, derived from the value of assets held in unit-linked policyholder 8

12 Risk Management (continued) funds, which will fluctuate due to market price movements. Risk Source The company has no appetite to offer investment guarantees on new products, and thereby expose the company to market risk, unless those guarantees can be statically hedged by purchasing replicating assets at outset and where any associated counterparty risks can be passed to policyholders. The company is affected by market price changes for securities, investment markets and foreign exchange rates. Revenues from many of the company s products and services depend on fees linked to the value of the assets under management, which can decline due to falling investment markets or currency exchange rate impacts on non-euro denominated asset values. Market risks also affect the cost of investment guarantees issued to policyholders. The market consistent cost of such investment guarantees is provided for within the balance sheet. However, in certain scenarios, including scenarios of adverse market returns, the costs could be higher. Interest rate risk is significant to the company s life assurance business, since the value of non-linked insurance reserves fluctuates with changes in medium to long term interest rates, and any such movements to the extent that they are not matched by changes in the backing assets, will lead to volatility in the shareholder equity. Risk Management The company is exposed to property risk via its investments in owner-occupied and non-owner occupied property. Non-owner occupied property exposures (investment properties) are significantly concentrated in property situated in Luxembourg. The company matches unit-linked policyholder liabilities with matching assets. In relation to interest rate risk, the company matches non-linked policyholder liabilities with assets whose sensitivity to interest rates is the same as, or similar to, that of the underlying liabilities. From the start of 2013 the company has sold equity futures contracts to partially hedge the exposure to equity market levels which arise from historic investment guarantees. Property investments of the company are managed by its investment manager a sister company within the Irish Life Group. Close management and monitoring of the letting and sales strategies for individual properties helps to manage the risks to property values. Definition Appetite Risk Source Credit Risk The risk arising from a counterpart s failure to meet the terms of any contract with the company or its failure to perform as agreed. The company also considers changes in the level or volatility of the market prices of assets and liabilities, due to fluctuations in the credit standing of the issuer, as a credit risk. The company accepts exposure to credit risk as an inherent part of its business activities, to the extent that the acceptance of the risk optimises its risk adjusted return. Credit risk arises from the company s relationships with counterparties to its financial transactions. Counterparty default can arise due to many different factors. Whilst collateral may be held against counterparty default, the collateral or security provided may prove inadequate to cover the obligations in the event of a default. Counterparty default risk for the company principally arises from fixed interest and cash assets within the shareholder equity and assets backing non-linked liabilities. These fixed interest assets are significantly invested in sovereign debt instruments. Credit risk on unit-linked assets is borne by the policyholder. However, where the company has issued a guarantee relating to counterparty default, the credit risk is transferred to the company. Risk Management The company is also exposed to credit risk from its reinsurers. The company is still liable for reinsured risks if the reinsurer does not meet its contractual obligations. Hence, a failure of a reinsurance counterparty would require the company to obtain replacement cover or to establish capital and reserves in respect of the previously reinsured business. The company manages credit risk exposures through a counterparty limit structure applicable at single counterparty, aggregate and average exposure levels utilising internal credit rating assessments and external credit rating agency ratings. The 9

13 Risk Management (continued) company requires collateral, where appropriate, for specific reinsurance arrangements and derivatives transactions. The company requires collateral for credit risk mitigation in respect of reinsurance treaties for its annuity business. A reinsurer withdrawal of assets from the collateral charged accounts must be authorised by ILA. Over the course of 2012, the continuing Eurozone economic crisis resulted in high volatility of spreads on fixed income securities and ratings actions for sovereign and non-sovereign counterparties alike. The company responded to the prevailing conditions; proactively managing counterparty exposures and diversification, and eliminating exposure to certain peripheral sovereigns no longer matching its credit risk appetite. Definition Appetite Risk Source Risk Management Liquidity Risk The risk that, though solvent, the company has insufficient liquid and other financial resources to meet its cash-flow and capital requirements, or can secure the required resources only at excessive cost. The company has no appetite for liquidity risk. Assets are invested so that the company can meet its liabilities as they fall due. Illiquid investments to optimise policyholder and company risk adjusted returns, are made only where the corresponding policyholder liabilities are also illiquid. Market downturns exacerbate asset liquidity by reducing the number of available investors, deflating market prices and limiting sources of funding. Only low probability / high impact risk events would be expected to significantly impact on the liquidity profile of the company. Such events might include, for example, market seizures affecting asset liquidity, or catastrophic levels of risk claims and payments. Illiquid assets of the company include property assets. In addition, for certain unitlinked property funds, policy terms and conditions allow the company to defer the policyholder right to encash their units for up to six months to allow time to sell the relevant property assets. Failure to sell within this time period, and if rental incomes from the properties are insufficient, may necessitate that the company provide temporary liquidity from shareholder funds. No such liquidity support is being provided at year-end 2012, but 8m of support was provided for a period during The Group does not anticipate any requirement to provide such liquidity support for the foreseeable future. The liquidity profile of the company s unit-linked liabilities is matched as closely as possible with that of the backing assets. The company has liquid resources significantly in excess of any anticipated requirements. Investment strategies for such excess liquid resources focus on investment quality and security with positions being actively monitored. Definition Appetite Risk Source Operational & Compliance Risk The risk associated with inadequate or failed internal processes, people and systems or from external events; and the risk of failure to meet legislation and regulation applicable to the company. The company recognises that operational and compliance risks are inherent in its business and cannot be fully eliminated. However, the company has no tolerance for regulatory compliance or legal breaches and co-operates fully with all regulatory requirements. The company recognises that compliance risks warrant particular attention in circumstances where the company is providing advice to customers. Processes - The company processes a high volume of complex transactions across a diverse product range adhering to a number of different regulatory requirements. The company s ability to maintain accurate records, provide high-quality customer service and develop profitable products, depends on the effectiveness of its internal or outsourced processes, systems and controls, including information technology and other business resilience systems. People - The company s ability to attract, retain and motivate key personnel is important for the effective management of the business. Talent management, succession planning and sound systems for staff learning and development are all necessary to ensure that the company retains talented personnel across key positions within the business. 10

14 Risk Management (continued) Systems Consistent with its peers, the company s reliance on computer systems exposes it to potential risks including complete or partial systems failure. Even though system back-up, disaster recovery systems and contingency plans are in place, the company cannot guarantee that disruptions, interruptions, failures or security breaches will not occur. Such systems failures can lead to interruptions in customer service, data loss, internal and external reporting errors or delays, ineffective anti-fraud measures and subsequent damage to the company s reputation. Risk Management Compliance - Regulations impact on many aspects of the company s business; including capital adequacy, marketing and sales practices, advertising, licensing agents, terms of business and permitted investments. The company s legal and regulatory environment requires accurate interpretation of the rules and continued successful implementation, especially during periods of regulatory change. ILA, has been assessed as high impact by its prudential regulator, the Central Bank of Ireland, due to the company s size of operations in Ireland. Operational and compliance risk management is coordinated on a group-wide basis for the Irish Life Group. Within this framework, company-specific operational and compliance risks are managed by dedicated operational risk and compliance functions within ILA. Registers are maintained of each business division s top operational risks and regulatory requirements. Senior management within the company and across the Group receive regular reports on current divisional status regarding operational and compliance risks. Risk can arise where the company has an advisory relationship with the customer during the sales process. The company maintains clear sales procedures, utilising automated point-of-sale tools and focused staff training to guard against the inherent risks from this role. During 2012, the company entered into a new bancassurance distribution agreement with Allied Irish Banks plc. Under this agreement, the company s bancassurance partner follows a consistent sales process for the company products to that used internally by Irish Life. Furthermore, the company employs additional risk management, legal and compliance procedures to monitor sales practices within its bancassurance partners. Definition Appetite Risk Source Risk Management Commercial Risks The risks arising from changes in the company s business environment and from adverse or improper implementation of business decisions leading to a failure to manage business performance against objectives or to safeguard corporate reputation. A financially strong and profitable business is best placed to provide long-term, security for policyholder benefits, whilst also providing a return for the shareholder. The performance of the company is inherently exposed to commercial risks and it recognises that annual earnings will be volatile. The company has a low tolerance for any damage to its reputation, which is critical to achieving its business objectives. The business divisions of the company are based in, and derive their income from Ireland. In recent years Ireland has experienced significant job losses, weak consumer confidence, increased consumer debt burdens and a decline in income levels, property values and other asset values. Such macroeconomic conditions can impact on the market perception of the company and its financial strength via the effects on customer confidence, demand for the company s products and persistency rates for existing customers. The company operates in competitive financial markets. The company s new business volumes, persistency and results are dependent upon the strength of the "Irish Life" brand and reputation relative to its competitors. Material operational losses, adverse regulatory or legal actions, mis-selling scandals, customer mismanagement, fraud, failure to satisfy fiduciary responsibilities or any wider market concern over the company s financial stability have the ability to damage the company s brand and reputation and affect its competitive position. Managing commercial risks is the day-to-day responsibility of the company s management team. The impact on the results of the company is monitored at divisional and product level. Business strategy is set within the individual business units of the company with oversight and challenge from executive management and the Board. 11

15 Risk Management (continued) Risk management framework Risk taking is fundamental to a financial institution s business profile and hence prudent risk management, limitation and mitigation forms an integral part of the company s governance structure. As part of the wider Irish Life Group, the company operates a proactive Enterprise Risk Management ( ERM ) approach in the identification, assessment and management of risk. This framework underpins profitable and prudent risk taking by the company. The ERM framework is designed to ensure that all material risks are identified and managed and that business strategy across the company is implemented in full recognition of its risks. The Board is ultimately responsible for the governance and oversight of risk throughout the company and establishing the mechanisms and structures that control and manage the risk. The Board has delegated authority (but not overall responsibility) in respect of risk identification, assessment, measurement, monitoring and control for the company, to the Irish Life Group Limited Board Risk and Compliance Committee. The company s risk management framework is therefore integrated with the risk management framework of the wider group, which was established by: Identifying and reviewing the risks applicable across the Group, assessing each risk s materiality for the company, the Group and its business divisions, and selecting the risk treatments best placed to control risk exposures; Setting the company s risk appetite for the risks to which it is exposed, and developing relevant risk policies to embed such risk appetites and tolerances at an operational level within the business through dedicated internal controls; Establishing risk management and governance structures incorporating committees and corporate functions with appropriate terms of reference, mandates and composition to effectively monitor and limit the risks; and Reviewing and evaluating the group-wide risk framework and benchmarking against industry guidelines for risk governance. Risk identification, assessment and treatment Identification of risks within the company (both existing and emerging) is overseen by the Risk function. Significant input is provided by the business divisions, senior management, risk specialists and the specific risk committees of the company and the Group. Risk identification relies on both a bottom up process and a top down review of existing and emerging risks. Risk identification leverages the company s stress testing framework where scenario analysis can lead to the identification of emerging risks and previously unidentified risk concentrations. Assessment of identified risks utilises individual risk assessment frameworks at the divisional level, overlaid with a company and group risk materiality framework. Risks assessed as material for the company are ratified with senior management from across the company and the Group and are monitored regularly by the Board Risk and Compliance Committee. The company s risk materiality framework follows an iterative approach as represented in the chart below. 12

16 Risk Management (continued) The company applies three broad approaches to the treatment of its identified risks and any combination of treatments may be used for specific risks. 1. Capital may be held to ensure continued solvency in the event of a severe occurrence of the risk; 2. Risk management through controls; and 3. Risk mitigation by choosing not to take on the risk or fundamentally transferring the risk to a third party. The desired risk treatments for the company s material risks form the basis of the company s risk policies. Risk appetite, policy and controls The core objectives of the company s risk strategy are to: maintain the security of policyholder benefits; and protect and increase the value of shareholders investment These objectives are mutually aligned since policyholder interests are best served if the company continues to operate as a financially strong, profitable business. Equally, continued profitability can only be achieved if customers, financial advisors and other interested parties are satisfied as to the security of the company. The company maintains a position of financial strength, holding capital in excess of minimum regulatory capital requirements. The amount of excess capital is determined so as to be sufficient to absorb a medium sized risk event shock without breaching the regulatory minimum. This approach to internal capital management supports the company s target Insurer Financial Strength Rating from external credit rating agencies, which is a key driver of external market perceptions of its security. Risk appetite statements build on the company s internal capital targets, establishing core risk strategy across the business. Statements are developed through an iterative process of review, monitoring and update involving key functions of the company and the Group, with the Board responsible for approval of the risk appetite statement. The risk parameters encapsulated within risk appetite statement are closely aligned with the company s strategic and business plans, and address core objectives, such as solvency stability, capital usage, earnings stability, prudent liquidity management, prudent credit risk management and operational risk management. Risk appetite sets risk strategy and risk tolerance and is cascaded down into business level process and controls in relation to the type and level of risk that the company is permitted to assume. This is achieved through risk policies set or adopted by the Board, which stipulate the Board s expectations for risk management and reporting 13

17 Risk Management (continued) along with any applicable risk limits to be enforced. Business division risk processes and controls are established to enforce the specific risk policies approved for use by the Board. The Irish Life Group sets minimum standards for the internal risk control framework across all of its group entities. For the company, the different aspects of internal control captured in its internal control framework include the control environment, risk assessment, control activities, monitoring activities and control management information and communication. Responsibilities in relation to the company s internal risk control framework are established based on the three lines of defence risk model. 3rd Line of Defence Board Audit Committee Internal Audit Independent Assurance over Risk Governance The Board Board Risk & Compliance Committee MI 2nd Line of Defence Risk Oversight CEO 1st Line of Defence Risk Taker Management Oversight Functions (Risk, Compliance, Actuarial) Internal Audit The 1st line of defence is maintained by the risk taking functions of the company, i.e. the business units and core service providers making business decisions on a day-today basis. The 2nd line of defence corresponds to the oversight functions which control, monitor and report risks within the company and across the group risk governance structure and help define risk policy. The 3rd line of defence relates to independent assurance provided by the group s internal audit function. In relation to internal risk controls, the 1 st line of defence has primary responsibility for design and implementation of effective internal controls. The oversight functions in the 2 nd line of defence are responsible for oversight and monitoring of these internal controls and the risks they manage. Internal audit, as the 3 rd line of defence, carry out risk-based independent assessments of the internal risk control framework and the oversight provided by the 2 nd line of defence. Risk governance The functions and corporate bodies forming the group-wide risk governance structure are set out below. This structure is subject to on-going review and amendment by the Group Board. 14

18 Risk Management (continued) Board Risk & Compliance Committee Board Nomination Committee ILGL Board of Directors ILA Board Board Remuneration & Compensation Committee Board Audit Committee Board & Non-Executive Sub- Committees Irish Life Assurance Financial Risk Committee Group Operational Risk Committee Group Compliance Management Committee Executive Risk Committees Risk, Actuarial & Compliance Functions Group Internal Audit Control Functions The risk governance structure facilitates reporting and escalation of risk issues from the bottom up, and communication and guidance relating to risk policy and risk decisions from the top down. The Board Risk and Compliance Committee is comprised of group non-executive directors and has responsibility for oversight and advice to the Board on risk governance, the current risk exposures of the company and future risk strategy, including strategy for capital and liquidity management, the setting of compliance principles and policies and the embedding and maintenance throughout the company of a supportive culture in relation to the management of risk and compliance. The Board Risk and Compliance Committee supports the Board in carrying out its responsibilities for ensuring that risks are properly identified, reported, assessed and controlled, and that the company's strategy is consistent with risk appetite. The Board Risk and Compliance Committee is responsible for monitoring adherence to risk appetite statements. Where exposures exceed levels established in appetite statements, the Board Risk and Compliance Committee is responsible for developing appropriate responses. The Board Risk and Compliance Committee, in turn, delegates responsibility for initial monitoring and management of specific risks to executive committees accountable to it. The terms of reference for each committee, whose members include members of group senior management, are reviewed and approved regularly by the Board Risk and Compliance Committee. The Irish Life Assurance Financial Risk Committee ( FRC ) is responsible for the management of financial risks arising for Irish Life Assurance plc. The principal objectives of the FRC include monitoring financial risk exposures and recommending suitable risk policy (for all financial risks including insurance risks, market risk, credit risks, liquidity risk, capital-funding risk and concentration risks), monitoring the matching of assets and liabilities and reviewing new product development. The Group Operational Risk Committee provides oversight and monitoring of operational risk within the company and the Group. The Committee provides a forum for the prioritisation and review of the company s existing and emerging material operational risks and the design and monitoring of key risk indicators attaching to such risks. The Group Compliance Management Committee provides oversight and monitoring of compliance within the company and the Group, including recommendation of appropriate regulatory and compliance policies and standards and monitoring of the on-going state of compliance across the company and the Group. Executive risk committees and the Board Risk and Compliance Committee are supported by dedicated control functions established within the company and across the Group. The Risk function supports the Head of Risk in the development of risk appetite, development of risk policies, risk identification, risk monitoring / reporting and provision of risk advice to the business. The Risk function is operationally independent and separate from the business units of the company. The Risk function is comprised of two operational pillars: Financial Risk Management and Operational Risk Management. The Actuarial function provides actuarial services and advice to the company. Led by the Chief Actuary, the Actuarial function carries out the company s actuarial-based statutory duties, including the investigation of its 15

19 Risk Management (continued) financial condition, the valuation of its liabilities and the review of the sufficiency of premiums for new business. The Actuarial function monitors the solvency and capital of the company and supports the Risk function in determining the capital required to cover the nature and level of the risks to which the company is, or might be, exposed. The Compliance function is largely decentralised with individual compliance units embedded in business units of the company. Reporting to the Head of Compliance at group level, the Compliance Officers in each of the company s business units are responsible for the implementation of compliance arrangements within their divisions. The compliance function supports the Head of Compliance in identifying, assessing, monitoring and reporting the compliance and regulatory risks across the company and the Group, and carrying out compliance investigations as required. The Compliance function supports the business by providing independent advice in relation to regulatory developments and other compliance matters. Group Internal Audit operates in accordance with its Board Audit Committee approved charter. Its objective is to provide an effective, responsive and highly valued internal audit service that adds value to, and improves the Group s operations through risk-based, independent assessment of the adequacy, effectiveness and sustainability of the Group s governance, risk management and control processes; with the ultimate objective of providing an opinion on the control environment to the Board Audit Committee. All activities undertaken within, and on behalf of, the Company and the wider group are within the scope of Group Internal Audit. This includes the activities of other control functions. Group Internal Audit has unrestricted access at any time to all records, personnel, properties and information of the company and the wider group. Evolving risk management framework During 2012 the Irish Life Group was separated from a larger group under the parental ownership of Irish Life & Permanent plc. This necessitated the separation of risk governance structures and provided the Irish Life Group with the opportunity to review and augment its own framework. The suite of risk policies enforcing risk appetite at an operational level across the company and the Group have been broadened. In addition, the formal documentation providing clarity on specific roles and responsibilities of corporate bodies and functions within the risk governance framework have been refreshed. The resulting Enterprise Risk Management framework of the company and the Group is considered to be closely aligned with the emerging Solvency II requirements for risk management and systems of governance. The framework will continue to develop as new initiatives are bedded into business as usual and the final Solvency II requirements become clearer. The company and the Group continue to regularly review and evaluate their risk management and governance structures. 16