EC Insurance Company Ltd.

Transcription

1 EC Insurance Company Ltd. Solvency and Financial Condition Report for the year ended December 31, 2017 ECIC is a trading name of Markel International Insurance Company Limited, whose ultimate holding company is Markel Corporation. Markel International Insurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority (FRN: ) Registered Office: 20 Fenchurch Street, London EC3M 3AZ. Company Number:

2 Table of Contents 1.0 Board of Directors Directors Responsibility Statement Audit Opinion Executive Summary Business & Performance Company Information Group Structure Group Supervision Business and Environment Summary Financial Performance Underwriting Performance Investment Performance Performance of Other Activities Any Other Information System of Governance General Information on System of Governance Board Committees Overview of Key Functions Fit and Proper Requirements Remuneration Policy Risk Management including the Own Risk and Solvency Assessment Risk Management Own Risk and Solvency Assessment ( ORSA ) Internal Control System Internal Audit Function Outsourcing Adequacy of System of Governance Material Transactions Any other information Risk Profile Overview Capital Requirements Risk Mitigation

3 4.4 Stress and Scenario Tests Overall Risk Profile Key Risk Areas Reserving Risk Underwriting Risk Market Risk Credit Risk Operational Risk Other Material Risks Group Risk Liquidity risk Regulatory Risk Conduct Risk Strategic Risk Any Other Information Expected profit included in future premiums ( EPIFP ) Material change in Risk Profile during Off Balance Sheet risks Valuation for Solvency Purposes Solvency II Valuation Basis Solvency II Balance Sheet and UKGAAP Financial Statements Assets Liabilities Technical Provisions Best Estimate Provision Risk Margin Uncertainties with Valuation of Technical Provisions Alternative Methods of Valuation Any Other Information Capital Management Capital Management Policy Own Funds Solvency Capital Requirement Use of Simplified Calculations

4 6.5 Variations from Standard Model Minimum Capital Requirement ( MCR ) Non-compliance with the MCR or SCR Transitional Arrangements Other Information Glossary ECICL Quantitative Reporting Templates

5 1.0 Board of Directors A.J. Davies (Chair) (Appointed 28 November 2017) R.D. Forrest Smith N.E.Galjaard (Appointed 28 November 2017) P.P. Guiry J.W.J. Spencer (Appointed 28 November 2017) A. Whitaker (Appointed 28 November 2017) S. Wilson (Appointed 28 November 2017) G.M. Fearn (Resigned 28 November 2017) M.D. Webb (Resigned 28 November 2017) S.J. Bratt (Resigned 28 November 2017) M.J. Burnley (Resigned 28 November 2017) D.E Bromley (Resigned 28 November 2017) 1.1 Directors Responsibility Statement Year Ended 31 December 2017 We acknowledge our responsibility for preparing the EC Insurance Company Limited ( ECICL or the Company ) SFCR in all material respects in accordance with the Prudential Regulatory Authority ( PRA ) Rules and the Solvency II Regulations. We are satisfied that: throughout the financial year in question, the Company has complied in all material respects with the requirements of the PRA Rules and the Solvency II Regulations as applicable at the level of the Company and it is reasonable to believe that the Company has continued to comply subsequently and will continue to comply until 31 December On behalf of the Board Richard Forrest Smith Director Date: 1 May 2018 Paul Guiry Director 5

6 1.3 Audit Opinion Report of the external independent auditor to the Directors of EC Insurance Company Limited ( the Company ) pursuant to Rule 4.1 (2) of the External Audit Chapter of the PRA Rulebook applicable to Solvency II firms Report on the Audit of the relevant elements of the Solvency and Financial Condition Report Opinion We have audited the following documents prepared by the Company as at 31 December 2017: The Valuation for solvency purposes and Capital Management sections of the Solvency and Financial Condition Report of EC Insurance Company Limited ( the Company ) as at 31 December 2017 ( the Narrative Disclosures subject to audit ); and Company templates S , S , S , S , S ( the Templates subject to audit ). The Narrative Disclosures subject to audit and the Templates subject to audit are collectively referred to as the relevant elements of the Solvency and Financial Condition Report. We are not required to audit, nor have we audited, and as a consequence do not express an opinion on the Other Information which comprises: The Business and performance, System of governance and Risk profile elements of the Solvency and Financial Condition Report; Company templates S , S , S ; and, the written acknowledgement by management of their responsibilities, including for the preparation of the Solvency and Financial Condition Report ( the Responsibility Statement ). In our opinion, the information subject to audit in the relevant elements of the Solvency and Financial Condition Report of the Company as at 31 December 2017 is prepared, in all material respects, in accordance with the financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)), including ISA (UK) 800 and ISA (UK) 805. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the relevant elements of the Solvency and Financial Condition Report section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the Solvency and Financial Condition Report in the UK, including the FRC s Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 6

7 Use of the audit report This report, including the opinion, has been prepared for the Directors of the Company to enable them to comply with their obligations under External Audit rule 2.1 of the Solvency II Firms Sector of the PRA Rulebook and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Directors for our audit work, for this report, or for the opinions we have formed. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: the directors use of the going concern basis of accounting in the preparation of the SFCR is not appropriate; or the directors have not disclosed in the SFCR any identified material uncertainties that may cast significant doubt about the company s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the SFCR is authorised for issue. Emphasis of Matter - Basis of Accounting We draw attention to the Valuation for solvency purposes and Capital Management sections of the Solvency and Financial Condition Report, which describe the basis of accounting. The Solvency and Financial Condition Report is prepared in compliance with the financial reporting provisions of the PRA Rules and Solvency II regulations, and therefore in accordance with a special purpose financial reporting framework. The Solvency and Financial Condition Report is required to be published, and intended users include but are not limited to the PRA. As a result, the Solvency and Financial Condition Report may not be suitable for another purpose. Our opinion is not modified in respect of this matter. Other Information The Directors are responsible for the Other Information. Our opinion on the relevant elements of the Solvency and Financial Condition Report does not cover the Other Information and, we do not express any form of assurance conclusion thereon. In connection with our audit of the Solvency and Financial Condition Report, our responsibility is to read the Other Information and, in doing so, consider whether the Other Information is materially inconsistent with the relevant elements of the Solvency and Financial Condition Report, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the relevant elements of the Solvency and Financial Condition Report or a material misstatement of the Other Information. If, based on the work we have performed, we conclude that there is a material misstatement of this Other Information, we are required to report that fact. We have nothing to report in this regard. 7

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9 1.0 Executive Summary The Solvency and Financial Condition Report ( SFCR ) is prepared for ECICL. The SFCR is prepared in accordance with the Solvency II directive and the various regulatory guidelines issued by the PRA and European Insurance and Occupational Pensions Authority ( EIOPA ). The SFCR is for the year ended 31 December Markel Capital Holdings Limited ( MCH ) purchased ECICL from its previous owner, EC Insurance Holdings Ltd, on 28 November ECICL did not prepare a standalone SFCR at 31 December 2016 because a SFCR was prepared for EC Insurance Holdings Limited in accordance with the Group Supervision provisions. Following the sale of ECICL to MCH, ECICL purchased a loss portfolio transfer ( LPT ) and quota share reinsurance from Markel International Insurance Company Limited ( MIICL ) to transfer the liabilities of the Company to MIICL. The impact of this reinsurance purchase is to ensure that ECICL does not bear any risk on a net basis on business written prior to the sale to MCH or on any future business. ECICL uses the standard formula to calculate the regulatory solvency capital requirement ( SCR ). At 31 December 2017, ECICL has Own Funds of 7,142,955 compared to a SCR of 3,833,815. This represents a solvency coverage ratio of 186%. 2.0 Business & Performance 2.1 Company Information Name EC Insurance Company Limited 20 Fenchurch Street London EC3M 3AZ Registered Number Supervisory Authorities Prudential Regulatory Authority, Bank of England, 20 Moorgate, London EC2R 6DA Financial Conduct Authority, 25 the North Colonnade, Canary Wharf, London E14 5HS External Auditor Mazars LLP Tower Bridge House St Katharine s Way London E1W 1DD Immediate Parent Markel Capital Holdings Limited Ultimate Holding Markel Corporation Company Subsidiaries None 9

10 2.2 Group Structure ECICL is 100% owned by MCH, a company registered in the United Kingdom. The ultimate holding company is Markel Corporation ( Markel ), which is incorporated in Virginia in the United States of America. The table below sets out a simplified group structure. Markel (Virginia) ACH (Bermuda) 90.48% MBL (Bermuda) MIHDL (Delaware) 9.52% MINT (UK) MCH (UK) MIICL (UK) ECICL (UK) MCAP (UK) Other Subsidiaries All holdings are 100% unless indicated otherwise 2.3 Group Supervision ECICL is a wholly owned subsidiary of MCH, which is incorporated in the UK. Its ultimate holding company is Markel, which is incorporated in Virginia, USA. ECICL s ultimate European Economic Area ( EEA ) parent is Markel International Limited ( MINT ). MINT is the EEA parent of MIICL. The simplified group structure is shown in the table above. Prior to the sale of ECICL to MCH on 28 November 2017, ECICL was part of the EC Insurance Holdings Limited for the purpose of Group supervision. 10

11 2.4 Business and Environment ECICL is a specialist UK insurer providing insurance solutions for contractors, construction trade associations and other specialist affinity groups. ECICL has operated for over 40 years in the UK insurance market. ECICL writes a portfolio of policies for contractors in the electrical, heating, ventilation, airconditioning, lift and escalator, roofing and building services sector. It also provides insurance schemes for the self-build residential property, mobility products and landlords and tenants of let property. ECICL underwrites liability, property, accident, sickness, warranty and guarantee business. The business environment in which ECICL operates remains highly competitive with surplus capacity and pressure on the rates that can be charged for insurance. All of ECICL business is located in the United Kingdom. There were no material changes in 2017 to the classes of business underwritten by ECICL from those previously written. 2.5 Summary Financial Performance The summary financial performance for year ended 31 December 2017 is set out below 2017 Underwriting Loss (1,191,167) Investment Income 1,289,321 Profit before Tax 98,154 Following the sale of ECICL to MCH, ECICL entered into a LPT and Renewal Rights Transfer Agreement with MIICL. The impact of this reinsurance transaction was: The outstanding insurance balances at 31 October 2017, net of third party reinsurance balances, were transferred to MIICL at their book value. All policies written by ECICL between 1 November 2017 and 31 December 2017, net of any external reinsurance in place, were reinsured on a quota share agreement with MIICL. All costs incurred by ECICL from 1 November 2017 are fully reinsured and recoverable from MIICL. The effect of this reinsurance transaction ensures that the financial impact of all policies written by ECICL from 1 November 2017 have been transferred to MIICL and that ECICL does not retain any net liability for insurance reserves relating to policies in force at 31 October Business written by ECICL in 2018 will also be fully reinsured with MIICL. During 2018, it is anticipated that ECICL may cease to write business and the renewal rights for the business 11

12 will be transferred to MIICL. ECICL may therefore potentially enter run off at some stage in 2018 and will focus on ensuring the professional management of its claims liabilities to customers. 2.6 Underwriting Performance The business has continued to operate in difficult market conditions and a challenging economic environment. Management use a range of performance measures to monitor and manage the business as set out below: Gross Premium Written: Gross written premium for 2017 is 20,296,242. The split by class of business is: Class of Business Gross Written Premium General Liability 10,665,148 Property Damage 5,859,992 Accident and Health 2,975,186 Warranty 603,248 Reinsurance Accepted 192,668 20,296,242 Net Written Premium: ECICL purchased a LPT from MIICL in 2017 to reinsure its liabilities at 31 October 2017 for 25,565,353. In addition, ECICL purchased quota share reinsurance from MIICL for the period 1 November 2017 to 31 December 2017 which resulted in ECICL not retaining any net liability for this period. As a result of purchasing this reinsurance, net written premium is a negative number in 2017, ( 14,194,897). Underwriting Result: The underwriting result for the year ended December 2017 is a loss of 1,191,167 reflecting the difficult trading conditions. General Liability business generated a loss in the year of 2,557,624 with the remainder of the business generating a profit of 1,366, Investment Performance During 2017, ECICL s investments comprised cash and fixed income investments. ECICL generated investment income of 1,289,321 in the year ended 31 December 2017 of which 501,341 related to investment gains and 787,980 was investment income. 12

13 Fixed income investments generated 758,126 of the total investment income. Cash on deposits with banks generated 29,854 of interest income. ECICL sold its fixed income holdings in December Performance of Other Activities ECICL does not have any other activities apart from the underwriting and investment activities set out above. 2.9 Any Other Information There are no other material matters in respect to the business or performance that need to be disclosed. 3.0 System of Governance 3.1 General Information on System of Governance The Board of ECICL is responsible for prudent oversight of the Company, ensuring that it is conducted in accordance with sound business principles and within applicable law and regulation. This includes responsibility to set and monitor adherence to strategic risk objectives and risk appetite statements. The ECICL Board also ensures that measures are in place to provide effective identification, management and control of risk. The overall risk strategy for the ECICL Board is to: Ensure an effective risk governance framework is in place lead by the Board. Anticipate and respond to changing external environment and emerging risks. Maintain an appropriately resourced risk management function to assist the business in the identification and mitigation of all material risks. Maintain a culture of compliance with applicable laws and regulations. ECICL achieves corporate governance by maintaining appropriate relationships between its management, its Board, its shareholders and other stakeholders to provide the structure through which ECICL s objectives are set, and the means of attaining those objectives and monitoring performance is determined. This enables ECICL s Board and management to interact effectively and deliver an agreed strategy and to share a clear understanding of the related risk appetite. It facilitates a robust control framework and allows for an appropriate level of engagement and challenge of the risks and issues as well as the appropriate level of oversight to maintain good governance. The Board ensures that ECICL meets the standards required for Solvency II Firms, as set out in the PRA Handbook, including the Fundamental Rules and the FCA handbook, including the Principles for Business. 13

14 The Board has identified the officers who hold each relevant Senior Insurance Manager Function (details are held in the Financial Services Register) and has approved the allocation of the PRA Prescribed Responsibilities. 3.2 Board Committees ECICL s governance arrangements include the following key committees. Risk and Capital Committee: ECICL forms part of the MIICL Risk and Capital Committee. The purpose of the Risk and Capital Committee is to assist the Board in its oversight of ECICL s risk management strategy and risk management framework. The Risk and Capital Committee has an agreed Terms of Reference which describes the purpose, responsibilities, membership and authority delegated from the Board for the Risk and Capital Committee. Prior to the sale, ECICL formed part of the EC Insurance Holdings Limited Risk and Compliance Committee. Audit Committee: ECICL forms part of the MIICL Audit Committee. The purpose of the Audit Committee is to assist the Board by overseeing the internal audit function and the relationship with external auditors. The Audit Committee has an agreed Terms of Reference which describes the purpose, responsibilities, membership and authority delegated from the Board to the Audit Committee. Prior to the sale, ECICL formed part of the EC Insurance Holdings Limited Audit Committee. Investment Committee: Prior to the sale, ECICL formed part of the EC Insurance Holdings Limited Investment Committee. ECICL sold its investment portfolio in December 2017 following the sale to MCH. Remuneration Committee: Prior to the sale, ECICL formed part of the EC Insurance Holdings Limited Remuneration Committee. 3.3 Overview of Key Functions The Company has identified the roles which it considers to be a Key Function performed by a Key Function Holder. All of the Key Function Holders have the necessary authority, resources and operational independence to carry out their roles and responsibilities. Internal Audit: The main responsibility of the Head of Internal Audit is to provide an independent assessment of the effectiveness and efficiency of risk management, control and governance process within ECICL s business operations. Prior to the sale of ECICL to MCH, the internal audit function was provided by KPMG LLP, which had undertaken this function since Risk management: The main responsibility of the Chief Risk Officer is to put in place and maintain effective Enterprise Risk Management comprising strategies, processes and reporting procedures necessary to identify, measure, monitor and report on a continuous basis the risk that the Company is or could be exposed, and their interdependencies. Compliance: The main responsibility of the Compliance Officer is to enable the Company to meet and exceed the standards required by its regulators. The responsibilities include 14

15 advising the Board on compliance with the laws, regulations and administrative processes adopted pursuant to Solvency II Directive and other relevant regulatory requirements. In addition, the compliance team assess the possible impact of any significant changes in the legal environment on the operations of ECICL and the adequacy of the measures adopted to prevent non-compliance. Actuarial: The actuarial function is fulfilled by a third-party organisation, Towers Watson Ltd, which has undertaken this actuarial function role since 2015 having previously provided actuarial and reserving support to ECICL since The actuarial function holder is responsible for fulfilling the Company s duties under Solvency II including the calculation of technical provisions and providing opinions on underwriting policy and reinsurance strategy. The actuarial function analyses and projects historical claims development data and use a number of actuarial techniques to validate assumptions used to calculate technical provisions. The actuarial function holder provides an actuarial function report to the Board annually setting out the tasks that have been undertaken by the actuarial function and their results, and any relevant recommendations. The actuarial function holder is a Fellow in the Casualty Actuarial Society ( FCAS ), a Member of the American Academy of Actuaries ( MAAA ), and a Fellow of the Institute of Actuaries ( FIA ) through mutual recognition. 3.4 Fit and Proper Requirements All Directors and employees, whether or not they perform a key function, are recruited on the basis that their professional qualifications, knowledge, experience, management and/or technical competences and experience are adequate to enable sound and prudent management and that they are of good repute and integrity. Approved Persons are required to be fit and proper persons and ECICL checks regularly that Approved Persons are eligible to perform controlled functions for ECICL under the PRA Senior Insurance Manager ( SIMR ) Regimes. When assessing whether a person is proper, ECICL carries out an assessment of that person s honesty and financial soundness based on relevant evidence regarding their character, personal behaviour and business conduct including any criminal, financial, supervisory aspects regardless of jurisdiction. To establish fitness and propriety of an individual to perform an approved function, prior to an individual joining the company and annually thereafter, ECICL looks to see if there are any adverse indicators that would not constitute fitness. ECICL utilises criminal record and financial credit checks as part of this process. In addition, on an ongoing basis, all Approved Persons are required to provide an annual confirmation to notify the Board of any items which might impact on their ability to act as an Approved Person. 3.5 Remuneration Policy ECICL has a remuneration policy that is agreed by the Board. The objective of the remuneration policy is to: Reward, motivate and retain high performing employees at all levels. 15

16 Encourage reliable and continuous performance. Establish a strong alignment aimed at delivering outcomes in the interest of the consumer. Endorse improvement of the skills of employees, and encourage innovation. Support employee retention. Incentivise executives to drive sustainable future value within the overall risk objectives. Create incentives aligned to longer-term outcomes rather than short- term gains. Support an ethical and customer centric culture of the Business. All employees are remunerated with an annual fixed salary and are entitled to participate in a discretionary bonus scheme, up to specific limits stated in their contracts of employment, depending on seniority. The bonus scheme is flexible, subject to a maximum payment, and allows zero bonus payments to be made when appropriate. Any payment is subject to both individual and company performance. 3.6 Risk Management including the Own Risk and Solvency Assessment Risk Management ECICL recognises that a strong culture of risk management is the key underlying feature of the risk and control process. It also recognises the need to have a risk culture that supports risk based decision-making processes and that risk culture should be embedded within the business. To facilitate and foster a healthy risk culture ECICL has embedded a risk management system in which colleagues at all levels actively engage in the process of managing risk through discussions at management, staff and risk awareness meetings. ECICL believes this process ensures: All material risks are likely to be identified. Risk issues can be escalated quickly in the firm. Senior management get high quality risk information and on a timely basis. The firms risk adjusted metrics (Risk Appetite) can be used to measure and model impacts. Delivery of a fair customer outcome and ensure the company operates within the regulatory framework Own Risk and Solvency Assessment ( ORSA ) The ORSA is the entirety of the processes and procedures employed to identify, assess, monitor, manage and report the short and long term risks ECICL faces or may face and to 16

17 determine the own funds necessary to ensure ECICL s overall regulatory and economic capital requirements are met at all times. The ORSA is submitted to the Board of ECICL each year. This process ensures that it is adequately embedded in the strategic decision-making process and management of risk within ECICL. The ORSA report is produced to a level of detail that would enable a suitably knowledgeable external reviewer to be able to gain an understanding of ECICL s risk and solvency assessment. The key processes that underpin the ORSA in determining solvency requirements include: Stress testing and scenario analysis. Business planning and assessment of the key risks to the Plan. Forward looking assessments of solvency position. Own assessment of solvency based on the standard formula SCR. Assessment of the appropriateness of standard formula for regulatory capital setting. Risk appetite process. Emerging risk process. 3.7 Internal Control System The management of ECICL is responsible for establishing and maintaining adequate internal controls. ECICL s internal controls cover all aspects of the business. ECICL assesses and manages internal controls by: Identifying what are the significant risks to the business and assessing how they have been evaluated and managed. assessing the effectiveness of internal controls in managing significant risks, having regard, in particular, to any material failings or weaknesses that have been reported. ensuring action is being taken promptly to remedy any identified failings or weaknesses. reviewing and updating its policies to ensure regulatory compliance. providing training to employees to ensure they have an appropriate understanding of their responsibilities and obligations from compliance and control perspective. ECICL s internal control systems encompass policies, processes and tasks that enable ECICL to respond appropriately to significant business, operational, financial, compliance and other risks. The ECICL risk register describes risk controls for each risk and identifies control ownership. Delegation of tasks and activities is undertaken commensurate with the level of competency required and the skill and experience of the individual. Authority limits and controls are communicated, documented and subject to regular review and change if necessary. 17

18 Segmentation of duties and function minimises the risk of financial crime. ECICL has a separate risk and compliance function within the organisation managed by suitably competent individuals. The risk and compliance functions has appropriate access to records, individuals and committees. 3.8 Internal Audit Function ECICL s internal audit function is led by the Head of Internal Audit (SIMF 5). Prior to the sale of the ECICL to MCH on 28 November 2018, the function was outsourced to KPMG LLP who undertook appropriate audits of the business function in line with the audit plan agreed with the Audit Committee and the Board. The internal audit function is implemented through a team of full time staff supported by subject matter experts as required. The internal audit function is an independent and objective assurance and consulting activity designed to add value and improve the ECICL s operations. It assists ECICL in accomplishing its objectives by bringing an independent, systemic and disciplined approach to the process of evaluating and improving the effectiveness of the risk management, control and governance processes. The internal audit function provides an independent assessment of the quality of internal controls and administrative processes, and provides recommendations and suggestions for continuous improvement. The Audit Committee monitors the implementation by management of these suggested improvements. An audit report is prepared and issued by the internal auditor following the conclusion of each audit, including any management responses. These reports are presented to the Audit Committee and a summary of their reports is presented to the Board. The internal audit function maintains it independence by reporting directly to the Audit Committee, the members of which are all Non-Executive Directors. 3.9 Outsourcing ECICL s operational strategy is to use a combination of in-house, Markel and outsourced resource to enhance operational efficiency. ECICL s Outsourcing Policy sets out its approach to meeting ECICL s regulatory requirements for outsourcing. The operation of outsourcing arrangements is reviewed by management on a regular basis. A function or activity is viewed as critical or important if without it ECICL could not deliver services to policyholders. Areas where critical services are outsourced are listed below. Outsourced Activity IT network infrastructure and disaster recovery services IT trading platform Delegated Underwriting Payroll Jurisdiction UK UK UK UK Investment management (until December UK 18

19 2017) Actuarial Function Holder Claims Handling UK UK Following the sale of ECICL to MCH, certain services are provided to ECICL on an intergroup basis. These include risk management, compliance, internal audit and human relations. All of these services are based in the UK Adequacy of System of Governance The Board of ECICL believes that the systems of governance is fit for purpose to deliver on their objectives within an agreed risk framework. ECICL is authorised by the PRA and regulated by the PRA and the Financial Conduct Authority ( FCA ) and complies with the corporate governance practices and principles expected by the regulators. In compliance with the UK Corporate Governance Code, an external Board evaluation of ECICL was undertaken by KPMG in April KPMG concluded that ECICL s Board is operating effectively and ECICL are committed to maintaining the highest standards of governance. KPMG s conclusion was that governance is considered proportionate to the nature and complexity of the business Material Transactions An interim dividend of 16,000,000 was paid in December 2017 to MCH. Following the sale of the ECICL to MCH, ECICL entered into a LPT and Renewal Rights Transfer Agreement with MIICL. The impact of this transaction was: the outstanding insurance balances at 31 October 2017, net of third party reinsurance balances, were transferred to MIICL at their book value. all policies written by ECICL between 1 November 2017 and 31 December 2017, net of any external reinsurance in place, were reinsured on a quota share agreement with MIICL. Under the agreement, all costs incurred by ECICL from 1 November 2017 are fully reinsured and recoverable from MIICL. The effect of this reinsurance transaction ensures that the financial impact of all policies written by the Company from 1 November 2017 have been transferred to MIICL and that the Company does not retain any net liability for insurance reserves relating to policies in force at 31 October Following the sale of ECICL on 28 November 2017, the Board agreed to a reduction in the share capital of the Company from 14,100,000 to 9,100,000. As noted above, the reinsurance arrangements with MIICL mean that ECICL now has minimal insurance risk. 19

20 3.12 Any other information The Directors do not consider that there is any other material information to disclose for ECICL. 4.0 Risk Profile 4.1 Overview The Board of ECICL is responsible for prudent oversight of the Company, ensuring that it is conducted in accordance with sound business principles and within applicable law and regulation. This includes responsibility to set and monitor adherence to strategic risk objectives and risk appetite statements. The Board also ensures that measures are in place to provide effective identification, management and control of risk. ECICL is committed to a structured and disciplined approach to risk management which considers strategy, process, people and technology. ECICL maintains a positive and open culture towards risk management throughout all levels of the organisation. 4.2 Capital Requirements ECICL uses the Standard Formula to calculate its regulatory capital requirements. ECICL uses a mark-up of 35% on the SCR amount as the basis for calculating its economic capital. ECICL is anticipated to hold capital in excess of this economic solvency level for ECICL ensures that it remains in continuous compliance with the requirement to ensure that it maintains a level of capital in excess of its regulatory SCR. The Board reviews the management accounts at each Board meeting to assess whether there is any deterioration in the financial results that may impact negatively on the capital position of ECICL and which may impact on the ability to meet its regulatory requirements. 4.3 Risk Mitigation ECICL s risk register details the risks to which it is, or may be exposed. For each risk, there are a number of controls in place that are used to mitigate the risk and are monitored over time. Risk controls can be tools or techniques to proactively identify, manage and reduce risk and may involve the policies, standards, procedures and operations of ECICL. The risk register describes risk controls for each risk and identifies control ownership. The Risk Management function facilitates the process to enable the risk owners to identify risks, develop control activities to mitigate the risk within appetite and to carry out risk assessments. The Risk Management function assesses the effectiveness of the controls and works with control owners to address any control weakness. 20

21 Information on risk is presented to the Risk and Capital Committee. The Risk and Capital Committee is chaired by an independent Non-Executive Director and meets on a quarterly basis to monitor any significant change in the risks or controls. 4.4 Stress and Scenario Tests A range of sensitivity tests is conducted for ECICL which allow for a better understanding of the key sensitivities for capital requirements. ECICL carries out stress and scenario testing as part of the ORSA process. As part of this process, ECICL also assesses explicit scenarios most likely to render its business model unviable, a process known as reverse stress testing. In order for ECICL s business model to become unviable, the Company would need to be unable to make recoveries from MIICL under the terms of the LPT and reinsurance agreement entered into in December The Board considers this to be a very remote possibility given the financial strength of MIICL and Markel. In the context of this analysis, management concludes that ECICL has sufficient capital to meet its solvency needs and to achieve its business goals to within an acceptable level of confidence. 4.5 Overall Risk Profile As at 31 December 2017, ECICL s risk profile expressed as percentage of its SCR, was: 2017 Reserving Risk 0% Underwriting Risk 0% Market Risk 0.2% Credit Risk 76.8% Operational Risk 23.0% 100% 4.6 Key Risk Areas Reserving Risk Reserving risk is defined as the risk of loss resulting from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities, focusing on risks that arise from the quantification of these liabilities. Risk mitigation includes: 21

22 The actuarial function analyses and projects historical claims development data and uses a number of actuarial techniques to both test and forecast claims provisions. ECICL purchased a LPT and quota share reinsurance from MIICL that ensures ECICL fully recovers any claims. Therefore, at the December 2017, ECICL had no reserve risk for the purpose of calculating the risk profile Underwriting Risk Underwriting risk is defined as the risk of loss resulting from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities, focusing on risks that arise from the acceptance of business. ECICL s underwriters and management consider underwriting risk at an individual contract level and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. Risk Mitigation includes: Premium rating, lapse ratios and new business premiums are tracked on a monthly basis. The current premium rating, as related to the historic claims records, inflation and insurance market trends, is also analysed to ensure adequate pricing. The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular reviews. ECICL purchased reinsurance from MIICL that ensures ECICL fully recovers any claims in respect of business written by ECICL. Therefore, at the December 2017, ECICL had no underwriting risk for the purpose of calculating the risk profile Market Risk Market risk refers to the risk of loss resulting from adverse financial market movements including interest rates or exchange rates. Risk mitigation includes: ECICL sold its fixed income investment portfolio prior to 31 December 2017 and thus significantly reduced its exposure to movements in interest rates and movements in the investment valuations. ECICL operates in the United Kingdom and all of its business is transacted in pounds sterling. The functional currency of ECICL is pounds sterling and the presentational currency in which ECICL reports is pounds sterling and therefore ECICL does not have any exposure to movements in exchange rates. ECICL s policy concerning market risk ensures compliance with Solvency II Prudent Person Principle requirements. 22

23 4.6.4 Credit Risk Credit risk relates to the risk of loss arising from the inability of a counterparty to fulfil its payment obligations. ECICL has exposure to credit risk, which is the risk that a counterparty will suffer a deterioration in solvency or be unable or unwilling to pay amounts in full when due. Key areas of exposure to credit risk include: reinsurers share of insurance liabilities. amounts due from insurance intermediaries and coverholders. Risk Mitigation includes: ECICL purchased a LPT and quota share reinsurance from MIICL in December Under the terms of this reinsurance agreement, a full recovery would be made from MIICL in the event of ECICL failing to recover an amount due from any other party, including third party reinsurers. Amounts due for insurance contract holders and insurance intermediaries are monitored on a daily basis. Default in premium payments is greatly mitigated by the provision of instalment premium facilities for the majority of policyholders that are controlled via monthly direct debit arrangements Operational Risk Operational risk is the risk that a financial loss or reputational damage may occur as a result of inadequate or failed internal processes, people and systems, or from external events. This category includes items relating to business and strategic risk including, business processes, data security and cyber risk, outsourcing, financial crime, human resources, business continuity, treating customers fairly, regulation and litigation. Risk Mitigation includes the review by management of metrics and benchmarks to monitor ECICL s operational risk profile, including the areas of business continuity, staff turnover and information technology. 4.7 Other Material Risks Group Risk Group risk is the risk that actions or events within one part of the Markel group adversely affect ECICL. ECICL considers it a strength to be part of a larger, experienced group with considerable financial resources and sound reputation. Overall, the Board considers that the fact that ECICL is part of a large group that has insurance experience mitigate the risks to which ECICL is exposed. 23

24 4.7.2 Liquidity risk Liquidity risk arises where cash may not be available to pay obligations when due at a reasonable cost. ECICL is exposed to daily cash calls on its available cash resources, mostly for the settlement of claims. ECICL monitors its cash flow requirements and ensures that it holds sufficient funds in the bank accounts to meet these cash flow requirements, including reviewing the cash flow requirements on a stressed basis Regulatory Risk ECICL is required to comply with the requirements of the PRA and the FCA. Regulatory risk is the risk of loss owing to a breach of regulatory requirements or failure to respond to regulatory change. Risk Mitigation includes ensuring that ECICL s compliance team monitors that regulatory reporting is performed with the agreed timeframe and ECICL is in compliance with its regulatory obligations Conduct Risk Conduct risk is the risk of financial and/or service detriment which adversely affects the customer due to failings in the customer value chain. ECICL s conduct objective is to build, maintain and enjoy long-term relationships with our customers whether it is directly or indirectly via a third party. This culture of partnership is fundamental to our dealings with our customers, and comes regardless of the complexity of the risk, the sophistication of the buyer, or the length of the supply chain to the end customer. The conduct objective is owned by the ECICL Board and cascaded throughout the organisation. It is central in achieving delivery of the six Consumer Outcomes (as set out by the FCA), which are at the heart of our business. The Board aims to embed a culture, from the top down, where the conduct risk arising from the execution of the business plan and strategy is appropriately monitored and managed to ensure good outcomes for all our customers Strategic Risk ECICL is aware of the dangers of following an inappropriate strategy or failing to implement a desired strategy. One of the strengths of being part of an insurance group is the benefit of the oversight of Markel, which is able to bring the collective insurance experience of many decades to ensure that the strategy is sound. The Board consists of experienced directors with insurance expertise and broad industry knowledge. 24

25 4.8 Any Other Information Expected profit included in future premiums ( EPIFP ) In addition to the above disclosures on the ECICL s risk management framework and its SCR by risk type, ECICL is also required to disclose the EPIFP as defined under Article 260 (2) of the Delegated Acts. As at 31 December 2017, the EPIFP was nil because ECICL has fully reinsured all of its written premium Material change in Risk Profile during 2017 There has been a material change to the risk profile of ECICL during ECICL was sold to MCH on 28 November ECICL purchased a LPT and quota share reinsurance from MIICL following the sale of ECICL to MCL. ECICL sold its investment portfolio during The impact of these transactions is to reduce the reserving and underwriting risk to zero at December Market risk is also reduced significantly to 8,804. ECICL s main risk is now a counterparty risk with MIICL for the recovery of the amounts due under the LPT and the quota share reinsurance Off Balance Sheet risks ECICL leases office space under two operating lease agreements. The future aggregate lease payments due under these agreements as at 31 December 2017 is 222,052. ECICL has not entered into any finance lease agreements and has no commitment payable under finance leases. ECICL does not transfer risk to any special purpose risk vehicles. 5.0 Valuation for Solvency Purposes 5.1 Solvency II Valuation Basis In accordance with Article 75 of the Solvency II Directive, assets and liabilities other than technical provision have been measured in accordance with the principles of an arms-length transaction between knowledgeable, willing parties using market consistent valuation methods. Technical Provision have been valued in accordance with Article 76 of the Solvency II Directive. 25

26 5.2 Solvency II Balance Sheet and UKGAAP Financial Statements As at 31 December 2017 UK GAAP Solvency II Assets Deferred Acquisition Costs 1,896,326 - Deferred Tax 22,227 22,227 Reinsurance Recoverable 57,237,752 47,984,825 Insurance Receivables 4,102,319 - Reinsurance Receivables 4,053,415 - Cash and Cash Equivalents 10,730,244 10,730,244 Other Assets 231, ,125 Total Assets 78,273,408 58,968,421 Liabilities Technical Provisions 57,237,752 50,481,578 Best Estimate Provision 47,436,568 Risk Margin 3,045,010 Insurance Payables 124,609 - Reinsurance Payables 7,960,038 - Trade Payables 607, ,605 Other Liabilities 2,632, ,283 Total Liabilities 68,562,612 51,825,466 Excess of Assets over Liabilities 9,710,796 7,142,955 Overall, Own Funds on a Solvency II basis, 7,142,955 are 2,567,841 lower than the Net Assets on a UK GAAP basis. This is mainly due to reflecting the Risk Margin, 3,045,010 in the Solvency II numbers. 26

27 5.3 Assets Deferred Acquisition Costs represents the proportion of acquisition costs incurred that corresponds to the unearned premiums provision at the reporting date. Deferred Acquisition Costs do not meet Solvency II valuation principles and are therefore not recognised on the Solvency II balance sheet. Deferred Tax is recognised on timing differences at the reporting date. Timing differences are the differences between taxable profits and total comprehensive income and arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the Company s financial statements. The Company has not recognised any deferred tax asset on the difference between the net asset value on a UKGAAP basis and the Own Funds on a Solvency II basis due to the uncertainty surrounding the recovery of this asset. Reinsurance Recoverable as reported in the financial statements comprise the reinsurers share of technical provisions. The treatment under Solvency II is discussed in the technical provisions section below. Insurance Receivables as reported in the financial statements comprise premium receivable. Premium receivable constitute future insurance cashflow under Solvency II and therefore form part of the Solvency II technical reserves. Reinsurance Receivables as reported in the financial statements comprise reinsurance recoverable on paid claims less a provision for doubtful debts. Reinsurance recoverable constitute future insurance cashflow under Solvency II and therefore form part of the Solvency II technical reserves. Cash and Cash Equivalents represent cash deposits with maturities of less than three months. They are stated at the realisable cash value of the asset in accordance with Solvency II. Other Assets comprise prepayments of expenses that cover more than one financial period. 5.4 Liabilities Insurance Payables consists of insurance liabilities payable to intermediaries which are recognised when insurance contracts are entered into. These liabilities are reclassified under Solvency II and included in the calculation of Solvency II Technical Provisions. Reinsurance Payables consists of reinsurance liabilities payable to reinsurers which are recognised when insurance contracts are entered into. These liabilities are reclassified under Solvency II and included in the calculation of Solvency II Technical Provisions. Trade Payables consist mainly of liabilities in respect of insurance premium taxation. Other Liabilities include deferred reinsurance acquisition costs that represents the proportion of the reinsurer s acquisition costs incurred that corresponds to the unearned premiums provision at the reporting date. Reinsurance acquisition costs do not meet Solvency II valuation principles and are therefore not recognised on the Solvency II balance sheet. In addition, other liabilities include amounts accrued for expenses that relate to 2017 but will be paid in future periods. 27