RELIANCE MUTUAL INSURANCE SOCIETY LIMITED

Transcription

1 RELIANCE MUTUAL INSURANCE SOCIETY LIMITED SOLVENCY AND FINANCIAL CONDITION REPORT 2016 Registered in England No: Reliance House, 6 Vale Avenue, Tunbridge Wells, Kent, TN1 1RG

2 SOLVENCY & FINANCIAL CONDITION REPORT 2016 Contents Solvency & Financial Condition Report EXECUTIVE SUMMARY... 3 STATEMENT OF DIRECTORS RESPONSIBILITIES... 9 AUDITORS REPORT AND OPINION A. Business & Performance A.1 Business A.2 Underwriting Performance A.3 Investment Performance B. System of Governance B.1 General Information B.2 Fit and Proper Requirements B.3 Risk Management System B.4 Own Risk & Solvency Assessment B.5 Internal Control System B.6 Internal Audit Function B.7 Actuarial Function B.8 Outsourcing Policy B.9 Assessment of Governance C. Risk Profile C.1 Underwriting Risk C.2 Market Risk C.3 Credit Risk C.4 Operational Risk C.5 Liquidity Risk C.6 Business Risk C.7 Stress and Scenario Testing Results C.8 Prudent Persons Principle - Investments D. VALUATION FOR SOLVENCY PURPOSES D.1 Assets D.2 Technical Provisions D.3 Other Liabilities D.4 Alternative Methods for Valuation E. CAPITAL MANAGEMENT E.1 Own Funds E.2 Solvency Capital Requirement and Minimum Capital Requirement E.3 Use of Duration-based Equity Sub-module in the Calculation of the Solvency Capital Requirement E.4 Differences between the Standard Formula and any Internal Model used E.5 Non-compliance with the Minimum Capital Requirement and Non-compliance with the Solvency Capital Requirement Appendix A - Valuation Basis Appendix B Quantitative Reporting Templates (QRTs) Page 2 of 71

3 SOLVENCY & FINANCIAL CONDITION REPORT 2016 EXECUTIVE SUMMARY Our Business Reliance Mutual is a long established mutual insurer providing life insurance and pension products, having started life in From 2000 onwards Reliance Mutual had a strategy of buying closed books and there are a range of previous acquisitions from Criterion Life 2003; Family Assurance 2004; Eurolife Assurance 2005; SEB Trygg (UK) Life 2006; ULAS & Hearts of Oak 2007; Time Assurance In 2014 the There, protection proposition launched. In addition the Society offered smoker/enhanced annuities from 2002 until We are committed to providing a quality service and products for our customers and pride ourselves on our friendly and professional service. All enquiries are handled by friendly, UK-based staff employed by the Society. We have a number of wholly owned subsidiaries which provide support functions to the Society, but none is material. The Society together with these subsidiaries constitute the entirety of the group structure, and the Society does not have a parent company. As a long standing life insurer, the Society manages a variety of types of individual life insurance policies, ranging from with-profits, to unit linked and annuity policies. Much of the Society s recent growth has been through acquisition of other books of insurance business, and as a result, the Society operates through 5 insurance sub-funds, 4 of which are closed funds consisting (almost entirely) of with profits policies. Following a strategic review, having regard to pressure on free capital, the Society s strategy changed in 2015, to one of seeking a solution to improve the security of members, and restricting any new business whilst the solution was found. This included seeking offers for the Society. The Society s Board took the decision that accepting the most attractive offer from Life Company Consolidation Group (LCCG) was more likely to be in the best interests of the members and policyholders of the Society than remaining independent. This is the first deal in the UK for LCCG who plan to inject additional capital. Their strategy is to acquire and consolidate other UK businesses. Historically the Society followed a similar strategy prior to its reduced capital availability. Heads of Agreement were signed with LCCG in September 2016 for the sale and transfer of the Society s business, with the binding Business Transfer Agreement (BTA) signed at the beginning of February The completion of the deal may take up to a year as it is subject to formal High Court and regulatory approval processes. In August we will write to members on progress and their involvement in the process. Other 2016 Business Activities Funeral Plan sales ceased in April 2016, notice of termination having been given in The on line protection proposition, There, was closed, and the new business capability and intellectual property were sold. The Society ceased annuity sales to new policyholders but continued to allow annuity conversions by maturing pension policyholders throughout the year. Page 3 of 71

4 2016 Financial Performance Financial management focused on managing the Society s capital, during a year of regulatory change, political and economic shocks including the Brexit vote which drove bond yields to record lows putting pressure on the Society s available capital and solvency coverage. The main activity to improve this was to optimise the Matching Adjustment asset portfolios and also to de-risking the other asset portfolios, with the aim of improving solvency coverage. Expense reserving was reviewed in the second half of the year, in the light of higher costs than budget during 2016, mainly from the Solvency II work required by the new regulations and the cost of delivering the strategy as well as developing strategic outlook. These costs resulted in a material increase in the reserves and corresponding reduction in Own Funds and solvency coverage. Take up rates for Guaranteed Annuity Options have reduced following the introduction of Pension Freedoms, so the Society s reserving took account of the reduced take up rates, particularly on smaller policies, and this partially offset the negative impact of the higher expense reserving. After conversion to the new regulatory regime, Solvency II, solvency coverage (Own Funds as a percentage of Solvency Capital Requirements- SCR ) started the year at 115%, but fell to 105% on 30 June 2017, immediately after the Brexit vote. Management actions taken in the second half, together with some improvement in financial markets, enabled coverage to improve to 114% at year end. Impact of Post Year End Activity Matching Adjustment portfolio optimisation has continued after year end, The Society has also agreed a revised proposal for its Transitional Deduction (a phasing in provision under Solvency II regulations) which further improved solvency coverage, The implemented Matching Adjustment actions have improved current solvency (end April 2017) coverage to over 120%. System of Governance The Society utilises a "3 Lines of Defence" governance model for the management of its risks. The table below shows how this model is operated through the Board, its Committees, and management committees within the Society. Page 4 of 71

5 During the year, Cameron Mills stood down from the Board and was replaced by Ed Gardner (Finance Director); also, Rachel Phillips joined the Senior Management Team as Chief Actuary. Risk Profile The Society manages risk and risk exposures through a well-defined Enterprise Risk Management Framework detailed later in this report. The chart below shows the component risks which make up the Society s SCR, shown on a postdiversification basis. Components of SCR* Underwriting risk Market risk Credit risk Operational risk *The credit risk component shown in the above chart includes the capital requirements with respect to credit spread widening and concentration risk (both of which are calculated as part of the Market Risk module under the Solvency II Standard Formula SCR). The largest risk exposure is to credit risk, due to the large portfolio of corporate bonds which match fixed/guaranteed liabilities, primarily annuities. Underwriting risk is the next largest, covering the Society s exposure to longevity risks in the annuity portfolio, lapse risk, and expense risk. In addition, the Society maintains a register of qualitative business risks a summary of which is covered in Section C.6. Valuation for Solvency Purposes The Society is sub-divided into a number of distinct sub-funds, which are: Ordinary sub-fund ( OSF ) which contains the majority of the Society s non-profit business, primarily unit linked and annuity business, and is where any new business is written; and Four separate with-profits sub-funds (WPSF1, 2, 4 and 6) which contain primarily, but not wholly, with-profits business. WPSF1 has a significant interest in the surplus emerging from the OSF and so it is clearer to show them added together. The with-profits sub-funds are all closed and in run-off with the assets of each fund being distributed to the members of these funds. Page 5 of 71

6 The table below summarises the Society s solvency in accordance with Solvency II regulations. SII Pillar 1 solvency ( m) OSF Society Own funds SCR (after loss absorbency) Sub-fund capital support Excess Available Capital (after capital support) Solvency ratio 127% 125% 115% 114% MCR Unused FDB / Restricted surplus Unused Future Discretionary Benefits (FDB) is the surplus in the with-profits sub-funds which is only available to protect the policy holders in those sub-funds. It is not available to protect other Society policyholders so is not included in the calculation of the Society solvency ratio. The overall solvency of the Society is at a similar level to that reported in the Solvency II opening position. However, this is the result of a number of management actions taken during 2016 to protect the solvency position against negative market movements. The majority of the actions have been asset focused with a move out of riskier corporate bonds and into gilts or cash. These de-risking actions have been accompanied by a process of optimising the Matching Adjustment portfolios to improve the benefit to solvency and this process has continued during In the opening position, capital support was required by WPSF1, WPSF4 and WPSF6 whereas the equivalent position at 31 December 2016 is that only WPSF1 requires support and the level of unused FDB in the WPSFs has improved significantly. The Society s solvency ratio year end under Solvency II is at 114%, which is below the Board s stated risk appetite of 120%. If the result is adjusted to include actions that have been implemented since year end the solvency ratio increases to above 120%. The Society has sufficient own funds to exceed the Minimum Capital Requirement ( MCR ) by 64.1m with a coverage ratio of 358%. This satisfies the Board s risk appetite of surplus of at least 10m over the MCR or a coverage ratio of at least 200% of MCR. m / % OSF/WPSF1 WPSF2 WPSF4 WPSF6 Total Own funds SCR Solvency Ratio 125% 100% 100% 100% 114% Unused FDB Own funds comprise Net Assets less Technical Provisions: m OSF/WPSF1 WPSF2 WPSF4 WPSF6 Total Net Assets 1, ,811.3 Technical Provisions 1, ,722.4 Own Funds Unused FDB Page 6 of 71

7 There are no material differences between the bases, methods or assumptions used for the Solvency II valuation of the Society s main asset classes and those used in the valuation for financial reporting, as shown in the table below. Assets m Statutory Accounts FRS 102 Reclassified Accounting Policy differences Solvency II Invested assets (excluding Unit Linked) 1, ,074.7 Assets for Unit Linked contracts Receivables 31.7 (14.3) Reinsurance recoverables and receivables 44.6 (23.4) 21.2 Cash and cash equivalents Intangibles, DAC and deferred tax asset 1.3 (1.0) 0.3 Total assets 1,877.6 (24.4) 1,853.2 Pension benefit obligations (3.5) 4.3 Deferred tax liabilities Payables Other liabilities Net Assets (excluding technical provisions) 1, (22.5) 1,811.3 As stated earlier, the assets stated in the above table are valued in line with FRS 102 and IFRS and the accounting policies are stated in the Annual Report and Accounts 2015 under Summary of Significant Accounting Policies. The 2016 Annual Report is not yet available but the accounting policies are identical for 2015 and Please refer to the following link for details: Differences between the Financial Reporting valuation of assets and Annual Report financial statements accounting policies compared to those under Solvency II as stated are: i. Reinsurance recoverables are valued in line with the technical provisions under Solvency II regulations. See Section D.2 for Valuation of Liabilities. ii. Intangible assets of 0.9m have been valued at zero in the Solvency II balance sheet. iii. Deferred acquisition costs of 0.1m are valued at zero under Solvency II regulations. iv. Pension scheme obligation under SII includes 3.5m incremental obligation arising from requirements under IFRIC 14. v. Deferred tax liabilities include the impact of a deferred tax asset of 0.5m recognised on the incremental SII Pension Scheme obligation. vi. Payables under SII have been adjusted for provision for claims outstanding on a best estimate basis (as against prudent basis under FRS 102). Capital Management The Society s Enterprise Risk Management framework includes explicit risk appetite statements for the Society as a whole, and the with-profits sub funds. The actual result as compared to the risk appetite is monitored weekly by management and is reviewed at each Board meeting. The Society applies the regulatory standard formula for the calculation of SCR. Page 7 of 71

8 Introduction to the Main Report The following report gives more detail on the performance of the Society, its governance and risk management for the year ended 31 December, This is the first year of reporting our annual Solvency II results and as such comparative information is limited to the balance sheet movements since 1 st January The report follows the structure required by regulation, but where helpful, we have taken account of how the business is managed, adding further information, which allows for the makeup of our business. Governance of this Report This document has been approved for issue by the board of the Society, having received an opinion from the Society s external auditors, PwC on Sections D and E. Page 8 of 71

9 STATEMENT OF DIRECTORS RESPONSIBILITIES Directors Statement The Directors are responsible for ensuring the Solvency and Financial Condition Report has been properly prepared in all material respects in accordance with the Prudential Regulatory Authority ( PRA ) rules and Solvency II Regulations. The Directors are satisfied that, throughout the year Reliance Mutual Insurance Society Limited has complied in all material respects with the applicable requirements of the PRA rules and Solvency II Regulations, and it is reasonable to believe that compliance has continued since the reporting date and will continue in the future. By order of the Board Ed Gardner Finance Director 19 May, 2017 Page 9 of 71

10 AUDITORS REPORT AND OPINION Report of the external independent auditors to the Directors of Reliance Mutual Insurance Society Limited ( the Company ) pursuant to Rule 4.1 (2) of the External Audit Part 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 Except as stated below, we have audited the following documents prepared by the Company as at 31 December 2016: The Valuation for solvency purposes and Capital Management sections of the Solvency and Financial Condition Report of the Company as at 31 December 2016, ( the Narrative Disclosures subject to audit ); and Company templates S , S , S , S , S and 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 Executive Summary, Business and performance, System of governance and Risk profile elements of the Solvency and Financial Condition Report; Company templates S and S ; Information calculated in accordance with the previous regime used in the calculation of the transitional measure on technical provisions, and as a consequence all information relating to the transitional measure on technical provisions as set out in the Appendix to this report; The written acknowledgement by management of their responsibilities, including for the preparation of the Solvency and Financial Condition Report ( the Responsibility Statement ). To the extent the information subject to audit in the relevant elements of the Solvency and Financial Condition Report includes amounts that are totals, sub-totals or calculations derived from the Other Information, we have relied without verification on the Other Information. 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 2016 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, as supplemented by supervisory approvals. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & I)), International Standard on Auditing (UK) 800 and International Standard on Auditing (UK) 805, and applicable law. Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the relevant elements of the Solvency and Financial Condition Report section of our report. Page 10 of 71

11 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 Prudential Regulation Authority. 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. Responsibilities of Directors for the Solvency and Financial Condition Report The Directors are responsible for the preparation of the Solvency and Financial Condition Report in accordance with the financial reporting provisions of the PRA rules and Solvency II regulations which have been supplemented by the approvals made by the PRA under the PRA Rules and Solvency II regulations on which they are based, as detailed below: Approval to use the matching adjustment in the calculation of technical provisions Approval to use the transitional measure on technical provisions The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of a Solvency and Financial Condition Report that is free from material misstatement, whether due to fraud or error. Auditors Responsibilities for the Audit of the relevant elements of the Solvency and Financial Condition Report It is our responsibility to form an independent opinion, in accordance with applicable law, ISAs (UK & I) and ISAs (UK) 800 and 805 as to whether the information subject to audit in the relevant elements of the Solvency and Financial Condition Report 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. ISAs (UK & I) require us to comply with the Auditing Practices Board s Ethical Standard for Auditors. An audit involves obtaining evidence about the amounts and disclosures in the relevant elements of the Solvency and Financial Condition Report sufficient to give reasonable assurance that the relevant elements of the Solvency and Financial Condition Report are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the relevant elements of the Solvency and Financial Condition Report. In addition, we read all the financial and non-financial information in the Solvency and Financial Condition Report to identify material inconsistencies with the audited relevant elements of the Solvency and Financial Condition Report. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. This report, including the opinion, has been prepared for the Directors of the Company 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. We do not, in providing this report, accept or assume responsibility for any other purpose save where expressly agreed by our prior consent in writing. Page 11 of 71

12 Report on Other Legal and Regulatory Requirements In accordance with Rule 4.1 (3) of the External Audit Part of the PRA Rulebook for Solvency II firms we are required to read the Other Information and consider whether it is materially inconsistent with the relevant elements of the Solvency and Financial Condition Report and our knowledge obtained in the audits of the Solvency and Financial Condition Report. 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. PricewaterhouseCoopers LLP Chartered Accountants 7 More London Riverside London SE1 2RT 19 May 2017 The maintenance and integrity of the Reliance Mutual Insurance Society Limited website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Solvency and Financial Condition Report since it was initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of Solvency and Financial Condition Reports may differ from legislation in other jurisdictions. Page 12 of 71

13 SOLVENCY & FINANCIAL CONDITION REPORT 2016 A. BUSINESS & PERFORMANCE A.1 Business Name Reliance Mutual Insurance Society Limited ( RMIS or the Society ) Legal Form UK Mutual Life Insurance Company Supervisory Authority Prudential Regulation Authority Bank of England 20 Moorgate London EC2R 8AH Alex Stephenson (Supervisor) External Auditor PricewaterhouseCoopers LLP 7 More London Riverside London SE1 2RT Gavin Phillips (Audit Partner) RMIS has a number of wholly owned subsidiary companies which provide support functions to the Society. As at 31 December 2016, the subsidiaries owned by the Society are all immaterial:- Reliance Unit Managers Limited Reliance Administration Services Limited FS Management Limited Reliance Pension Scheme Trustee Limited RMIS together with the above subsidiaries constitute the entirety of the group structure, and RMIS does not have a parent company. A.1.1 Lines of Business The vast majority of the Society s in-force business has been written in the UK, either by the Society directly or by other UK life insurance companies previously acquired by the Society. The Society is sub-divided into a number of distinct sub-funds, which are: The Ordinary sub-fund ( OSF ) which contains the majority of the Society s non-profit business; and Four separate with-profits sub-funds (WPSF1, 2, 4 and 6) primarily with-profits business. The following table summarises the Society s material lines of business as at 31 December Page 13 of 71

14 Line of Business Contract Type Product(s) % of Technical Provisions Deferred Annuities 2% WPSF Insurance With-Profit Participation Conventional With- Profits Term Assurance, Endowment Assurances, Whole of Life 8% Annuities 5% OSF Unit-Linked Insurance Unit-Linked Life and Pensions Savings 41% OSF Other Life Insurance Non-Linked Term Assurance, Endowment Assurances, Whole of Life 3% Annuities 35% Funeral Plan 4% The Society also has small amounts of in-force unitised with-profits business, unit-linked annuities, nonlinked deferred annuities, and health insurance business. A.1.2 Summary of Key Events and Business Performance during 2016 Delivering the revised strategy The Society implemented the plan to seek offers for the Society's business during 2016, resulting in the signing of Heads of Agreement with Life Company Consolidation Group (LCCG) on 15 September 2016, and a formal Business Transfer Agreement on 3 February End of Funeral Plan sales - the arrangement with the National Association of Funeral Directors to provide life insurance policies to insure pre-paid funeral plans was terminated in April 2016, notice of termination having been given in Closure of There and sale of website and intellectual property (IP) - The Society confirmed closure of There in 2016, and an agreement was concluded at the end of the year for the sale of the new business capability and the IP. EU Referendum The UK electorate voted to leave the EU in a referendum during The UK will formally leave the EU once negotiations with other EU member states have concluded. This process began with the triggering of Article 50 of the Treaty of Lisbon by the UK government at the end of March The long term effects of 'Brexit' on the domestic insurance market are largely unknown, but in the short-medium term the decision is likely to contribute to continuing uncertainty with respect to economic performance, investment markets, and consumer behaviour. Page 14 of 71

15 Uncertain Economic Conditions, Including Falling Interest Rates Bond markets went through turmoil in 2016, with long term interest rates and bond yields falling to record lows after the Brexit vote on 23 June This had a material adverse effect on the Society's solvency, resulting in close and frequent regulatory scrutiny of the Society's solvency and other activities, requiring allocation of material resource and time to provide management information and manage this communication process, as well as actions to mitigate the deterioration (see below). Implementation of Solvency II The new EU wide insurance regulatory regime "Solvency II" came into force on 1 January Initial results were submitted on time on 21 May 2016 including Transitional Measure on Technical Provisions and Matching Adjustment portfolios for the Annuity and Funeral plan business. This coincided with the start of heightened instability in financial markets, putting pressure on the Society's solvency. Management needed to develop a deeper understanding of the dynamics of significant volatility and extreme low interest rates under the new solvency standard. In these extreme conditions the existing models for estimating solvency on a real time basis proved to be unable to estimate solvency within a reasonable margin of error, so redesign and external validation was a priority for the second half of Asset De-Risking The change in strategy to seeking offers for the Society and the reduced solvency coverage during 2016 required the Society to de-risk the asset portfolios and the following de-risking actions were taken: a) rebalancing assets held in the Matching Adjustment (MA) Portfolios, b) sale of lower rated bonds in With Profits Sub Funds 4 and 6 (WPSF4/WPSF6) c) replacement of corporate bonds in the non-ma surplus of the Ordinary Sub Fund (OSF) with cash. Business and Financial Performance The Society prepares its financial statements on a UK GAAP basis, and the most significant difference between this basis and Solvency II reporting is that actuarial liabilities are calculated on a prudent basis for UK GAAP, and on a best estimate basis for Solvency II reporting. This year the Society is seeking membership approval of its Report and Accounts at an Annual General Meeting expected to take place in September 2017, so for the purposes of this document, financial performance is presented on a Solvency II basis and the table below analyses the changes to the solvency coverage of the Society :- SII Pillar 1 solvency ( m) OSF Society Own funds SCR (after loss absorbency) (48.1) (44.2) (85.2) (77.7) Sub-fund capital support (10.0) (6.5) Excess Available Capital (after capital support) Solvency ratio 127% 125% 115% 114% MCR - - (23.1) (24.8) Unused FDB / Restricted surplus Unused FDB is the Solvency II terminology for surplus in the with-profits sub-funds which is only available to protect the policy holders in those sub-funds. It is not available to protect other Society policyholders so is not included in the calculation of the Society solvency ratio. Page 15 of 71

16 The following table now looks at the reason for the 9.4m reduction of the Society s available own funds down from 98.2m to 88.9m funds:- Analysis of change in SII Own Funds m OSF With Profits Society Non-economic assumptions: (5.5) 1.4 (4.1) -Mortality (0.9) (1.4) (2.3) -Longevity GAO take-up rates Expenses (11.9) (0.2) (12.1) Market conditions: Interest rates (1.6) Spreads (0.3) Inflation Unit prices / asset shares Other experience: (0.4) Expenses (1.9) (0.2) (2.1) -Claims 2.1 (1.2) 0.9 -Asset trades (4.5) Other changes: Sub-total (3.7) FDB - (13.2) (13.2) Risk margin (3.7) (0.1) (3.8) Total (7.4) (2.0) (9.4) Ordinary Sub Fund (OSF) The changes in non-economic assumptions have resulted in a net increase in liabilities of 5.5m, with an increase in expense reserves of 11.9m and a small change on assurance mortality being offset by the assumptions (following pensions freedoms) of fewer people taking up their Guaranteed Annuity Rate Options. Given the degree of matching within the fund, the impact of changes in market conditions from the key components of interest rates and spreads is relatively low as would be expected. The net surplus arising from the change in inflation was due to the long duration of index-linked assets being held. The Matching Adjustment (MA) rate provides good protection against short term changes in spreads in the MA portfolios and, following de-risking activities, the other corporate bond holdings in OSF are limited. The increase in equity values over the year has increased unit-linked funds, and has reduced non-linked liabilities by 3.1m. In addition to the change in future expenses included within the reserves, expenses during 2016 were higher than those expected within the opening position reserves, resulting in a loss of 1.9m in the fund during the year. Claims were lower than expected with a small surplus arising. The impact of asset trades was more significant, due to asset write offs and certain de-risking sale of corporates in Q prior to the fall in interest rates. Other changes principally reflect the expected surplus from the run-off of the business over the year and other experience variances. Page 16 of 71

17 With Profits Within WPSF1, the majority of items have an immaterial effect with the exception of claims payments. Other changes principally reflect the expected surplus from the run-off of the business over the year and other experience variances. A.2 Underwriting Performance Due to the nature of the Society s business (containing four closed with profits sub funds, savings contracts including unit linked business, and annuities) an analysis of underwriting performance does not provide meaningful information without netting off the investment performance, and for this reason it is not the way the Society manages the business. Financial performance focuses on the movement in solvency of the Society. The detailed performance is explained in the tables in A.1 above. For example the downward movement of own funds in OSF of 1.6m due to interest rate movements is made up of an investment gain of 55.6m less a liability increase of 57.2m due to the high degree of matching within the fund. A.3 Investment Performance Investment income including realised and unrealised gains and losses, other than for unit-linked business aggregated 134.1m as follows: Income Description ( m) OSF/WPSF1 WPSF2 WPSF4 WPSF6 Total Investment income Realised gains/(losses) Unrealised gains/(losses) Total The investment income and unrealised gains were largely on corporate bonds. The realised gains were largely on derivatives (swaptions) and corporate bonds. Unit Linked performance and the with-profit performance of the original Reliance Mutual fund (WPSF1) can be found on our website at: Page 17 of 71

18 B. SYSTEM OF GOVERNANCE B.1 General Information The board of Reliance Mutual Insurance Society consists of four non-executive directors and three executive directors. During 2016, one executive director resigned (Cameron Mills), and a replacement was appointed from management (Ed Gardner). No other changes occurred either to the composition or structures of the board or its committees. The Board takes overall responsibility for the management of the Group, determining: Strategic principles and objectives, annual plans and budgets (and any material changes to them), performance monitoring and corrective action; Risk management processes including setting the risk appetite; Investment Strategy; Organisational and group structure; and Remuneration policies Audit Committee The Audit Committee seeks to gain assurance, on behalf of the Board, that an appropriate governance and control framework is in operation. The oversight provided by the Audit Committee ensures that: a process is in place for the review of systems and controls, both financial and otherwise; the Society is complying with all relevant aspects of the law, regulation and good practice. The Audit committee consists of three non-executive directors. The Chairman of the Society is not a member of this committee. Particular focus in 2016 was brought to bear on challenging the control framework around expense reserving, investment reconciliation, budgeting and the practical implementation of Solvency 2, including for the latter driving a clear assurance plan for year-end, ensuring a complete and coherent approach between PwC, Deloitte, Milliman and skilled person assurance. Page 18 of 71

19 Risk Committee The Risk Committee primarily provides oversight of the Society s risk management. The Risk Committee also oversees outsourced investment management (including cash management and investment administration) from a risk and capital management point of view. This committee consists of two non-executive directors and two executive directors. Neither the Chairman of the Society nor the CEO is a member of this committee. In addition to the usual programme to examine the Society s risk management, key focus for challenge in 2016 was on the oversight of the risks inherent in Project Norton and also those inherent in the management and reporting of the Society s regulatory solvency position. Fair Member Benefits Committee The role of the Fair Member Benefits Committee is to make recommendations to the Board to ensure that fair outcomes are achieved for all members and policyholders, having regard to their characteristics and needs. This committee consists of three non-executive directors and the CEO. The Chairman of the Society is not a member of this committee. Particular focus in 2016 was brought to bear on examining management s preparations for the FCA s Finalised Guidance in response to its Thematic Review TR16/2 on the fair treatment of long-standing customers in the life insurance sector. Care was also taken to ensure the fairness of the approach to Project Norton and particularly its impact on bonus declarations. Nomination Committee The role of the Nomination Committee is to ensure effective Board deliberation by leading the process for Board appointments and reviewing board and senior management performance annually. This committee comprises of all board directors. Additional focus was brought to bear in 2016 to ensure the competence, fitness and propriety of each of the directors to fulfil not only their duties to members but also their regulatory functions as redefined by SIMR. Remuneration Committee The role of the Remuneration Committee is to consider remuneration policy for the Society s staff and specifically to determine the remuneration and other terms of service of executive directors and senior managers. The executive directors and the Chairman of the Society decide the fees payable to nonexecutive directors. This committee comprises of all the non- executive directors, including the Chairman of the Society. The Senior Independent Director chairs the committee. Particular focus in 2016 sought to carefully align remuneration with members interests in a successful and timely completion of Project Norton. The full terms of reference for the Board and Committees are available on our website at: Integration of Risk Management, Internal Audit, Compliance and Actuarial Function in organisation structure/decision making The Society s Enterprise Risk Management framework covers all these functions, with named individuals with the regulatory SIMR functions as part of their responsibilities. Page 19 of 71

20 Risk management is the responsibility of all functional managers, with the Risk Function providing oversight and reporting to the Risk Committee of the Board. The Chief Risk Officer is a member of the Senior Management Committee, and reviews the Society s risks with the senior team at least monthly, and at every Board meeting. The Compliance function performs its role in a similar way, with the Compliance Officer also being a member of the Senior Management Team. Internal Audit is outsourced to Deloitte LLP, who report directly to the Audit Committee. The Chief Actuary is a member of the Senior Management Team, and has a direct reporting line to the Audit Committee and the main Board. Remuneration policy and practices The remuneration of the Society s Directors and employees is overseen by its Remuneration Committee. The Committee aims to ensure that the Society s various remuneration structures encourage and support alignment between business decisions, individual behaviour, business performance and the Society s values, risk appetite and capital management strategy. The remuneration of the Chairman, Chief Executive, Executive Directors and Senior Managers is set by the Remuneration Committee in accordance with the Society s Remuneration Policy. The primary objective of the Remuneration Policy is to ensure that each Executive Director/Senior Manager is provided with appropriate incentives to encourage exceptional performance and are rewarded for their individual contributions to the long-term success of the Society - in a way that aligns their interests with those of members. The principles underpinning the remuneration of the Society s Executive Directors/Senior Managers are as follows: Remuneration in general should reflect individual performance and support the delivery of benefits and services to members. Remuneration should enable the Society to attract, retain and motivate Executive Directors of the quality required to run the Society effectively while avoiding paying more than is necessary. Reviews of base salary will give due regard to information disclosed by comparable companies to bear a reasonable relationship to the scale of the role as well as to other factors. A performancerelated incentive scheme is in place for Executive Directors and Senior Managers. The Remuneration Committee takes care to ensure that any such bonus payments are appropriate and that the objectives upon which performance-related payments are assessed are closely aligned to the interests of members and take into account the Society s current strategic position. Staff pay is determined according to similar principles to Executive Director/Senior Manager pay, with the exception that staff do not participate in the same bonus scheme; instead, there is a retention bonus scheme, which expires in mid The remuneration of Non Executive Directors is in the form of fees, made up of a basic amount together with additional fees for additional roles such as chairing active committees. Fees are reviewed annually, aiming to set a balance between data from comparable firms in the mutual and private sectors, while remaining sensitive to staff and stakeholder perceptions. Fees are not performance related, nor are they linked to any incentive plans. Remuneration of Non Executive Directors (other than the Chairman) is determined by the Chairman and the Executive Directors. The Chairman s fees are determined by the other members of the Remuneration Committee. Page 20 of 71

21 B.2 Fit and Proper Requirements The Society has documented fitness and propriety procedures in place that outline the checks to be undertaken at both initial selection stages and regular annual assessments. All roles within the Society, including those of the non-executive directors, have individual job descriptions, and a list of experience, qualifications and core competencies required to fulfil the role. Before submitting any approval or notification request in respect of an approved role to the PRA or FCA, the Society carries out a thorough assessment of competence, fitness, and propriety that includes: ensuring that suitable due diligence and interview work is carried out; obtaining satisfactory references, Disclosure and Barring Service ( DBS ) check and credit report; ensuring the PRA and FCA conduct rules, prescribed responsibilities are documented the appropriate compliance with the regulator(s) process for the Approved Person status; ensuring that the annual appraisals and Training & Competence ( T&C ) assessments are completed satisfactorily and are suitably evidenced; the checks are reviewed at least every three years; For employed staff, the Society uses a semi-annual written appraisal process to manage performance and ensure continued suitability for each role (in addition to the regular fitness and propriety checks). Board members are appraised annually through a transparent self-assessment process, with results aggregated and discussed by the whole Board. The Chairman supplements this with individual interviews. Senior Managers The Society s Senior Management Team consists of: the Chief Executive, Chief Risk Officer, Head of Operations, Chief Actuary, Head of Governance and Finance Director. Role Chief Executive RMIS - Senior Management Specific Requirements Requirements - relevant and recent experience of operating at a senior level in financial services - excellent awareness of industry developments - relevant professional qualification - good appreciation of regulatory and other relevant requirements in relation to investment, life assurance and pensions business Head of Governance - Chartered Secretary maintaining the CPD required by the Institute of Chartered Secretaries and Administrators; - understanding of the requirements of the Companies Act and other relevant legislation and also codes of best practice in governance; - understanding of the regulatory and other relevant requirements in relation to investment, life insurance and pension business, as well as working with regulators. Chief Actuary Chief Risk Officer - Qualified Actuary holding a current Chief Actuary certificate, maintaining the CPD required by the Institute and Faculty of Actuaries; - senior level experience managing and optimising capital usage within regulatory solvency standards; - senior level experience of the actuarial management of with-profits business; - strategic awareness of industry, economic and actuarial developments; and - experience of the regulatory environment in the UK for life offices and working with the regulators knowledge and understanding of current risk management tools and techniques applied in the life insurance industry knowledge and understanding of the life insurance industry and wider business environment Page 21 of 71

22 Role Head of Operations RMIS - Senior Management Specific Requirements Requirements - knowledge of life assurance and pensions business, including contracts, Inland Revenue rules - understanding of the effective use of Information Technology in a life assurance company - project sponsorship expertise - relevant business and management experience in a life assurance company - understanding of HR strategy, implementation and operation B.3 Risk Management System The Risk Management Function is principally responsible for the ongoing implementation of the Society s Enterprise Risk Management Framework - the framework in place to identify and effectively manage the risks of the Society and support the achievement of the Society s corporate objectives. The following table describes each element of the Society s Enterprise Risk Management Framework. RMIS - ERM Framework Overview Area Description Risk Strategy Articulates the Society s approach to the taking on and management of risk Risk Culture Determines the values, knowledge, understanding and behaviour with regard to risk Risk Governance The method used for directing and controlling the management of risk Risk Appetite Framework Risk Management Process Risk Classes/ Risk Policies Risk Management Information Stress Testing Framework Capital Management The Society s view on the level and type of risk that it is willing to take on in the pursuit of achieving its strategic objective and business plan Identifies and articulates the key elements of the Risk Management Process. These key elements are described in the table below. Identifies the individual risk classes used by the Society (Credit, Market, Liquidity, Insurance, Operational and Business).The Society maintains a policy for each Risk Class. Each policy documents the Society s approach to the management of the individual risk class. Underpins the Board / Senior Management s (i) understanding of the Society and (ii) decision making capabilities Provides insight into how the Society may be affected by alternative and typically adverse conditions Articulates the Society s approach to the management of capital and the responsibilities of the Capital Management Function Page 22 of 71

23 The following table summarises the processes used to identify, measure, monitor, manage & report the risks of the Society. Process Risk Identification Risk Measurement Description Key elements of the process include: Control Risk Self-Assessment, Risk Management Function Analysis, Senior Management Analysis, Senior Management Committee Review, Risk Committee Review, ORSA Analysis Section C provides details of the risk measures for each risk class identified by the Society Risk Monitoring Senior Management & Board Level Review of the risk measures articulated in Section C for each Risk Class Risk Management The management & mitigation techniques used for each risk class are articulated in Section C Risk Reporting Regular review by Senior Management & the Board of the Society s risk reporting which includes: Risk Profile, ORSA Reporting, Risk Reports, Key Risk Indicators, Loss data Risk Management is the responsibility of all functional managers, with the Risk Function providing oversight and reporting to the Risk Committee of the Board. The Chief Risk Officer is a member of the Senior Management Committee, and reviews the Society s risks with the senior team at least monthly, and at every main Board meeting. The Risk Committee provides oversight of the Society s risk management. The Society operates the three lines of defence model for risk management and oversight as shown on page 4: Line 1 has responsibility for the management of risk across the organisation and comprises executive committees, management and staff Line 2 is responsible for the provision of oversight to ensure the first line is managing risk within the Board-approved Risk Appetite and in line with the Enterprise Risk Management framework; this line consists of the Risk Function and the Senior Management Committee Line 3 is responsible for providing independent assurance on the effectiveness of internal controls and risk management processes across first and second line, and is performed by the Internal and External Auditors reporting to the Audit Committee and the Risk Committee. Consideration of the Society s Risk Appetite Framework is a key component of the Society s decision making process. Material decisions made by the Society are fully considered, documented and evidenced in terms of alignment with the Society s risk appetite. The Society s risk appetite framework articulates the process to be followed if any prospective actions or decisions have the potential to lead to non-alignment with the Society s Risk Appetite. B.4 Own Risk & Solvency Assessment The Society s ORSA framework is the primary means by which the Board and other key stakeholders are provided with a comprehensive understanding of the Society s expected risk profile and capital needs over its business planning period. The analysis, findings and recommendations (i.e. the output) from the ORSA are therefore a key part of the Board s strategic decision making process and the way in which these decisions are implemented by Senior Management. Equally, the Society s current strategic objectives, business plan and target risk profile are also key inputs into the scope and focus of the ORSA. The Society s Board together with Senior Management play a significant and ongoing role in determining the set of scenarios which will be included in the Page 23 of 71