FOR THE YEAR ENDING 31 DECEMBER Pacific Life Re Limited ( Solo ); and Pacific Life Re Holdings Limited ( Group ) 4 May 2018

Transcription

1 FOR THE YEAR ENDING 31 DECEMBER 2017 Pacific Life Re Limited ( Solo ); and Pacific Life Re Holdings Limited ( Group ) 4 May

2 Executive Summary 1 This report is a combined solvency and financial condition report ( SFCR ) in that it covers both Pacific Life Re Limited ( PLRL ) solo and Pacific Life Re Holdings Limited ( PLRH ) group. This report is provided in compliance with: The Solvency II ( SII ) Directive 2009/138/EC (the Directive ), published in December 2009, and any amendments to it by the Omnibus II Directive (16330/13), published in May 2014; The SII Delegated Regulation 2015/35 (the Delegated Regulation ), published in October 2014; European Insurance and Occupational Pensions Authority ( EIOPA ) requirements, including EIOPA CP 13/010: Submission of Information to National Competent Authorities, published in September 2013; and Prudential Regulation Authority ( PRA ) requirements, including PRA Supervisory Statement SS4/13, published in December This SFCR has five sections: A Business and Performance; B System of Governance; C Risk Profile; D Valuation of Technical Provisions, Assets and Other Liabilities; and E Capital Management. 3 PLRL is the only insurance undertaking in the PLRH group. The PLRL and PLRH Boards have approved the submission of a single combined SFCR. Paragraphs or sections of this report that are specific to the PLRH group, in that they are not relevant to PLRL solo, are identified in brown font. 4 PLRL and PLRH set out their system of governance in a system of governance document which is available to all staff and is reviewed and updated annually. The last update was 9 February The PLRL SII basic own funds ( BOF ) value as at 31 December 2017 is 1,015.5m (2016: 1,023.7m), which comprises 173.2m of share capital (2016: 173.2m) and 842.3mm (2016: 850.5m) of reconciliation reserve (within equity), both of which are tier 1 own funds. Ancillary own funds ( AOF ) in the form of unpaid and uncalled shares constitutes a further 100m of regulatory capital funding, as tier 2 own funds. 6 The PLRH group SII BOF value as at 31 December 2017 is 1,016.8m (2016: 1,028.9m ), which comprises 121.1m share capital (2016: 121.1m) and 832.7m reconciliation reserve (within equity) (2016: 848.3m), both of which are tier 1 own funds, and 62.9m subordinated liabilities (2016: 59.5m), which is tier 2 own funds. The aforementioned AOF constitutes a further 100m of regulatory capital funding, as tier 2 own funds. 7 The solvency capital requirement ( SCR ) is calculated using a group partial internal model ( PIM ) approved by the PRA, and using the standard formula ( SF ) for non-pim risks. PLRL has a solvency coverage ratio at 31 December 2017 of 157% (2016: 160%), and the PLRH group has a ratio of 157% (2016: 161%). 2

3 8 Material changes during the year ended 31 December 2017, by reference to the five sections of this SFCR, are summarised as follows: A Business and Performance: A large retail business reinsurance treaty was won by Pacific Life Re Australia (Pty) Limited ( PLRA ) during 2017, with a significant share of the underlying risks retroceded to PLRL. B System of Governance: The only material change over the period was the establishment of a PLRL Board Risk Committee in November In addition, the Board composition has changed with two non-executive members retiring form the Board, including an Independent Non-Executive Director ( INED ), and two new INEDs being appointed to the Board. C Risk Profile: No material changes. D E Valuation of Technical Provisions, Assets and Other Liabilities: No material changes. Capital Management: PLRL s transitional measure for technical provisions ( TMTP ) was recalculated as at 31 December

4 Table of Contents... Executive Summary... 2 Approval by the Board of Directors of PLRL of the SFCR for the financial year ending 31 December Approval by the administrative, management or supervisory body of the SFCR and reporting templates Report of the external independent auditor Section A. Business and Performance (Unaudited) A1. Business 15 A1.1 Name and legal form of the undertaking A1.2 Name and contact details of the supervisory authority A1.3 Name and contact details of the external auditor A1.4 Qualifying holdings in the undertaking A1.5 Solvency II reporting currency A1.6 Reporting period A1.7 Legal structure of the group A1.7.1 Pacific Life Re Limited position within the legal structure of the group A1.7.2 Pacific Life Re Holdings Limited position within the legal structure of the group A1.8 Pacific Life Re Limited lines of business and geographical areas of operation A1.9 Any significant business or other events over the reporting period A1.9.1 Product range changes A1.9.2 Company structure changes A1.9.3 Holding company structure changes A2. Underwriting performance 20 A3. Investment performance 24 A3.1 Information on income and expenses arising from investments over the reporting period A3.2 Information about any gains and losses recognised directly in equity over the reporting period 25 A3.3 Information about any investments in securitisation over the reporting period A4. Performance of other activities 25 A5. Any other information 27 Section B. System of Governance (Unaudited) B1. General information on the system of governance 31 B1.1 Structure of the system of governance B1.2 Overview of the Boards and Committees

5 B1.2.1 Role and duties of the Board of Directors B1.2.2 PLRL Board Committees B1.2.3 Executive responsibility B1.2.4 Enterprise-wide risk management B1.3 Governance changes over the period B1.4 Remuneration policy B1.5 Key functions B1.5.1 The actuarial function B1.5.2 The internal control system B1.5.3 The internal audit function B Pricing function B1.6 Material transactions over the period B Material arrangements in place during the period B Changes over the period B1.7 Adequacy of systems of governance B2. Fit and proper requirements 40 B2.1 Overview B2.2.1 Determining an individual s skills, knowledge and expertise B2.2.2 Determining an individual s fitness and propriety B2.3 Outsourced key functions B Asset liability management, investment policy and liquidity management function B3. Risk management system including own risk and solvency assessment 42 B3.1 Risk management system overview B3.2 Risk governance B3.3 Risk strategy, appetite and policy B3.4 Risk identification and assessment B3.5 Scenario testing and modelling B3.6 Risk reporting and escalation B3.7 Risk management culture B4. Risk management strategies, objectives, processes and reporting 46 B4.1 Insurance risk B4.2 Operational risk B4.3 Group risk

6 B4.4 Credit risk B4.5 Market risk B4.6 Liquidity risk B5. Own risk and solvency assessment 55 B6. Any other information 58 Section C. Risk Profile (Unaudited) C1. Underwriting risk 61 C1.1 Underwriting risk at 31 December C1.2 Change in underwriting risk over the period to 31 December C1.3 Risk appetite and tolerance statement C2. Market risk 64 C2.1 Market risk at 31 December C2.2 Change in the market risk over the period to 31 December C2.3 Risk appetite and tolerance statement C3. Counterparty default risk 66 C3.1 Counterparty default risk at 31 December C3.2 Change in the counterparty default risk over the period to 31 December C3.3 Risk appetite and tolerance statement C4. Liquidity risk 68 C4.1 Risk appetite and tolerance statement C5. Operational risk 69 C5.1 Operational risk at 31 December C5.2 Change in the operational risk over the period to 31 December C5.3 Risk appetite and tolerance statement C6. Outcome of stress testing and sensitivity testing results 70 C7. Other material risks 70 C8. Any other information 72 C8.1 Internal model appropriateness Section D. Valuation for Solvency Purposes D1. Bases, methods and main assumptions used for the valuation for solvency purposes for each material class of assets and the nature of differences with IFRS accounting policies 73 D1.1 Deferred acquisition costs D1.2 Intangible assets D1.3 Investments

7 D1.4 Deposits other than cash equivalents D1.5 Reinsurance recoverables D1.6 Insurance, intermediaries, reinsurance and other receivables D1.7 Cash and cash equivalents D1.8 Any other assets, not elsewhere shown D2. Bases, methods and main assumptions used for the valuation for solvency purposes for each material class of liabilities and the nature of differences with IFRS accounting policies 77 D2.1 Bases, methods and main assumptions used for its valuation of liabilities for solvency purposes D2.1.1 Methodology applied in deriving the technical provisions D2.1.2 Methodology applied in deriving the risk margin D2.1.3 Key assumptions in deriving the technical provisions D2.2 Uncertainty associated with the value of technical provisions D2.3 Differences between the bases, methods and main assumptions used for the valuation for solvency purposes and those used for valuation in financial statements D2.4 Volatility adjustment (Unaudited) D2.5 Transitional measures (Unaudited) D2.6 Other D2.6.1 Recoverables from reinsurance contracts D2.6.2 Changes in assumptions from previous reporting period D3. Bases, methods and main assumptions used for the valuation for solvency purposes for each material class of other liabilities and the nature of differences with IFRS accounting policies 85 D3.1 Provisions other than technical provisions D3.2 Deferred tax liabilities D3.3 Insurance, intermediaries, reinsurance and other payables D3.4 Subordinated liabilities in basic own funds D4. Alternative methods for valuation 88 D4.1 Identification of assets and other liabilities D5. Any other information 89 D5.1 Future management actions D5.2 Assumptions about policyholders behaviour D5.3 Consolidation Section E. Capital Management E1. Own funds 91 7

8 E1.1 Management of the own funds E1.1.1 Objectives E1.1.2 Capital management policy E1.2 Components of own funds E1.2.1 Tier 1 basic own funds E1.2.2 Tier 2 basic own funds E1.2.3 Tier 3 basic own funds E1.3 Analysis of change in the own funds from 31 December 2016 to 31 December E Paid-in ordinary share capital E Reconciliation Reserve E Subordinated liabilities E1.4 Eligible own funds to cover solvency capital requirements E1.5 Eligible own funds to cover the minimum capital requirement E1.6 Analysis of change from IFRS equity to basic own funds E1.6.1 Exclusion of UnderwriteMe Limited and UnderwriteMe Technology Solutions Limited equity 96 E1.6.2 Exclusion of preference share receivable E1.6.3 Deferred acquisition costs E1.6.4 Net technical provisions E1.6.5 Intangible asset, prepayment and deferred income balances recognised in relation to a single reinsurance platform E1.6.6 Taxes E1.7 Transitional arrangements applied to basic own funds E1.8 Ancillary own funds E1.9 Restrictions on own funds E2. Solvency capital requirement and minimum capital requirement (Unaudited) 99 E2.1 Detail of the capital requirements for Pacific Life Re Limited E2.2 Calculation of minimum capital requirement E2.3 Explanation for material changes to solvency capital requirement and minimum capital requirement E2.4 Simplifications and parameters used in deriving the solvency capital requirement E2.5 Disclosure of capital add-ons to solvency capital requirement E3. Use of duration-based equity risk sub-module in the calculation of the solvency capital requirement (Unaudited) 101 E4. Differences between the standard formula and the internal model used (Unaudited) 101 8

9 E5. Non-compliance with the MCR and noncompliance with the SCR 102 E6. Any other information 102 Section F. Appendices F1. Glossary 103 F2. Quantitative Reporting Templates 105 9

10 Approval by the Board of Directors of PLRL of the SFCR for the financial year ending 31 December 2017 We certify that: The SFCR has been properly prepared in all material respects in accordance with the PRA rules and SII Regulations; and We are satisfied that: a) Throughout the financial year ending 31 December 2017, the insurer has complied in all material respects with the requirements of the PRA rules and SII Regulations as applicable to the insurer; and b) It is reasonable to believe that, at the date of the publication of the SFCR, the insurer has continued so to comply, and will continue so to comply in future. Approval by the administrative, management or supervisory body of the SFCR and reporting templates Dave Howell Director and Chief Executive Officer Date: 26 April

11 Report of the external independent auditor to the Directors of Pacific Life Re Holdings Limited and Pacific Life Re Limited (together the Group ) 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 Group Solvency and Financial Condition Report ( SFCR ) Opinion Except as stated below, 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 Group SFCR of the Company as at 31 December 2017, ( the Narrative Disclosures subject to audit ); and Group templates S , S , S , S ( the Group Templates subject to audit ) Solo Templates S , S , S , S and S in respect of Pacific Life Re Limited ( the Solo Templates subject to audit ). The Narrative Disclosures subject to audit and the Group Templates and Solo Templates subject to audit are collectively referred to as the relevant elements of the Group SFCR. 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: Information contained within the relevant elements of the Group SFCR set out above which are, or derive from the Solvency Capital Requirement, as identified in the Appendix to this report; The Executive Summary, Business and performance, System of governance and Risk profile elements of the Group SFCR; Group templates S , S , S ; Solo templates S and S ; Information calculated in accordance with the previous regime used in the calculation of the transitional measures on technical provisions, and as a consequence all information relating to the transitional measures 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 Group SFCR ( the Responsibility Statement ); Information which pertains to an undertaking that is not a Solvency II undertaking and has been prepared in accordance with PRA rules other than those implementing the Solvency II Directive or in accordance with an EU instrument other than the Solvency II regulations ( the sectoral information ). To the extent the information subject to audit in the relevant elements of the Group SFCR 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 Group SFCR 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, as modified by relevant supervisory modifications, and as supplemented by supervisory approvals and determinations. 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, and applicable law. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the relevant elements of the Group 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 Group SFCR in the UK, including the FRC s Ethical Standard as applied to public interest entities, and we have fulfilled our other 11

12 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. Emphasis of Matter Basis of Accounting We draw attention to the Valuation for solvency purposes and/or Capital Management sections of the Group SFCR, which describe the basis of accounting. The Group SFCR 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 Group SFCR is required to be published, and intended users include but are not limited to the PRA. As a result, the Group SFCR may not be suitable for another purpose. Our opinion is not modified in respect of these matters. Conclusions relating to going concern We are required by ISAs (UK) to report in respect of the following matters where: the Directors use of the going concern basis of accounting in the preparation of the Group SFCR is not appropriate; or the Directors have not disclosed in the Group 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 Group SFCR is authorised for issue. We have nothing to report in relation to these matters. Other Information The Directors are responsible for the Other Information. Our opinion on the relevant elements of the Group SFCR does not cover the Other Information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the Group SFCR, 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 Group SFCR, 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 Group SFCR 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 relation to these matters. Responsibilities of Directors for the Group Solvency and Financial Condition Report The Directors are responsible for the preparation of the Group SFCR in accordance with the financial reporting provisions of the PRA rules and Solvency II regulations which have been modified by the modifications, and supplemented by the approvals and determinations made by the PRA under section 138A of FSMA, the PRA Rules and Solvency II regulations on which they are based. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of a Group SFCR that is free from material misstatement, whether due to fraud or error. Auditor s Responsibilities for the Audit of the relevant elements of the Group Solvency and Financial Condition Report It is our responsibility to form an independent opinion as to whether the relevant elements of the Group SFCR are prepared, in all material respects, with financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based. Our objectives are to obtain reasonable assurance about whether the relevant elements of the Group SFCR are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the 12

13 aggregate, they could reasonably be expected to influence the decision making or the judgement of the users taken on the basis of the Group SFCR. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at The same responsibilities apply to the audit of the Group SFCR. Use of our Report This report is made solely to the Directors of Pacific Life Re Holdings Limited and Pacific Life Re Limited in accordance with Rule 4.1 (2) of the External Audit Chapter of the PRA Rulebook for Solvency II firms. We acknowledge that our report will be provided to the PRA for the use of the PRA solely for the purposes set down by statute and the PRA s rules. Our audit work has been undertaken so that we might state to the insurer s Directors those matters we are required to state to them in an auditor s report on the relevant elements of the Group SFCR and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the PRA, for our audit work, for this report or for the opinions we have formed. Other Matter The Company has authority to calculate its Group Solvency Capital Requirement using a partial internal model ( the Model ) approved by the Prudential Regulation Authority in accordance with the Solvency II Regulations. In forming our opinion (and in accordance with PRA Rules), we are not required to audit the inputs to, design of, operating effectiveness of and outputs from the Model, or whether the Model is being applied in accordance with the Company s application or approval order. Report on Other Legal and Regulatory Requirements Sectoral Information In our opinion, in accordance with Rule 4.2 of the External Audit Chapter of the PRA Rulebook, the sectoral information has been properly compiled in accordance with the PRA rules and EU instruments relating to that undertaking from information provided by members of the group and the relevant insurance group undertaking. Other Information In accordance with Rule 4.1 (3) of the External Audit Chapter of the PRA Rulebook for Solvency II firms we are also required to consider whether the Other Information is materially inconsistent with our knowledge obtained in the audit of Pacific Life Re Holdings Limited s statutory financial statements. 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. Mark McQueen Mark McQueen ACA (Senior Statutory Auditor) For and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 4 May

14 Appendix relevant elements of the Group Solvency and Financial Condition Report that are not subject to audit Group internal model The relevant elements of the Group SFCR that are not subject to audit comprise: The following elements of Group template S : o Row R0550: Technical provisions non-life (excluding health) risk margin o Row R0590: Technical provisions health (similar to non-life) risk margin o Row R0640: Technical provisions health (similar to life) risk margin o Row R0680: Technical provisions life (excluding health and index-linked and unit-linked) risk margin o Row R0720: Technical provisions Index-linked and unit-linked risk margin The following elements of Group and Solo templates S o Column C0030 Impact of transitional measure on technical provisions o o Row R0010 Technical provisions Row R0090 Solvency Capital Requirement The following elements of Group and Solo templates S o Row R0020: Non-available called but not paid in ordinary share capital at group level o Row R0060: Non-available subordinated mutual member accounts at group level o Row R0080: Non-available surplus at group level o Row R0100: Non-available preference shares at group level o Row R0120: Non-available share premium account related to preference shares at group level o Row R0150: Non-available subordinated liabilities at group level o Row R0170: The amount equal to the value of net deferred tax assets not available at the group level o Row R0190: Non-available own funds related to other own funds items approved by supervisory authority o Row R0210: Non-available minority interests at group level o Row R0380: Non-available ancillary own funds at group level o Rows R0410 to R0440 Own funds of other financial sectors o Row R0680: Group SCR o Row R0740: Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds o Row R0750: Other non-available own funds The following elements of Solo template S o Row R0310: SCR Elements of the Narrative Disclosures subject to audit identified as unaudited. 14

15 Section A. Business and Performance (Unaudited) A1. Business A1.1 Name and legal form of the undertaking 9 The "Undertakings are as follows: The solo entity for SII purposes ( PLRL solo ; Solo ) is PLRL, a company registered in England and Wales; and The group entity for SII purposes ( PLRH group ; Group ) is the group of companies whose parent is PLRH, a company registered in England and Wales, but excluding UnderwriteMe Limited ( UM ) and excluding the direct and indirect subsidiaries of UM. 10 Paragraphs or sections of this report that are specific to the PLRH group, in that they are not relevant to PLRL solo, are identified in brown font. A1.2 Name and contact details of the supervisory authority Prudential Regulation Authority Financial Conduct Authority 20 Moorgate 25 The North Colonnade London London EC2R 6DA E14 5HS A1.3 Name and contact details of the external auditor Deloitte LLP Chartered Accountants and Statutory Auditor Hill House 1 Little New Street London EC4A 3TR A1.4 Qualifying holdings in the undertaking % of the voting rights of PLRL were held by its immediate parent company, Pacific Life Re Services Limited ( PLRS ), as at 31 December The ultimate parent company of PLRL is Pacific Mutual Holding Company ( PMHC ) % of the voting rights of PLRH were held by its immediate parent company, Pacific Life Re Holdings LLC ( PLRH LLC ), as at 31 December The ultimate parent company of PLRH is PMHC. A1.5 Solvency II reporting currency 13 The Undertakings report on a SII basis in GBP. 15

16 A1.6 Reporting period 14 This report covers the financial position as at 31 December This is analysed by reference to the previously reported position, as at 31 December A1.7 Legal structure of the group A1.7.1 Pacific Life Re Limited position within the legal structure of the group 15 The corporate structure of the United Kingdom ( UK ) operating entities, including their United States ( US ) intermediate parent company, is set out below: Pacific Mutual Holding Company ( PMHC ) US ultimate parent company Pacific LifeCorp ( PLC ) US intermediate parent company Pacific Life Re Holdings LLC ( PLRH LLC ) US immediate parent company Pacific Life Re Holdings Limited ( PLRH ) Solvency II ultimate EEA holding company; non-regulated Solvency II reporting Pacific Life Re Services Limited ( PLRS ) Service company; non-regulated Pacific Life Re Limited ( PLRL ) Solvency II solo entity; Solvency I reported returns UnderwriteMe Limited ( UM ) Negligible interest for objective of group supervision UnderwriteMe Technology Solutions Limited ( UMTS ) Negligible interest for objective of group supervision UnderwriteMe Australia (Pty) Limited ( UMA ) Negligible interest for objective of group supervision Figure 1 Corporate structure chart. 16

17 Pacific Life Re Holdings Limited (ultimate EEA holding company for Solvency II purposes) 16 PLRH is the holding company for the UK group. The primary function of PLRH is to act as a holding company and to provide financing to its subsidiary undertakings. All financing to PLRH is provided in the form of common equity, with the exception of subordinated debt sourced from its immediate parent company, PLRH LLC. Pacific Life Re Services Limited 17 PLRS is an intermediate parent company of PLRL. PLRS employs the staff engaged in the PLRL UK operations and provides management services to other entities in the Pacific Life Re ( PL Re ) Division (the Division ), including its operations in Australia, Asia and North America. Pacific Life Re Limited (solo company for Solvency II purposes) 18 PLRL is a reinsurance company operating in the UK and across selected markets through its Singapore, South Korea and Canada branches and through its representative offices in Japan and China. PLRL provides retrocession services to its affiliate in Australia. PLRL carries out an annual Own Risk Solvency Assessment ( ORSA ) which considers all risks that it faces, including those arising from membership of a group. A1.7.2 Pacific Life Re Holdings Limited position within the legal structure of the group 19 The corporate structure of the UK operating entities, including their US intermediate parent company, is set out in section A The financial data included in the PLRH group for SII reporting purposes is determined in accordance with the following waivers: Group supervision: PLRS has a majority shareholding in another subsidiary UM. UM and its subsidiaries are excluded from the PLRH group for SII reporting purposes via a waiver granted by the PRA. The waiver was granted on the grounds that UM and its subsidiaries are of negligible interest with respect to the objective of group supervision and that the necessary changes to UM s governance and risk management structure, and its inclusion in group solvency calculations, would be disproportionate. Other methods: The ultimate parent company of PLRH is PMHC. The PRA has granted a waiver for other methods of group supervision above the level of the PLRH group and therefore no further group SII submissions are being made. A1.8 Pacific Life Re Limited lines of business and geographical areas of operation 21 PLRL is one of the main reinsurance carriers participating in the Division. PLRL writes life reinsurance business in the UK, Ireland, Asia, Australia and Canada. 22 The lines of business and geographical areas of operation for PLRH are the same as those of PLRL. 17

18 Europe 23 The Europe business consists primarily of UK and Irish protection and UK longevity business. The protection business comprises mortality, critical illness and income protection business. The longevity business comprises both annuity and longevity swap business. 24 There has been no material change in longevity swap business in the year. PLRL has written one new longevity treaty during The protection business has shown steady growth through increased volumes from existing and new treaties. 25 Longevity business is ceded on a 70% quota share basis to its affiliate PLIC, and three specific treaties are partially retroceded to a third party. Mortality business is ceded to a retrocession pool comprising affiliate and third party retrocessionnaires in order to maintain the PLRL 3m per life retention, although the volumes ceded are not material. Asia 26 The main line of business in Asia is critical illness. The critical illness products in Singapore and South Korea are similar to those in the UK, though frequently focussing on cancer benefits. 27 PLRL Japanese marketing efforts focus primarily on direct marketing business which involves the cedant marketing life and health products directly to the consumer. This line of business makes up the bulk of both the inforce and new business production for Japan. This exposes PLRL to morbidity risks and is also associated with higher exposure to lapse risk due to participation in the upfront marketing costs associated with this line of business. 28 The quality of data available for setting pricing and valuation assumptions is more limited in Asia than in the UK. However, the data is adequate and the greater range of products and territories means that the risks are more diversified. Australia 29 PLRL accepts retrocession of group protection business from its affiliate Pacific Life Re (Australia) Pty Limited ( PLRA ). This covers principally mortality and total and permanent disability lump sum benefits as well as income protection. The Australian premiums have increased in 2017 due to a large retail business reinsurance treaty won by PLRA during 2017, with a significant share of the underlying risks retroceded to PLRL. Retro 30 PLRL writes retrocession business through its Canadian branch, with a small number of treaties novated from another Pacific Life group company in the year. 18

19 A1.9 Any significant business or other events over the reporting period A1.9.1 Product range changes 30 There were no significant new products launched, nor product design changes made, during the year ending 31 December A1.9.2 Company structure changes 31 PLRL has established a representative office in China in A1.9.3 Holding company structure changes 32 There have been no changes to the holding company structure. 19

20 A2. Underwriting performance 33 The underwriting performance of PLRL by material line of business is presented below on an international financial reporting standards ( IFRS ) basis, and a reconciliation to the profit for the year in the IFRS financial statements of PLRL and PLRH is provided on the next page Protection Longevity Total Protection Longevity Total Premiums Gross 378,981 64, , , , ,185 Reinsurers' share * (3,983) (45,154) (49,137) (2,607) (93,304) (95,911) Net 374,998 19, , ,485 39, ,274 Claims incurred Gross (193,351) (15,486) (208,837) (182,389) (16,378) (198,767) Reinsurers' share 1,037 10,493 11, ,746 12,232 Net (192,314) (4,993) (197,307) (181,903) (4,632) (186,535) Change in technical provisions Gross (113,856) 123,730 9,874 (959) (119,358) (120,317) Reinsurers' share 568 (86,412) (85,844) (39,669) 111,442 71,773 Net (113,288) 37,318 (75,970) (40,628) (7,916) (48,544) Acquisition costs Acquisition commission (98,617) - (98,617) (43,364) - (43,364) Reinsurance commission - 8,271 8, ,328 8,330 Other acquisition costs (14,884) (2,527) (17,411) (8,444) (3,928) (12,372) Net (113,501) 5,744 (107,757) (51,806) 4,400 (47,406) Underwriting result (44,106) 57,250 13,144 9,148 31,641 40,789 Figure 2 Summary of underwriting performance over the reporting period by line of business (PLRL and Group numbers are identical). SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 20

21 PLRL Group PLRL Group Underwriting result, per the preceding table 13,124 13,124 40,789 40,789 Net investment income 44,032 44, , ,115 Net realised losses on embedded derivative (3,669) (3,669) (15,590) (15,590) Other operating income 2,129 14,580 1,960 10,708 Foreign currency gains 4,239 4,356 1,578 1,183 Reinsurers share of interest on custody assets (8,200) (8,200) (8,859) (8,859) Other administrative expenses (36,719) (58,078) (33,442) (47,534) Interest payable and similar charges (283) (3,780) (1,264) (4,638) Fair value movement on financial liability Tax (4,234) (2,749) (17,304) (14,963) Profit for the year, per the PLRL financial statements 10,419 68,981 (Loss)/Profit for the year, per the PLRH financial statements (224) 62,219 Figure 3 Reconciliation of underwriting result to the profit/(loss) for the year in the IFRS financial statements. * Premiums ceded to reinsurers for the year ended 31 December 2016 include termination payments totalling 70m ( 49m of which was ceded to PLIC) that were recognised on the termination of two longevity treaties. The termination payments are classified as gross other insurance income in the IFRS financial statements of PLRL and PLRH. 34 The underwriting performance of PLRL by material line of business, on an IFRS basis as above but then adjusted for significant one-off items, is presented on the next page. The adjustments to 2016 are to remove the aforementioned termination payments and to reverse the associated impact on reserves. SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 21

22 Premiums Protection Longevity Total Protection Longevity Total Gross 378,981 64, , ,092 63, ,220 Reinsurers' share (3,983) (45,154) (49,137) (2,607) (44,328) (46,935) Net 374,998 19, , ,485 18, ,285 Claims incurred Gross (193,351) (15,486) (208,837) (182,389) (16,378) (198,767) Reinsurers' share 1,037 10,493 11, ,746 12,232 Net (192,314) (4,993) (197,307) (181,903) (4,632) (186,535) Change in technical provisions Gross (113,856) 123,730 9,874 (959) (17,460) (18,419) Reinsurers' share 568 (86,412) (85,844) (39,669) 39,486 (183) Net (113,288) 37,318 (75,970) (40,628) 22,026 (18,602) Acquisition costs Acquisition commission (98,617) - (98,617) (43,364) - (43,364) Reinsurance commission - 8,271 8, ,328 8,330 Other acquisition costs (14,884) (2,527) (17,411) (8,444) (3,928) (12,372) Net (113,501) 5,744 (107,757) (51,806) 4,400 (47,406) Underwriting result (44,106) 57,250 13,144 9,148 40,594 49,742 Figure 4 Adjusted summary of underwriting performance over the reporting period by line of business (PLRL and Group numbers are identical). 35 The main drivers of underwriting performance for the year ended 31 December 2017 were otherwise as follows: Premiums from new protection treaties entered into during the year and a steady increase in premiums from new business written on existing treaties; An increase in reserves due to an update to demographic assumptions following a basis review process, offset by a revision of the Provision for Adverse Deviation (PAD), particularly for mortality and critical illness; and SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 22

23 An increase in acquisition commissions due to higher commissions across multiple treaties during The underwriting performance of PLRL by geographical area is presented below on an IFRS basis. Premiums Europe Asia Australia Other * Total Europe Asia Australia Other * Total Gross 313,616 50,569 76,376 2, , ,704 37,764 43, ,185 Reinsurers' share (48,037) - - (1,100) (49,137) (95,857) - - (54) (95,911) Net 265,579 50,569 76,376 1, , ,847 37,764 43, ,274 Claims incurred Gross (163,536) (20,973) (22,920) (1,408) (208,837) (170,381) (17,963) (10,638) 215 (198,767) Reinsurers' share 10, ,530 12, ,232 Net (152,572) (20,973 ) (22,920) (842) (197,307) (158,278) (17,963) (10,638) 344 (186,535) Changes in technical provisions Gross 5,645 39,435 (40,108) 4,902 9,874 (110,874) 12,729 (31,098) 8,926 (120,317) Reinsurers' share (86,113) (85,844 ) 71, ,773 Net (80,468) 39,435 (40,108) 5,171 (75,970 ) (39,573) 12,729 (31,098) 9,398 (48,544) Commissions Acquisition commission (54,024) (22,996) (21,359) (238 ) (98,617) (24,923) (11,831) (6,537) (73) (43,364) Reinsurance commission 8, (3) 8,271 8, ,330 Other acquisition costs (12,317) (1,986) (3,000) (108) (17,411) (9,938) (1,114) (1,297) (23) (12,372) Net (58,067) (24,982) (24,359) (349) (107,757) (26,533) (12,945) (7,834) (94) (47,406) Underwriting result (25,528) 44,049 (11,011) 5,634 13,144 16,463 19,585 (5,635) 10,376 40,789 Figure 5 Summary of underwriting performance over the reporting period by geographical area (PLRL and Group numbers are identical). * The Other geographical area comprises the Retro business unit, run-off and general lines of business, which are not material to PLRL and have been aggregated. SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 23

24 A3. Investment performance A3.1 Information on income and expenses arising from investments over the reporting period 37 Income and expenses arising from investments over the reporting period are shown below: PLRL Group PLRL Group Investment income and expenses Investment income Gains/(losses) on fixed income securities Fixed income securities 27,214 27,280 26,777 26,777 Cash (24) (9) Total 27,190 27,271 27,530 27,533 Realised gains 11,289 11,289 50,820 50,820 Realised losses (1,028) (1,028) (1,005) (1,005) Net unrealised gains 7,714 7,714 25,375 25,375 Total 17,975 17,975 75,190 75,190 Investment expenses (1,133) (1,162) (1,607) (1,607) Total net investment income 44,032 44, , ,113 Figure 6 Summary of change in income and expenses arising from investments over the reporting period. 38 PLRL earned investment income on fixed income securities of 27.2m during the year ended 31 December 2017, which is 0.5m higher than the investment income of 26.8m earned during the year ended 31 December PLRL made realised gains and losses on fixed income securities of 11.3m and (1)m during the year ended 31 December 2017, whereas it made realised gains and losses of 50.8m and (1)m during the year ended 31 December The higher net realised gains in 2016 primarily resulted from the sale of UK treasury bonds as part of an exercise undertaken by PLRL to lengthen the duration of its asset portfolio. 40 PLRL made net unrealised gains on fixed income securities of 7.7m during the year ended 31 December 2017, whereas it made net unrealised gains of 25.4m during the year ended 31 December During 2016 there was a decrease in government bond yields and narrower credit spreads. 41 PLRS and PLRH hold cash balances which are not included within PLRL solo, resulting in the additional cash investment during the year ended 31 December 2017 and the year ended 31 December

25 A3.2 Information about any gains and losses recognised directly in equity over the reporting period 42 There were no investment gains or losses recognised directly in equity during the reporting period. A3.3 Information about any investments in securitisation over the reporting period 43 PLRL held 1.2m US$-denominated securitised assets as at 31 December 2017 (2016: 1.5m). A4. Performance of other activities 44 Material income and expenses during the year ending 31 December 2017, other than those discussed elsewhere in this report, are presented below on an IFRS basis. Net realised losses on embedded derivative Net realised losses on embedded derivative (3,669) (15,590) Figure 7 Summary of net realised losses on embedded derivative over the reporting period (PLRL and Group numbers are identical). 45 PLRL has in place a retrocession agreement with PLIC as retrocessionaire. There is one block of annuity business and two blocks of longevity swap business for which the retrocession gives PLIC a security interest in the underlying custody assets held by PLRL. The custody assets are measured at fair value and the return on them is subject to risk exposures, such as credit risk on the financial investments, that are not closely related to the PLIC credit risk exposure to PLRL. PLIC and PLRL therefore recognise corresponding embedded derivative balances, measured at fair value in accordance with Level 2 of the fair value hierarchy under IFRS 13 Fair Value Measurement. These balances are accounted for as a deposit from reinsurer for SII purposes. 46 The initial embedded derivative recognised by PLRL in prior years was nil, but it has subsequently increased and decreased in accordance with decreases and increases, respectively, in the fair value of the custody assets. 25

26 Operating expenses (other than acquisition commission, other acquisition costs and reinsurance commission) PLRL Group PLRL Group Operating expenses (other than acquisition commission, other acquisition costs and reinsurance commission) Reinsurers share of interest on custody assets 8,200 8,200 8,859 8,859 Other administrative expenses 36,719 58,078 33,442 47,534 Total 44,919 66,278 42,301 56,393 Figure 8 Summary of change in operating expenses over the reporting period. 47 The reinsurers share of interest on custody assets of 8.2m (2016: 8.9m) arises from the collateral provisions of a retrocession to PLIC and is the PLIC share of the investment income that PLRL receives on the custody assets that PLRL holds in relation to two longevity treaties and one annuity treaty with a third party. 48 Other administrative expenses include employee costs, property costs and depreciation of assets, or recharges thereof. The PLRH group costs of 58.1m (2016: 47.5m) are greater than the PLRL costs of 36.7m (2016: 33.4m) as a result of costs incurred in PLRS that are then recharged to PLRA and Pacific Services Canada Limited ( PSCL ), both of which are not consolidated within PLRH, and as a result of costs incurred in UM and UMTS. The 11.9m (2016: 6.7m) of UM and UMTS costs are included in the consolidated financial statements of PLRH but are not included in the PLRH group when reporting under SII (see section A1.7.2). Tax charged to the Statement of Comprehensive Income PLRL Group PLRL Group Current tax charge 4,789 3,079 18,045 14,686 Deferred tax (credit)/charge (555) (330) (741) 277 Total tax charge 4,234 2,749 17,304 14,963 Figure 9 Summary of tax charge in the reporting period. 49 Further information about the tax charged to the Statement of Comprehensive Income is included in note 8 in the financial statements of PLRL and PLRH. 26

27 A5. Any other information Intragroup transactions 50 Material intragroup transactions during the year ending 31 December 2017 are presented below and on the next page on an IFRS basis. The PLRL table shows material transactions between PLRL and members of the Pacific Life group. The Group table shows material transactions between members of the SII group (comprising PLRH, PLRL and PLRS) and members of the Pacific Life group that are not in the SII group. Management services Amounts due from/(to) intragroup counterparty at 1 January 2017 Amount of transactions for the period PLRL Settlements paid/ (received) during the period Foreign currency gains/ (losses) Amounts due from/(to) intragroup counterparty at 31 December Pacific Life Re (Australia) Pty Limited (1,399) 1, Pacific Life Re Services Limited (8,784) (40,405) 49,190 (1) - Pacific Services Canada Limited (41) (482) UnderwriteMe Technology Solutions Limited Retrocession arrangements (300) (4) - Pacific Life Insurance Company (42,757) (123,013) 110,122 (130) (55,778)* Pacific Life Re (Australia) Pty Limited 500 (42,387) (28,664) 564 (69,987) Pacific Life Reinsurance (Barbados) Limited Group relief (24) (842) 1, Pacific Life Re Holdings Limited (1,070) (1,070) Pacific Life Re Services Limited (256) (201) UnderwriteMe Limited (541) (391) (386) UnderwriteMe Technology Solutions Limited (1,805) (1,475) Total intragroup transactions (56,150) (205,241) 132, (128,627) 27

28 Management services Amounts due from/(to) intragroup counterparty at 1 January 2017 Amount of transactions for the period Group Settlements paid/ (received) during the period Foreign currency gains/ (losses) Amounts due from/(to) intragroup counterparty at 31 December Pacific Life Insurance Company 7 (818) (533) Pacific Life Re (Australia) Pty Limited (1,075) 6,221 (5,398) 4 (248) Pacific Life Reinsurance (Barbados) Limited 151 1,033 (1,184) - - Pacific Services Canada Limited (420) 3,646 (3,370) UnderwriteMe Limited (769) UnderwriteMe Technology Solutions Limited Retrocession arrangements (238) (4) 344 Pacific Life Insurance Company (42,757) (123,013) 110,122 (130) (55,778)* Pacific Life Re (Australia) Pty Limited 500 (42,387) (28,664) 564 (69,987) Pacific Life Reinsurance (Barbados) Limited Financing (24) (842) 1, Pacific Life Re Holdings LLC (59,495) (3,497) - - (69,992) Preference shares UnderwriteMe Limited 30,415 14, ,696 Group relief UnderwriteMe Limited (541) (386) UnderwriteMe Technology Solutions Limited (1,805) (1,475) Total intragroup transactions (74,695) (143,920) 72, (145,617) Figure 10 Summary of intragroup transactions in the reporting period. * The balance due to PLIC consists of reinsurers share of technical provisions of 149.9m (2016: 228.3m), net deposits due to PLIC of 184.7m (2016: 203.3m) reinsurance premiums, claims and commissions payable of 14.0m (2016: 14.7m), and guarantee fee payable of 7.0m (2016: 4.1m). Management services: 51 PLRL receives management services from PLRS and PSCL. PLRS also provides management services to PSCL and PLRA, and it receives management services from PLIC and PLRA. 52 PLRL entered into a cost contribution agreement on 22 December 2015, with an effective date of 31 December 2015, as a result of which it paid and will pay contributions to the costs PLRS has incurred and will incur in the development and implementation of a global reinsurance operations system platform for use within the Division for the benefit of PLRL and other contributing group companies. The other contributing group companies, which are not part of the SII Group (see section A1.7.2), are PLIC, PLRA and Pacific Life Reinsurance (Barbados) Limited ( PLRB ). 28

29 Retrocession arrangements: 53 Transactions with PLIC, a stock life insurance company domiciled in the state of Nebraska, USA, are in respect of retrocession contracts for certain reinsurance business accepted by PLRL. The intragroup balance consists of accrued premiums and commissions, reinsurers share of long term provisions and claims outstanding, deposits due to and from PLIC, guarantee fees charged to PLRL by PLIC, and outstanding balances on the quarterly PLIC statement. 54 The aforementioned guarantee fees comprise: Guarantee fees to Pacific Life Re Limited and Pacific LifeCorp: Pacific LifeCorp ( PLC ) provides a first guarantee for the performance of certain obligations of the PLRL, in accordance with a guarantee agreement dated 29 March If PLRL is unable to meet its current obligations under reinsurance agreements, PLC shall guarantee payment. On 29 March 2010, PLIC entered into an agreement with PLRL to guarantee the performance of reinsurance obligations of PLRL. PLRL pays fees to PLIC and PLC for their respective guarantees. The PLIC guarantee is secondary to the guarantee provided by PLC and would only be triggered in the event of non-performance by PLC. Ancillary own funds and related guarantee: On 17 December 2015, PLRL issued and allotted 100,000,000 uncalled and unpaid ordinary shares (the New Shares ) of 1 each to PLC as AOF for SII regulatory purposes. PLRL is permitted to make a call on demand upon PLC for the full 100m in one call or, alternatively, an unlimited number of calls for lower amounts that in aggregate do not exceed 100m. PLC s payment obligations in respect of any calls made by PLRL are supported by a guarantee given by PLIC. From 1 January 2016, PLRL paid a commitment fee to PLIC. 55 PLRL provides retrocession cover to PLRA for Australian lives business. 56 Transactions with PLRB, a subsidiary of PLC, relate to retrocession reinsurance premiums incurred net of claims recovered during the year by PLRL in the course of normal business. Financing: 57 All of the PLRL share capital is held by PLRS (other than uncalled and unpaid shares issued to PLC as AOF), a company registered in England and Wales. All of the PLRH share capital is held by PLRH LLC, a company registered in Delaware, USA, which has also provided loan financing to PLRH. Preference shares: 58 UM has issued preference share capital to PLRS, the redemption value of which increases at a rate of 16% per annum. Group relief: 59 When unused tax losses are transferred to PLRL from another group company, PLRL makes a payment in cash that is equal to the amount of the tax losses surrendered. 29

30 Other relevant information 60 Other relevant information regarding the business and performance of the Undertakings, to the extent not already covered elsewhere in this report, is as follows: Future developments: PLRL s strategy is to continue to grow its in-force portfolio by writing new business which meets its internal return requirements whilst maintaining an appropriate level of diversification by risk category, underpinned by sufficient capital in accordance with SII regulatory requirements. In particular, PLRL intends to introduce a single operations platform across its Business Units ( BUs ), implementation of which has so far been completed in Australia in 2016 and Asia in 2017, and is to be completed by the rest of the Division during Equity reconciliations: Figure 11 below provides a reconciliation between (a) equity in the IFRS separate financial statements of PLRL, and (b) equity in the IFRS consolidated financial statements of PLRH. Figure 35 in section E1.6 provides: - A reconciliation between (a) equity in the IFRS separate financial statements of PLRL, and (b) the SII excess of assets over liabilities of PLRL; and - A reconciliation between (a) the equity in the IFRS consolidated financial statements of PLRH, and (b) the SII excess of assets over liabilities of PLRH group (SII group) Equity in the IFRS separate financial statements of PLRL 430, ,622 Add: Equity in the IFRS separate financial statements of the other group entities Equity in the IFRS separate financial statements of PLRH 412, ,970 Equity in the IFRS separate financial statements of PLRS 474, ,194 Equity in the IFRS separate financial statements of UM (32,270) (18,400) Equity in the IFRS separate financial statements of UMTS 10,588 8,844 Equity in the IFRS separate financial statements of UMA Less: Eliminations Investment that PLRH has in PLRS (474,235) (465,394) Investment that PLRS has in PLRL (430,056) (427,622) Investment that PLRS has in UM - - Investment that UM has in UMTS (10,588) (8,844) Investment that UM has in UMA (649) (896) Other (not material) (85) (49) Equity in the IFRS consolidated financial statements of PLRH 379, ,521 Figure 11 Reconciliation between equity in the IFRS separate financial statements of PLRL and equity in the IFRS consolidated financial statements of PLRH. 30

31 Section B. System of Governance (Unaudited) B1. General information on the system of governance 61 PLRL and PLRH set out their system of governance in a system of governance document which is available to all staff and is reviewed and updated annually. The last update was 9 February B1.1 Structure of the system of governance 62 The system of governance document describes the main elements of the system of governance. The document applies to PLRL and PLRH, including all of the PLRL branches. The Boards of PLRL and PLRH are each responsible for the overall oversight of PLRL and PLRH (respectively), and each Board has the powers, authorities and duties vested in it by, and pursuant to, the relevant laws of England and Wales and its articles of association. Each Board has approved a list of certain matters which are reserved for the decision of that Board (see section B.1.2.1). Matters which are not reserved are delegated to the Chief Executive Officer ( CEO ) who, with the management team, manages PLRL and PLRH business on a day to day basis. The PLRL Board has also delegated authority and certain functions to various committees (see section B.1.2.2). B1.2 Overview of the Boards and Committees 63 Collectively the Board is expected to provide challenge to, and scrutiny of, the CEO and management. The role of the Board is: To set strategy, to ensure that the key goals in that strategy are within the agreed risk appetite and to oversee executive implementation of that strategy; To articulate and maintain an appropriate culture to follow in pursuit of its business goals; and To set risk appetite which is used by the Board to monitor and control actual and prospective risks and to inform key business decisions. B1.2.1 Role and duties of the Board of Directors 64 The Chair of the Board is responsible for the operation, leadership and governance of the Board, ensuring its effectiveness and setting its agenda. The CEO is responsible for the management of PLRL and PLRH businesses, for the implementation of strategy and for ensuring the appropriate apportionment of all significant responsibilities among the executive committee ( ExCo ) and all other staff engaged in PLRL and PLRH businesses. The Non- Executive Directors ( NEDs ) all have industry relevant experience and are responsible for providing guidance to and challenging the executive. The responsibilities of the Directors, including any prescribed responsibilities under the Senior Insurance Managers regime, are agreed with each Director and recorded. 31

32 65 Certain matters require approval of the Boards, either by law or inclusion in a separate list of matters reserved to the Boards. These include, for example: Approving any material changes to risk policies and risk strategy; Major changes to the corporate structure; Approving annual accounts; Approving the ORSA; Approving major changes to the PLRL internal model in accordance with the PIM governance and change policy; Material changes to the AOF or making a call under the AOF (PLRL only); and Approving large reinsurance transactions 66 Members of the PLRL Board who served during the year ended 31 December 2017 were as follows: Name David Howell Duncan Hayward Jerry Staffurth George Scott Mary Ann Brown Gary Falde John Cliff Clare Bousfield Simon Machell John Lister Toby Strauss Role Executive Director Executive Director Executive Director Executive Director Non-Executive Chairperson Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Date of appointment 22/05/ /10/ /01/ /01/ /08/2008 Retired from Board 31/12/ /08/ /03/2011 Retired from Board 31/12/ /08/ /08/ /06/ /06/2017 Senior Insurance Manager Function ( SIMF ) Chief Executive Function (SIMF1) Chief Finance Function (SIMF2) Chief Actuary (SIMF20) Chief Risk Function (SIMF4) Chair Function (SIMF9) and Chair of Remuneration Committee Function (SIMF12) Group Entity Senior Manager Function (SIMF7) Senior Independent Director Function (SIMF14) Chair of Audit Committee Function (SIMF11) Senior Independent Director (SIMF14) The Whistleblowers Champion Chair of Risk Committee (SIMF 10) Chair Function (SIMF9) and Chair of Remuneration Committee (SIMF12) Key Function Holder Effectively running the firm Effectively running the firm Asset liability management, investment policy and liquidity management Effectively running the firm Acturial function Effectively running the firm Compliance function Risk management function None None None None None None None 32

33 Figure 12 Members of the PLRL Board who served during the year ended 31 December Members of the PLRH Board who served during the year ended 31 December 2017 were as follows: Name Date of appointment David Howell 01/04/2015 Duncan Hayward 01/04/2015 Jerry Staffurth 01/04/2015 George Scott 01/04/2015 Mary Ann Brown 03/06/2008 Gary Falde 01/04/2015 John Lister 14/06/2017 Toby Strauss 14/06/2017 Figure 13 Members of the PLRH Board who served during the year ended 31 December The PLRL Board meets at least six times a year. The PLRH Board meets at least annually. Meetings are structured to allow open discussion and each of the CEO and Chief Risk Officer ( CRO ) provides an update at each PLRL Board meeting followed by updates from the PLRL Board Committees (see section B.1.2.2). Specific risk management topics which either require Board approval (e.g. approval of the final ORSA) or which the CRO considers require Board input (e.g. the ORSA process) are discussed by the Board as separate agenda items. 69 The PLRL Board conducts a self-assessment of its performance and effectiveness annually. Following gathering feedback from the other NEDs, the Chair assesses the performance of the CEO, while the Senior Independent Director assesses the performance of the Chair. B1.2.2 PLRL Board Committees 70 The PLRL Board has delegated some of its powers and discretions to the following permanent committees, and the scope of that delegation is set out in the relevant committee s terms of reference: Audit Committee; Remuneration Committee Assumptions Committee; and Board Risk Committee. 71 The PLRL Board has also formed a committee of its Independent Non-Executive Directors ( INEDs ), the INED AOF Committee, which has authority (acting unanimously) to make a call under the AOF and/or to veto any amendment to the AOF which would impede the ability of PLRL to make a call under the AOF. 33

34 Audit Committee 72 The Audit Committee is responsible for assisting the Board in the financial reporting processes, internal controls, performance of the internal and external audit processes and any other matters that may impact the financial results of PLRL. The Committee consists of three NEDs (two are independent). The Committee meets four times a year with the mandate to convene additional meetings as circumstances require. The Chairperson of the Committee is an INED and reports at each Board meeting on the activities of the Committee. Remuneration Committee 73 The Remuneration Committee is responsible for preparing an annual report which details PLRL s proposed fixed and variable remuneration for the previous year, compliance with the principles set out in the Remuneration Policy and whether the Remuneration Policy and practices are effective and consistent with effective risk management and regulatory requirements. The Committee also approves the remuneration of any persons for whom a significant portion of total remuneration is based on performance and whose activities, individually or collectively, may affect the financial soundness of PLRL. The Chairperson of the Committee is also Chair of the Board and reports annually to the Board on the activities of the Committee. The Committee also consists of the CEO and of a representative from Pacific Life s HR team, and it meets at least annually. The CEO s remuneration is reviewed and approved by the governing body of Pacific Life in accordance with the Remuneration Policy; it is not discussed by the Remuneration Committee of which he is a member. Board Risk Committee 74 The Board Risk Committee ( BRC ) was established in November The BRC is responsible for advising the Board on PLRL s risk framework including overall design of the framework, risk strategy, risk appetite, capital management policy and other risk policies relevant to PLRL. Additionally the Committee oversees the risk function s implementation of the framework and in particular conduct of the annual ORSA. The committee advises the Board on all aspects of the Partial Internal Model ( PIM ). The committee is further responsible for monitoring risk exposures in relation to PLRL s risk appetite and reviewing the adequacy and effectiveness of risk management information ( Risk MI ). The committee has also taken over the role previously performed by the Assumption committee (see below) for PLRL relating to reviewing material actuarial assumptions, the results of the annual experience analyses and the resulting actuarial assumption changes. The Chairperson of the Committee is an INED and reports quarterly to the Board on the activities of the Committee. The Committee also consists of 2 other INEDs and one NED, and it meets at least four times a year with the mandate to convene additional meetings as circumstances require. Assumptions Committee 75 The Assumptions Committee prior to its replacement by BRC (see above) was responsible for reviewing material actuarial assumptions, the results of the annual experience analyses and the resulting actuarial assumption changes. The Committee consisted of two NEDs and two 34

35 Executive Directors. The Committee met at least three times a year. The Chairperson of the Committee was the Chief Actuary (a Board Director), who reported at each Board meeting on the activities of the Committee. B1.2.3 Executive responsibility Executive Committee 76 The ExCo is chaired by the CEO and comprises the most senior managers in the Division, who meet on a monthly basis to discuss significant matters that relate to the management of the Division s business. ExCo coordinates developments and initiatives within the business that involve more than one department, and it explores strategic, business and operational issues before they are presented to the Board. Division Risk Management Committee 77 The Division Risk Management Committee ( DRMC ) is responsible for: Establishing, reviewing and implementing the Division risk policies; Monitoring the risks inherent in the Division s business; Ensuring that appropriate actions are taken to mitigate those risks; and Reporting to and advising relevant stakeholders in relation to risk matters. 78 The DRMC meets monthly. The Chairperson of the DRMC is the CRO, who has a position on the Board and reports at each Board meeting on risk management issues and on activities of the Committee. The attendees of the DRMC collectively have extensive actuarial, insurance, regulatory, legal, accounting, pricing, and management skills. Business Unit Risk Management Committees 79 The Europe, Asia, Australia and Retro Business Unit Risk Management Committees ( BURMCs ) oversee second line activities within the relevant BUs. The BURMCs form a means of communication between the DRMC and the first line of defence in the relevant BU, they help to implement policy and initiatives developed by the DRMC, and they escalate issues that arise within the relevant BU. The BU risk management function escalates matters to the DRMC as necessary. B1.2.4 Enterprise-wide risk management 80 A three lines of defence risk management model is applied within PL Re: The first line comprises all functions and departments other than the risk management and internal audit functions. The first line is responsible for the prudent management of risks arising from day to day business activities. This includes the identification and assessment of risk and the design and implementation of appropriate controls. The majority of risk management activities are conducted by the first line of defence; The second line of defence is the risk management function, which supports the first line of defence by providing risk management tools and guidance. The risk management function is also responsible for certain risk monitoring and assessment activities; and 35

36 The third line of defence is the internal audit function, which is responsible for assessing compliance with, and the appropriateness of, policies and procedures applied by the first and second lines. B1.3 Governance changes over the period 81 PLRL has undergone limited change in its governance and management arrangements over the period. A new representative office was established in China in June 2017, and PLRL has taken steps to ensure that this change is managed in a planned and coordinated manner. Additionally, as described in section B1.2.2, the BRC was established in November B1.4 Remuneration policy 82 PL Re recognises that employee rewards and incentives are a significant determinant of behaviour and that setting these appropriately is an important means to nurture an appropriate risk culture and to ultimately promote the long-term success of the business. The objectives of the Division s remuneration policy are: To align individual objectives with the strategy and the interests of the relevant BU, the Division and PMHC, the sole ultimate shareholder of PLRL; To ensure that, so far as is possible, the incentives applicable to individual employees are consistent with effective risk management and that any perverse incentives are eliminated; To mitigate the potential for any misalignment of incentives to result in adverse outcomes for the business and the shareholder; To establish a clear and transparent process for the setting of incentives and the determination of any subjective judgments; and To establish clear roles and responsibilities for those involved in remuneration decisions and processes. Fixed remuneration 82 Fixed remuneration is determined taking into account an individual s professional experience and qualifications, relevant laws and regulations, local labour market conditions and internal benchmarking. Variable remuneration annual incentive plan 83 PL Re has implemented an annual incentive plan ( AIP ), which is designed to create a strong relationship between an employee s performance and reward. An employee s AIP target is set depending on the level of the employee s seniority and is based on a percentage of the employee s annual salary. 84 An AIP bonus is determined by an employee s own performance against challenging objectives set by their manager, as well as that of the Division and the BU in which they work. As part of the annual performance review process, each individual is awarded a performance rating which drives their AIP bonus subject to the AIP pool. 36

37 AIP pool and performance metrics 85 A single AIP pool with one set of performance metrics has been created to cover employees in all BUs and it is the performance of the Division as a whole which determines the overall pool. The bonus pool is structured in this way to help to create a sense of shared goals, to promote cooperation between operational locations and to reduce the risk of conflicting objectives for those with responsibilities across different BUs. The Division AIP pool is allocated to each BU based on its performance against BU targets. These BU targets are based on the same metrics as those used to measure Division performance, although the weighting applied to the relevant metrics is different for each BU depending on its stage of development. 86 The performance metrics include: (i) the amount of new business written in the year; (ii) the returns generated by the Division which are measured by using post-tax US GAAP return on equity; and (iii) a qualitative measure which recognises the activities which support long term sustainability and growth of PL Re s business. PL Re believes in the importance of capping variable remuneration so as to avoid incentivising excessive risk taking. Accordingly, the AIP pool is capped and the performance metrics allocate no benefit for writing additional new business significantly in excess of plan. The variable element of remuneration for senior risk staff is more restricted to mitigate adverse incentives. Variable - long term incentive plan 87 The purpose of PL Re s rolling long term incentive plan ( LTIP ) is to incentivise the ExCo and other senior employees by aligning their interests with the longer-term strategy of PL Re and Pacific Life. An employee s LTIP target is set depending on the level of the employee s seniority and is based on a percentage of the employee s annual salary. 88 The LTIP remuneration is based on post-tax US GAAP return on equity over a three year period. The LTIP measurement is based on PL Re s results in each of the three years of the plan in order to provide an appropriate long-term measure of performance. The delayed emergence of profits from business written by PL Re under US GAAP has the effect of adding another layer of deferral. Explicit clawback arrangements are included in the LTIP arrangements for 3 year periods commencing on or after 1 January 2017, to allow for non-payment in case of material adverse corporate or individual performance. There is no adjustment for an employee s individual performance under the LTIP as this is reflected under the AIP. The variable element of remuneration for senior risk staff is more restricted to mitigate adverse incentives. Non-Executive Directors 89 The remuneration of INEDs is designed to attract and maintain high quality board members while being consistent with and supportive of maintaining their independence. The INEDs receive a set fee for their services but are not entitled to any performance-based options or bonus payments. NEDs who represent Pacific Life receive no remuneration relating to their roles as PLRL and PLRH Directors. 37

38 Supplementary pension or early retirement schemes 90 Subject to local practices and requirements, staff are offered the choice of making contributions into a defined contribution pension scheme, which will be matched up to a limit. There are no defined benefit pension schemes open to new members. B1.5 Key functions 91 PLRL has identified the following key functions: Actuarial function (see section B1.5.1); Compliance function (see section B1.5.2); Internal audit function (see section B1.5.3); Risk management function (see section B3); Pricing function (see section B.1.5.4); and Asset liability management ( ALM ), investment policy and liquidity management function (see section B2.3.1). 92 Each Key Function Holder is either an Executive Director or a member of the ExCo (with the exception of internal audit, which is required to be independent of management). All of the Executive Directors (including the CEO) of PLRL, together with certain other senior individuals, also perform the function of effectively running the firm. B1.5.1 The actuarial function 93 Overall responsibility for the actuarial function rests with the Chief Actuary, who is an Executive Director of PLRL and PLRH. The actuarial function is responsible for: The calculation of technical provisions under direction from the Board and the DRMC; The calculation aspects of the PLRL internal model under direction from the Board and the DRMC; Advising the Board on the appropriateness of the terms used for writing new business, including the adequacy of premium rates; and Advising the Board on the appropriateness of retrocession arrangements. B1.5.2 The internal control system Internal control system 94 PLRL has adopted the Division internal control policy in order to ensure a consistent internal control system across BUs. The internal control policy requires that internal controls are in place to mitigate the likelihood and severity of manifestation of individual risks recorded in BU risk registers and that the controls are adequately documented and operational. The internal control policy sets out: A classification of the controls between key and non-key depending on the likely consequences of the failure of the control; The responsibilities of each individual to whom a control has been allocated; The requirements for documenting controls; Ongoing accuracy and completeness of the risk register; 38

39 The process for changing a control; and Control testing and audit. 95 In accordance with the internal control policy, all key business controls are subject to high level control testing every alternate year, which is supplemented by departmental controls testing presentations at BURMCs. Any material issues are escalated to the DRMC by the relevant BURMC. The control testing process complements internal audit work in providing assurance that key controls referred to on the risk register are operating as intended. Compliance function 96 PLRL is engaged solely in reinsurance business and is not therefore subject to any material conduct of business regulation. The PLRL compliance requirements are predominantly prudential insurance regulations and generally applicable legal and regulatory requirements. Accordingly, PL Re s compliance function has fewer personnel and a broader remit than that of a typical insurance company. The compliance function comprises all members of Pacific Life Re s Legal Department, which has legal professionals assigned to each BU. Overall responsibility for the PLRL compliance function rests with the General Counsel, who is an Executive Director of PLRL and PLRH. The General Counsel provides a quarterly legal and regulatory report to the Board and attends a quarterly compliance committee in each BU together with members of the legal, actuarial and finance teams. The compliance committees assess the possible impact of any changes in the legal environment on the operations of PLRL and PLRH, and they identify and assess the compliance risk. B1.5.3 The internal audit function 97 Overall responsibility for the internal audit function rests with the Senior Internal Audit Manager, who, in order to maintain independence, has a reporting line to Pacific Life s internal audit function. The annual audit plan is reviewed and approved by the Audit Committee (in relation to financial audits) and the Board (in relation to non-financial audits). The Senior Internal Audit Manager is invited to present reports, including an overall judgement of the function s activities, at the Audit Committee and, where relating to non-financial matters, the Board. B Pricing function 98 The pricing function is responsible for pricing new business opportunities and for reviewing the profitability of inforce treaties for the various lines of business the Company is involved in. The Chief Pricing Officer has responsibility as Key Function Holder of the pricing function. B1.6 Material transactions over the period B Material arrangements in place during the period 99 The material intragroup transactions between the PLRH group and other entities in the Pacific Life group are as follows: Longevity retrocession from PLRL to PLIC; Protection retrocession from PLRL to PLRB; 39

40 Protection retrocession from PLRA to PLRL; Support services provided to PLRL and PLRH from PLRS; AOF arrangement between PLIC, PLC and PLRL, and the associated fee; Guarantee of PLRL s obligations by PLC and PLIC, and the associated fee; Cost contribution arrangement between PLRS, PLRL, PLRB, PLIC and PLRA relating to the development and implementation of a new administration system; and 34.9m of unsecured subordinated loan notes issued by PLRH to PLRH LLC. B Changes over the period 100 There have been no changes in material arrangements in place over the period. B1.7 Adequacy of systems of governance 101 An assessment of whether the PLRL system of governance complies with the requirements of the EIOPA guidelines (EIOPA-BoS-14/253 EN) was carried out during A small number of nonmaterial deficiencies were identified and were remediated during B2. Fit and proper requirements B2.1 Overview 102 In order for PL Re to conduct its business activities and recruitment practices in accordance with PL Re guiding principles and high ethical standards, PL Re is committed to carrying out due diligence on all new staff and on an ongoing basis for individuals carrying out certain roles as set out in the Division fitness and propriety policy. Individuals performing SIMFs and/or who are Key Function Holders (see figure 12) are subject to ongoing checks. All such individuals (together with persons performing key functions) received training on conduct rules and standards relevant to their roles in 2017, when the regimes came into force, and relevant new joiners receive training on joining PL Re. B2.2.1 Determining an individual s skills, knowledge and expertise 103 PL Re maintains procedures for ensuring that staff are fit, which means ensuring that each individual possesses the necessary skills, qualifications, knowledge, expertise, experience, diligence and soundness of judgment to undertake and fulfil the particular duties and responsibilities of the role in question. The competencies required in any role are set out in a detailed job description and are evaluated annually through a robust performance review process. PL Re staff are offered training and opportunities to develop their expertise. 104 In addition to a robust interview process which is designed to assess competence and suitability for a role, all staff are subject to general background checks prior to joining PL Re, which include: Identity verification; Proof of professional qualifications and memberships;* Verification of academic qualifications (usually the highest qualifications achieved); 40

41 Verifying information on the CV for a period dependent on the role to confirm dates of employment and job titles and to identify any gaps greater than 12 weeks; Verification of the right to work in the relevant location; and Criminal background check to the extent permitted by law.* 105 The following additional background checks are conducted on Board members and Key Function Holders: Regulatory references where required; Credit checks;* Searches of the relevant registers to ensure that they have not been disqualified from holding an approved function (e.g. the Financial Services Register in the UK); and Checks on directorships held.* 106 The checks marked with an asterisk are repeated annually in respect of Board Members and Key Function Holders. B2.2.2 Determining an individual s fitness and propriety 107 PL Re maintains procedures for ensuring that staff are proper, which means ensuring that each individual is reputable, has previously demonstrated the appropriate competence and integrity in fulfilling occupational, managerial or professional responsibilities, and that he or she has no conflicts of interest which could affect the proper performance of duties. B2.3 Outsourced key functions 108 PLRL and PLRH have adopted PL Re s Division outsourcing policy, the purpose of which is to ensure that: Decisions regarding outsourcing are made in an appropriate and consistent manner; Outsourcing arrangements are appropriately documented, managed and controlled; and Relevant approvals and/or notifications are sought internally and from relevant regulators. 109 The policy sets out the review and authorisation process that must be undertaken for outsourcings. 110 PL Re s philosophy in relation to outsourcing is only to outsource non-core functions, and only where this can provide better value for money or enhanced service. Intragroup outsourcing is chosen over external outsourcing where this is possible and provides better economy of scale for the Pacific Life group and/or the Division. 41

42 111 PLRL s and PLRH s material outsourcing arrangements are set out in figure 14. Description of material outsourcing Intragroup IT network services which ensure availability of server resources and data processing capabilities Intragroup agency support services PLRS provides key services such as management services, staff and offices. All costs incurred by PLRS are allocated and recharged to PLRL as appropriate IT hosting services in relation to the adminstration platform implemented for business from Australia & Asia Investment management of certain assets of PLRL (see section B.2.3.1) Figure 14 The material outsourcings of PLRL and PLRH. Jurisdiction US UK Poland UK B Asset liability management, investment policy and liquidity management function 112 ALM is overseen by the Business Unit Investment Committees ( BUICs ) with support from the finance and actuarial departments. Overall responsibility for ALM rests with the Chief Financial Officer ( CFO ). Day to day management of the PLRL investment portfolio is delegated to an external investment manager based in the UK acting in accordance with instructions from BUICs. The PLRL Investment Committee is responsible for directing investment policy through investment guidelines which detail the objectives of PLRL investment activities, including establishing the desired basis of ALM and the scope of permissible investments. The Investment Committee also monitors the performance of the investment manager and undertakes various investment-related risk monitoring activities. B3. Risk management system including own risk and solvency assessment B3.1 Risk management system overview 113 The Division risk management policy describes the overall approach, principles and processes employed by PLRL and PLRH in relation to risk management. In particular, it describes the methods used by PLRL and PLRH for: Identifying; Recording; Mitigating and controlling; Monitoring; and Measuring/reporting on risks that arise in the course of business activities. 114 As outlined previously in section B1.2.5, PLRL operates a three lines of defence risk management model, where the first line comprises all departments other than the risk management and internal audit functions, the second line of defence comprises the risk management function, and the third line of defence is the internal audit function. 42

43 B3.2 Risk governance 115 The risk management function is responsible for oversight of risk management activities. The risk management function is comprised of permanent risk management staff and the respective Board, Division and BU Risk Management Committees. The BRC plays the primary role regarding oversight of the PLRL risk management framework. The DRMC is responsible for oversight of the Divisional aspects of the risk management framework and plays the primary role in establishing harmonised Divisional risk policies and risk strategy which incorporate the requirements of the relevant boards. Each BU has its own BURMC that is responsible for implementation of the risk management framework within the BU. These responsibilities include carrying out risk management activities delegated by, and escalating risk issues to the DRMC. The BRC, DRMC and BURMCs are ultimately subject to the overarching authority of the PLRL Board and PLRH Board in relation to risk management issues affecting PLRL and PLRH respectively. Members of the DRMC and relevant BURMCs are familiar with relevant aspects of the business of PLRL and PLRH and thus are well-placed to assess, monitor and control risk affecting PLRL and PLRH. 116 Responsibilities of the BRC, DRMC and BURMCs are set out in written terms of reference. 117 All material risks encountered in the business are recorded on BU risk registers. All risks are allocated to senior individuals and it is the responsibility of the BURMCs to monitor and challenge each risk owner in relation to the risks for which they are responsible. 118 Overall responsibility for the risk management function of PLRL/PLRH rests with the CRO. The CRO has responsibility for ensuring that risk management activities are carried out in a timely manner with an appropriate degree of rigour. The CRO produces a quarterly report for the PLRL Board so that it can monitor the risks that PLRL is exposed to and ensure that PLRL is operating within its defined tolerances and appetite. 119 The Division risk management policy is supplemented by specific risk policies defining the Division appetite or tolerance for its material risks. Where relevant, appetites and tolerances are also set at the legal entity level. Material changes in risk policies or appetite affecting PLRL/PLRH are subject to approval by the PLRL and PLRH Board. 120 The risk management activities described in the risk management policy and the specific risk policies promote consistent and professional management of risk. 121 The continued appropriateness of the risk policies is reviewed by the DRMC. In addition to the annual review, any material changes in strategy or business plan trigger an assessment. 122 Arrangements for governance of the PIM are set out in the PIM Governance and Change policy. There have been no material changes to PIM governance during the reporting period. B3.3 Risk strategy, appetite and policy 123 PLRL and PLRH have adopted the Division risk strategy, which comprises a high-level appetite statement for the most material risks encountered in the business. 43

44 124 PL Re has a high appetite to take risks meeting its target returns which fall within its areas of expertise and for which it has the necessary capital. The Division risk strategy defines the risk appetite in terms of preferred, accepted and minimised risks based on an assessment of relative knowledge and the potential for reward: Category Preferred Accepted Minimised Mortality Persistency Equity Longevity Credit Currency Risk Morbidity Contract Interest Rate Operational Inflation Liquidity Reputation Figure 15 PL Re risk appetite. 125 Division risk policies have been adopted for the following risks: Insurance risk; Operational risk; Group risk; Credit risk; Market risk; and Liquidity risk. 126 Risk policies set out the definition of the risk in question and how the risk manifests in the context of the business. They also specify appetite or tolerance for the risk and the methods employed within the Division for identifying, assessing, monitoring and controlling it. 127 Further details of each risk policy are provided in section B A statement of appetite and risk tolerance within each policy is provided in section C. B3.4 Risk identification and assessment 129 PLRL carries out comprehensive risk assessments as part of the ORSA process. 130 Various activities contribute to keep the risk assessments up to date. Each BURMC conducts periodic emerging risk reviews which are presented to the DRMC. Economic capital assumptions, methodologies and results are also reviewed periodically. 131 Risk registers maintained by the BUs including Division Centre set out the material risks they face in conducting their business. 44

45 132 The risk registers are certified on a twice yearly basis. Certification involves risk owners confirming the following: All significant risks within their department or area of responsibility have been recorded on the risk register; Adequate controls are operating in respect of those risks; and Controls are properly documented in accordance with the internal control policy (subject to listed exceptions). 133 Following the certification process the updated risk registers are reviewed by the BURMCs for accuracy, consistency and completeness. 134 The operational effectiveness of risk controls is subject to multiple forms of review which can include internal audit, external audit and Sarbanes-Oxley ( SOx ) testing. The risk management function performs reviews of key controls. B3.5 Scenario testing and modelling 135 Scenario testing and modelling is carried out as part of the ORSA. The scenarios tested reflect the risk profile of the business. 136 PLRL is materially exposed to longevity risk and so improvements in mortality beyond those assumed could have a significant adverse financial impact. For this reason, a scenario envisaging a cure for cancer is tested. 137 PLRL retrocedes a majority of its longevity business to its affiliate PLIC. The Division group risk policy sets out PLRL s appetite for PLIC failure, which is monitored by way of scenario testing. 138 Key scenario tests are carried out both at the effective date of the ORSA and at the end of the 5 year planning period, in order to assess the impact of any change of business mix over the period. 139 PLRL also conducts scenario tests. 140 The business plan is subject to sensitivity testing in which the impact on future capital requirements of altering a range of assumptions is examined, including; new business assumptions, claims assumptions and investment conditions. B3.6 Risk reporting and escalation Risk MI 141 The purpose of risk MI is to enable management to assess the evolving nature of exposure to identified risks and to monitor the effectiveness of related controls. 142 Risk MI packs capture metrics within each risk category with predefined thresholds designed to provide early warning of emerging issues and to drive corrective actions. Metrics are also 45

46 designed to align with risk controls referenced in the risk registers. Risk MI is supplemented by monthly strategic MI packs which monitor first line BU activities. 143 Risk MI packs are produced on a quarterly basis at BU level for review by BURMCs, at entity level for review by BRC and at Division level for review by the DRMC. Loss events 144 A loss event is defined as an actual event or near miss arising from operational risk that involves a financial loss, a major disruption to the operation of the business and/or material reputational damage. 145 Loss events are recorded on loss event logs maintained by risk management for each BU. Material loss events are escalated to the DRMC and relevant legal entity Boards for information purposes. Open loss events are reviewed at BU management meetings to track remediation of the specific loss and any control weakness that contributed to it. 146 Recording and reviewing loss events also helps to ensure the completeness of the risk registers, and output is used to calibrate appropriate levels of economic capital for operational risk. 147 All employees are responsible for reporting loss events that occur and of which they become aware in connection with their normal duties. 148 Loss events may not be closed until remediation is complete. B3.7 Risk management culture 149 It is recognised that strong systems and controls and risk management processes are not a substitute for an appropriate risk culture among senior management and employees. An appropriate risk culture will underpin and reinforce systems, controls and processes, encouraging individuals to follow them in an effective and proportionate manner and to apply good judgement in relation to matters that are not covered. Management reinforces the risk culture with regular communication, through the annual performance management process, and through training relating to risk management issues. B4. Risk management strategies, objectives, processes and reporting 150 As described in section 3.3, PLRL and PLRH have adopted the risk policies of the Division. The sections below provide more detail on risk policy requirements by category of risk. 151 A description of how the internal control policy and compliance function are implemented is given in section B1.5 46

47 B4.1 Insurance risk Definition 152 PLRL and PLRH define insurance risk as the risk of financial loss arising from fluctuations in the timing, frequency and severity of insured events, including the rate at which inforce business lapses. Strategy 153 PL Re s core business is the acceptance of mortality, morbidity and longevity risk. PL Re considers that it has specialised skills and knowledge to understand and manage these risks. It also recognises the benefits of diversification gained by retaining a balance of these risks. 154 Persistency, expense and ancillary benefit risks are not actively sought but will be accepted in conjunction with the risks for which PL Re has a high appetite. Further detail regarding PL Re s insurance risk appetite is given in section C1.3. Insurance risk assessment 155 The assessment of new insurance risk is carried out by the BU pricing teams. The actuarial bases used for pricing purposes are set out in documents referred to as terms of trade ( ToTs ). ToTs are established for each of the PLRL major product lines. The pricing teams maintain pricing manuals, which document the processes and controls operating for all new quotations. 156 BUs carry out internal experience analyses annually where credible experience data exists. The pricing teams carry out treaty reviews to establish whether closure or changes to new business terms are required. 157 The assumptions used to derive the capital required to support different lines of business are set out in quantifying insurance risk ( QIR ) documents. ToT and QIR documents are updated on a regular basis using population, industry, client and other available data. 158 Financial results are analysed and compared with plan by management in quarterly management information meetings. A quarterly profit and loss attribution is also reviewed by the DRMC. These reviews are designed to enhance management s understanding of PL Re s insurance risk and to detect problems in performance so that remedial action may be taken. Insurance risk controls 159 The Division new product policy documents the requirements to be met for approving new risks and products. New product approval is required should any BU wish to enter new territories. 160 BUs must have robust documentation and controls in place both for approving the issuance of treaty quotations and for putting in place new or revised reinsurance treaties where quotations are successful. 47

48 161 The medical underwriting and claims competence of clients is assessed by cedant audit visits. The frequency and scope of these visits reflects the risks associated with each treaty. 162 The ORSA quantifies insurance risks and the level of diversification between risks. This is used to help identify ways of managing the overall exposure to insurance risk. 163 PL Re uses retrocession to manage its exposure to aggregate longevity risk and to per-life risk on protection business. Insurance risk monitoring 164 The BRC reviews the adequacy and effectiveness of insurance risk MI for PLRL. The DRMC and BURMCs are also responsible for monitoring exposure to insurance risks and the effectiveness of insurance risk controls at the Division & BU level respectively. Risk MI is reviewed on a quarterly basis by the risk management committees. The review of financial results, internal experience studies and new business treaty reviews are all forms of monitoring of insurance risk. 165 Management uses the output from the ORSA and discussions with PL Re s ExCo to prioritise its internal audit activities towards those areas where a failure of internal insurance risk controls would be likely to lead to significant financial losses. B4.2 Operational risk Definition 166 PL Re defines operational risk as the risk of financial loss arising from any internal or external event or process that is not covered by its risk policies for insurance, credit, market, liquidity or group risk. Strategy 167 PL Re s risk strategy identifies operational risk as an accepted risk. Further detail regarding PL Re s operational risk appetite is given in section C5.3. Operational risk assessment 168 Each BURMC carries out operational risk assessments on at least an annual basis. 169 The results of operational risk assessments are recorded in each BU s risk register. The risk register also specifies controls that are relevant to each risk and MI that is used to monitor the risk. The risk register is kept up to date by a certification process carried out every 6 months. 170 As part of its review of the risk register, each BURMC reviews the maximum expected losses for each operational risk in the register. Where this is considered to be excessive, it seeks a reduction in the exposure, for example by improving controls. However, it is recognised that any costs or inefficiencies associated with improving controls need to be factored into this analysis. 48

49 171 An annual calibration exercise is conducted based on collated loss event data to test the ongoing appropriateness of capital based on the SF. Operational risk controls 172 The Division regards the maintenance of effective controls, as opposed to holding capital, as the primary mitigant of operational risk. 173 PLRL seeks, where possible, to avoid sharing systemic operational risks of its clients. In particular, appropriate contractual terms are sought to: Minimise the Division s exposure to compensatory payments or awards to individual customers that are not defined by the terms of the underlying insurance contract; and Enable the Division to avoid or reduce its liability to clients in circumstances where there have been significant failings in the client s own internal processes. 174 PLRL is at risk of reporting errors due to failings in its clients own internal processes, or in the processes of other parties with whom its clients do business. PL Re seeks to identify such administrative errors early by: Developing and monitoring internal controls designed to identify anomalies in client reporting that could be an indication of such errors; and Regularly scheduling and performing client administrative audits (either desktop or onsite). Operational risk monitoring 175 Each BU s exposure to operational risks is monitored using MI specified in its risk register. MI used for monitoring purposes may show the scale of the risk, the effectiveness of controls, and/or instances where the risk has crystallised. Risk owners and/or the BURMC should take appropriate action where monitoring activities indicate that the scale of the risk or the effectiveness of controls is out of tolerance. 176 As part of its monitoring activities, each BURMC (or in the case of the Division Centre, the Division Centre Management Team) conducts reviews of the effectiveness of key operational risk controls by department, at least every two years. Risk management staff also perform complementary reviews of key controls to verify that controls are in fact operating in accordance with the relevant control documentation or standard. 177 The Division uses a loss event reporting process (see section B3.7) as a key method for identifying, reacting to and measuring operational risk that manifests in its business. 178 Material loss events are reported to the BRC and the Board. Loss events are also escalated to the DRMC if the Division CRO or relevant BURMC considers them to be qualitatively material even though they fall below the limit. 179 Internal audit activities are directed towards those operational risks and related controls that have been highlighted by risk assessments or entries on the loss event logs as being material or out of tolerance. 49

50 B4.3 Group risk Definition 180 PL Re defines group risk as the risk of loss arising from membership of the Pacific Life group. This risk may manifest itself through default on intragroup retrocession, failure to provide agreed services, or a negative impact on the creditworthiness of PL Re carriers. Strategy 181 PL Re s risk strategy classifies group risk within the accepted category. This is because incurring group risk is an unavoidable part of being a member of the Pacific Life group. Group risk assessment 182 Each BURMC reviews the exposure to group risk of all the carriers allocated to it on at least an annual basis. The most material group risk exposure for PLRL/PLRH currently relates to the AOF and the retrocession of longevity risk to PLIC. Assessments of exposure to PLIC are made based primarily on solvency and liquidity measures in the light of the very different risk profile of PLIC compared with PLRL/PLRH. Group risk controls 183 The Division regards the maintenance of effective limits and controls, as opposed to holding capital, as the primary mitigant of group risk. 184 PLRL measures its exposure to group risk on intragroup retrocession by monitoring the level of PLRL/PLRH solvency after a failure of entities within the Pacific Life group. The levels that are deemed acceptable are reviewed at least annually and may also be reviewed when there has been a significant change. 185 PLRL only utilises services from group entities which could be readily outsourced to a third party in the event of a failure of these services. These services comply with the third party outsourcing policy and are appropriately documented. Group risk monitoring 186 PLIC exposure monitoring is conducted by the BRC using the quarterly risk MI. Metrics cover regulatory solvency, sufficiency of short term liquid assets, coverage of AOF and rating agency measures. 50

51 B4.4 Credit risk Definition 187 PL Re defines credit risk as the risk of financial loss arising from the failure of another party to perform its financial obligations to the firm, including failing to perform them in a timely manner. Strategy 188 PL Re s risk strategy identifies credit risk as an accepted risk. 189 PLRL and PLRH will generally seek only to incur credit risk where: It is a necessary or normal consequence of the Division business (e.g. credit risks to cedants); The risk incurred is considered to be preferable to other risks that would otherwise have been incurred (e.g. retrocession replaces insurance risk with credit risk); or The risk incurred is considered to be warranted by some other benefit (e.g. an increased return on investments). 190 Further detail regarding PL Re s credit risk appetite in relation to credit spread risk and counterparty default risk are given in sections C2.3 and C3.3 respectively. Credit risk assessment 191 PLRL and PLRH are exposed to credit risk from the following: Invested assets and related accrued income; Insurance counterparty exposures; Bank counterparty exposures; and Other counterparty exposures (non-insurance). 192 In general, credit risks related to unpaid premium are not material because the legal entities will normally have the ability to avoid the contract for non-payment or to set-off unpaid premium against incurred claims. 193 PL Re assesses credit risk and its capital implications on a quarterly basis and as part of its annual ORSA process. Additional risk assessments are undertaken if appropriate in the light of any perceived material change in the nature of the Division credit risk exposures and credit risk controls. Credit risk controls 194 PLRL and PLRH control credit risk by adhering to credit risk limits established for each form of credit exposure identified in the credit risk assessment. The nature of these limits is set out in the Division credit risk policy. 195 Invested assets within PLRL and PLRH are subject to limits on the overall average credit rating as well as individual limits according to rating class and aggregate limits within each rating class. The nature of these limits is set out in the Business Unit Investment Guidelines ( BUIGs ). 51

52 196 PLRL exposure to insurance counterparties with respect to financing of initial commissions and marketing costs are subject to individual limits depending on the territory, rating and regulator of the counterparty. 197 PL Re ensures that it only enters into contracts with appropriate counterparty insurers with respect to its credit risk appetite. A credit exposure assessment is made at quotation stage within the relevant pricing paper for all new arrangements which involve financing elements or unusual credit features. 198 PLRL and PLRH exposure to banks in respect of individual operational bank balances are also subject to counterparty limits by rating class unless the related assets are fully government guaranteed. Credit risk monitoring 203 Monthly investment analysis reports monitor investment credit exposures against the tolerances defined within the BUIGs. 204 Monitoring of counterparty credit exposures is via monthly credit exposure reports as part of the BU s financial controls processes. Details of these exposures are contained within the monthly BU MI packs. 205 Credit exposures arising from the build-up of negative reserves on an economic basis and cash financing arrangements are monitored as part of the quarterly close process. 206 Operational bank balances are monitored by the BU finance departments through the daily bank account maintenance processes and weekly short term liquidity forecasts. 207 Details of credit exposures and any credit risk issues arising from the monitoring described above are escalated to both the BRC and DRMC in quarterly risk MI. B4.5 Market risk Definition 208 PL Re defines market risk as the risk of loss or adverse fluctuation in the value of its assets (including its invested assets) and liabilities as a result of movements in interest rates or exchange rates. 209 Market risk affects investment strategy, pricing of reinsurance contracts and actuarial reserving policy. Strategy 210 PL Re s risk strategy identifies market risk as an unavoidable part of securing the preferred categories of risk. There are financial costs and practical limitations to eliminating market risk 52

53 and therefore market risk is tolerated where it is proportionate to do so. Further detail regarding PL Re s market risk appetite is given in section C2.3. Market risk assessment 211 PL Re primarily assesses market risk as the solvency impact of divergence in the values of its assets and liabilities resulting from interest rate and currency movements. 212 PL Re assesses liability currency matching and sensitivity to risk free interest rate changes under asset/liability matching metrics within each major currency block quarterly and otherwise more regularly where duration is subject to fluctuation or where regulatory requirements dictate. 213 PL Re assesses market risk and its capital implications as part of the PLRL annual ORSA process and quarterly profit and loss attribution analyses. Additional risk assessments are undertaken if appropriate in the light of any perceived material change in the nature or extent of PLRL s market risk exposures and market risk controls. Market risk controls 214 PL Re seeks to minimise exposure to both interest rate and exchange rate fluctuation through its asset/liability matching management processes through which invested and other assets are managed to tolerance limits for sensitivity to risk free interest rate changes. 215 PL Re considers an economic basis as the most appropriate basis for determining the cash flows and resulting sensitivity of PLRL s solvency position to risk free interest rate changes. Where appropriate assets are not available to fully match the liabilities, PL Re will consider alternative strategies for mitigating market risk and/or decide to tolerate the resulting mismatch. 216 Duration and asset management strategy changes are approved by the respective BUICs. Any material change in investment strategy or tolerance for market risk is subject to board approval. Market risk monitoring 217 The investment managers manage the BUs investments on a day to day basis in accordance with the BUIGs. The BU finance departments prepare monthly market risk analysis reports on these activities. The BUICs review the currency and duration mismatch exposures on a quarterly basis. 218 Exposure information and any currency or duration matching issues arising from the monitoring described above are escalated to both the BRC and the DRMC in quarterly risk MI. 53

54 B4.6 Liquidity risk Definition 219 PL Re defines liquidity risk as the risk that any relevant legal entity, though solvent, does not have sufficient financial resources available to enable it to meet its obligations as they fall due. Liquidity risk arises if there are circumstances when an entity has insufficient liquid or readily realisable assets to meet its commitments and may be forced to rely upon the sale of assets that cannot be realised at short notice at a reasonable cost. Strategy 220 PL Re s risk strategy identifies liquidity risk as an unavoidable part of securing the preferred categories of risk. There are financial costs and practical limitations to eliminating liquidity risk and therefore liquidity risk is tolerated where it is proportionate to do so. Further detail regarding PL Re s liquidity risk appetite is given in section C Investments held by the Division BUs are traded on regulated markets and there is a high proportion of investment grade assets realisable at short notice at current carrying value. Liquidity risk assessment 222 PLRL s liquidity strategy is to plan to hold, through a five year planning horizon, an amount of unrestricted liquid assets sufficient to meet certain liquidity scenarios which reflect PLRL s risk profile. 223 A lack of fungibility may exist between PLRL and its branches in respect of the capital it is required to hold locally. Accordingly, the Division manages liquidity risk at the legal entity/branch level. Liquidity risk controls 224 The Division regards the maintenance of effective monitoring of actual and future availability of liquidity at the legal entity level as the mitigant of liquidity risk in lieu of holding capital. 225 Treaty authorities require that client arrangements which could create material liquidity strain are approved by the Division CEO and CFO at the quotation stage. 226 The Division has the ability to liquidate assets in its investment portfolio within normal settlement days which are the same day for US securities and up to three days for other territories. 227 Funding is available to PLRL from Pacific Life group undertakings under the AOF or guarantee arrangements. The degree of reliance placed on this funding is subject to monitoring of PLIC as described in section B4.3 and to annual assessment of PLIC s financial strength following the liquidity scenarios considered to be significant for PLRL. 54

55 Liquidity risk monitoring 228 On at least a weekly basis the BU finance areas obtain cleared funds reports for their respective operational bank accounts by legal entity. Consideration is made of the likely short term outflows to ensure sufficient cash resources are available to meet expected cash requirements. If a shortfall is identified, action will be taken to ensure that sufficient cash is available to meet each entity s obligations. 229 On at least a quarterly basis a three month rolling cash forecast is prepared for each legal entity in each BU together with analysis of historic cash flow trends. Such information is collated by the respective finance area and is reviewed as part of the respective BU MI pack. 230 On a quarterly basis, and otherwise where significant events in the business have occurred, longer term liquidity forecasts (over a five year planning horizon) are used to assess the availability of liquid assets realisable at short notice. B5. Own risk and solvency assessment Relationship to partial internal model and solvency capital requirement 231 The PLRL ORSA is calibrated using the Division economic capital model applied to calculate economic capital requirements ( ECR ) for all PL Re entities relevant to PLRL. The broad structure of this model is congruent with that used to calculate PLRL s SII SCR. 232 The ORSA ECR diverges from the SII SCR in a number of ways. The key differences are: The calibration of ECR calculated using the latest QIR stresses for some PIM risks diverge from SCR calibrations where the board considered that the calibration required to achieve PIM approval was not appropriate given the risk profile; The ECR valuation discount rates include an illiquidity adjustment reflecting the nature of investments actually held rather than the SII volatility adjustment ( VA ); The risk margin is calculated using an internally calibrated cost of capital and reflects consistent discounting at valuation rates of interest; The approach to correlations between PIM and SF risks allows pairwise assumptions between risks rather than being constrained by SII integration techniques; and The economic capital resources do not include any TMTP. 233 The process for carrying out the ORSA is set out in the ORSA policy. This policy applies to both the Solo ORSA to be performed by PLRL and the Group ORSA to be performed by PLRH. The Group ORSA is based on the Solo ORSA with adjustments to reflect the limited areas where the PLRH risk profile, capital requirements or capital resources differ. 234 Any differences in methodology between the ORSA and the regulatory calculation are highlighted in the ORSA report. 55

56 Compliance with six Solvency II tests for internal models 235 The Directive mandates the following six tests for firms using an internal model: Use test; Statistical quality standards; Calibration standards; Profit and loss attribution test; Validation standards; and Documentation standards. 236 As part of the annual ORSA assessment process, compliance with the six tests is reviewed and verified. The results of the review are included in the ORSA report. Frequency and timing 237 The ORSA assessment is performed on at least an annual basis. The review process is carried out in parallel with the business planning exercise. This enables the financial projections carried out as part of the ORSA process to include appropriate scenarios and sensitivities that are aligned with the planning process, and it also ensures that the ORSA is an integral part of the development of business strategy. 238 Interim ORSA assessments must be carried out whenever there is a significant change in risk profile. Pacific Life Re Holdings Limited own risk solvency assessment 239 The majority of risk taking in the PLRH sub-group is conducted by PLRL. Accordingly, the PLRH ORSA comprises a short supplement to the PLRL ORSA. The PLRH ORSA considers, in particular: PLRH strategy to the extent that it diverges from that of PLRL; Incremental risks in PLRH which are not covered by the PLRL ORSA, including those relating to UM and its subsidiaries; Whether the SF is an appropriate basis for assessing those risks; Quality and tiering of capital resources within the PLRH sub-group; Availability of capital resources to meet requirements across the PLRH sub-group without material restrictions on fungibility; and Future projected PLRH required capital injections or dividends. Calibration and governance 240 The current policy is to set capital requirements using a 99.5% confidence level over a one year time horizon. 241 Material changes to the assumptions used in calculating ORSA capital requirements are approved by either the BURMC, the DRMC or the board depending on the level of materiality. 56

57 Constituent parts of own risk solvency assessment performance 242 The following requirements specified in the ORSA policy must be met each time an ORSA assessment is performed: PLRL ORSA A qualitative description of the risks faced by PLRL; An assessment of the overall solvency needs (i.e. capital requirements) of PLRL as at the balance sheet date and a quantitative statement of such needs; An assessment of the overall solvency needs of PLRL covering at least the business planning period following the balance sheet date (typically 5 years); A summary and analysis of any differences in methodology between the ORSA and the SCR, including a quantitative estimate of the impact of such differences; and PLRH ORSA An assessment of incremental risks in PLRH which are not covered by the PLRL ORSA, including those relating to UM and its subsidiaries; An assessment of whether the SF is an appropriate basis for assessing those risks; and An analysis of the availability of capital resources within the PLRH sub-group to cover risks outside of PLRL. 243 The ORSA is performed using the same data quality standards that are applicable to the PIM in accordance with the PLRL data policy. The ORSA includes an assessment of the appropriateness of own funds to meet the risks implicit in both PLRL and PLRH capital requirements. The future availability of additional capital from the parent of PLRL and PLRH is considered as part of the analysis of projected capital requirements. ORSA process 244 The elements of the risk framework of PLRL and PLRH, which form part of the ORSA process, are set out below: Risk identification via maintenance of risk registers and supporting processes, including emerging risk reviews, loss event reporting and profit & loss attribution; Risk assessment including annual reviews of QIR papers, terms of trade, and scenario and sensitivity testing; Risk monitoring in particular quarterly risk MI and financial reporting, including solvency monitoring, monthly strategic MI, experience reviews and annual reviews of ORSA capital requirement targets; Risk management i.e. the operation of controls specified in risk registers, activities of the BRC & DRMC, and reviews of risk policies and risk strategy via the annual business planning process; and Risk reporting via the ORSA report and supporting documents. 245 The risk management function prepares an annual plan for the ORSA process to ensure that it is managed effectively and that all necessary inputs are available in a timely manner for presentation of ORSA results to the PLRL and PLRH Boards. 57

58 246 The CRO presents the ORSA plan to the PLRL Board and seeks direction and comments. This includes the following: Specific risk issues that should be investigated as part of the ORSA process, and any further suggestions from the Board; Scenarios and sensitivities that should be considered as part of the ORSA process; and The impact on the ORSA process of any material changes in the business (for example, products or territories) or business strategy that have occurred since the ORSA was last performed. 247 The results of the ORSA performance are set out in a detailed internal report. 248 Branch-level ORSAs, where required, must be reviewed by the BRC and approved by the legal head of the branch, and the results thereof must be communicated to the PLRL Board. 249 A record of the challenge process is recorded in respective BRC and Board minutes. 250 Each performance of the ORSA is reported to the PRA within 2 weeks of completion of the assessment. Branch-level ORSAs are reported to their local regulator where required. Communication of results 251 The CRO is responsible for ensuring that results and conclusions regarding each assessment of capital requirements are communicated to all staff for whom the information is relevant. 252 The Board and senior management take the results of each performance of the ORSA, and the insights gained from it, into account in carrying out their functions and, in particular, in the design and implementation of the system of governance, including capital management, business planning and product development and design. 253 Any specific actions arising as a result of an ORSA assessment will be recorded as part of the internal report and will be followed up as part of the regular meetings of the BRC. Ongoing solvency monitoring process 254 The Chief Actuary is responsible for ensuring that solvency is monitored to ensure continuous solvency compliance with the ORSA and SCR capital requirements. The monitoring process is set out in the PLRL capital management policy. B6. Any other information 255 There are no other material aspects of the system of governance which are not covered in the above sections. 58

59 Section C. Risk Profile (Unaudited) 256 PLRL s SCR was 709m at 31 December Pre-diversification and before allowance for the loss-absorbing capacity of deferred taxes and other adjustments, the SCR was 2,336m. The following table shows the derivation of the SCR from this pre-diversification amount. The table shows the impact of diversification both within and between the constituent modules under the PLRL integration technique, and it shows postdiversification adjustments including deferred tax. 000 Capital requirement SCR (before diversification) 2,335,606 less Diversification module - life and health underwriting risk -1,167,122 less Diversification module - market risk -83,047 less Diversification module counterparty risk -1,026 less Inter-module diversification -216,495 less Non-linearity adjustment -44,509 less Adjustment for deferred tax -145,179 plus New business adjustment 21,314 plus Operational risk 17,263 less Profit share adjustment -7,991 PLRL SCR 708,815 Figure 16 Summary of SCR from quantitative reporting template ( QRT ) S b. 258 The PLRL risk profile is based on regulatory capital at risk. The relative contribution of each risk, except operational risk, is determined based on the pre-diversification amount, i.e. 2,336m, before allowing for the impact of diversification between risks. The operational risk contribution is shown post diversification. 259 For PLRH the risk profile is substantively the same as PLRL, i.e. the PLRH SCR is the same as PLRL within rounding. 260 The pie chart below sets out the risk profile, excluding operational risk, and each of the key risks that are covered in the following sections. 59

60 Figure 17 Summary of undiversified SCR from QRT S b. Risk profile drivers 261 Underwriting risks dominate the SCR net of retrocession (87%) reflecting the preferred nature of longevity, mortality and morbidity risks under PL Re s Division risk strategy (see section B.3). In total, preferred risks under this policy account for 75% of SCR whilst accepted risks (mainly persistency and credit) contribute 11%, leaving a 13% contribution from minimised risks. The contribution from minimised risks is overstated as much of the interest rate risk element is subsequently eliminated through the non-linearity adjustment. 262 The contribution from preferred risks is reduced by retrocession, with longevity subject to the most material reduction. Change in the risk profile over the period to 31 December The following table highlights the change in the risk profile presented for PLRL over the valuation period. 60