Solvency and Financial Condition Report for Reporting Period 2016 Telenor Forsikring AS Jan Gunnar Rossvoll/Anthony Kingston May 5 2017
Table of Contents 1. Summary... 3 2. The business and key figures... 3 2.1 About the business... 3 2.2 Results from the insurance portfolio... 4 2.3 Results from investments... 4 2.4 Results from other activities of the business... 5 3. System of Governance... 5 3.1 General information on the system of governance... 5 3.2 Fit and proper requirements... 6 3.3 Risk management system including the own risk and solvency assessment... 7 3.4 Internal control system... 8 3.5 Internal audit function... 9 3.6 Actuarial function... 10 3.7 Outsourcing... 10 3.8 Evaluation of suitability of system of governance... 10 4. Risk Profile... 10 4.1 Underwriting risk... 10 Exposure... 10 Concentration... 12 Mitigation... 12 Sensitivity... 12 4.2 Market risk... 12 Exposure... 12 Mitigation... 13 Sensitivity... 14 4.3 Counterparty risk... 14 Exposure... 14 Concentration... 14 Mitigation... 14 4.4 Liquidity risk... 15 Exposure... 15 Mitigation... 15 Sensitivity... 15 4.5 Operational risk... 15 Solvency and Financial Condition Report 1
Exposure and Mitigation... 16 5. Valuation for Solvency Purposes... 17 5.1 Assets... 17 5.2 Technical provisions... 18 Values and calculations... 18 5.3 Other liabilities... 19 5.4 Alternative methods for valuation... 19 5.5 Any other information... 19 6. Capital Management... 19 6.1 Own Funds... 20 6.2 SCR and MCR... 20 6.3 Non-Compliance with the MCR and Non-Compliance with the SCR... 21 6.4 Any other information... 21 Appendices... 21 Solvency and Financial Condition Report 2
1. Summary Telenor Forsikring AS (TeFo) is a captive insurance company with a concession to underwrite loss or damage insurance and reinsurance relating to owned assets of Telenor Group companies, and to underwrite personnel insurances related to employees of Telenor Group that are employed in Norway. In 2016, it had a technical accounting result of NOK 19.3m and a non-technical result of NOK 21.1m. TeFo has established a system of governance with 18 governance policies and operates a structured risk management and internal control system which supports the Board and management in making riskbased strategic and operational decisions. TeFo s overall risk profile is appropriately managed. The portfolio of insurance products underwritten is standard and net risk retained is limited. It operates a stable investment management strategy and invests in accordance with the prudent person principle through formal annual Board approval of both the investment strategy and the governance policies for investment risk management and liquidity and concentration risk management. TeFo s counterparty risk is low. Liquidity risk is managed through separate agreements in place covering sudden liquidity required for normal course of business and emergency liquidity needs following a mass casualty event. Operational risk is evaluated to be relatively low due to clear lines of responsibility, a structured system of governance and an actively managed internal control system. At year-end 2016, TeFo had own funds of NOK241.83m counting towards the solvency capital requirement. Its regulatory solvency capital requirement (SCR) was NOK 87.4m and minimum capital requirement (MCR) was NOK 26.99. The company s solvency ratio was therefore 277% and its MCR coverage was 838%. 2. The business and key figures 2.1 About the business The company s formal status and registered address Telenor Forsikring AS was established in 1998 as the Telenor Group s captive insurance company. The company address is Snarøyveien 30, 1360 Fornebu. Ownership structure and ownership interest The company is a captive insurance company owned 100% by Telenor ASA. Name of external auditor and regulatory oversight body External Contact person Email Auditor E&Y Markus Schmid markus.schmid@no.ey.com Finanstilsynet are the company s regulatory body. Material lines of business The company underwrites employee-related insurances for employees in Norway with the exception of workers compensation which has been placed externally since 2010. It also underwrites an All Risks Solvency and Financial Condition Report 3
insurance product covering Telenor Group assets and business interruption. TeFo structures its participation as a reinsurance layer in conjunction with a commercial insurer fronting partner. Material lines of business therefore include: LOB 2 (Income Protection). Additionally, TeFo underwrites a Group Life product which is treated by Finanstilsynet as health insurance (Similar to Life). LOB 28 (Non-proportional property reinsurance). 2.2 Results from the insurance portfolio Qualitative and quantitative results Summary of Income Statement 31.12 2016 (MNOK) Premium for own account 53.240 Other insurance related income 2.274 Insurance claims costs 23.735 Insurance related operating costs 12.473 Technical (insurance) accounting result 19.305 Net investment income 21.089 Other income 82 Non-technical (investment) accounting result 21.171 Other result components -29 TOTAL RESULT MNOK 32.804 Costs per line of business and in aggregate Costs per line of business are identified in the attached QRT scheme 05.01 Premium, claims and expenses by line of business. 2.3 Results from investments Returns and losses from investments In 2016 TeFo had NOK 21.09m net investment income. At year-end 2016, combined investment capital was NOK 448m. Adjusted returns in 2016 were 4.8%. Solvency and Financial Condition Report 4
Returns and losses accounted directly against equity capital In 2016 TeFo had a non-technical result of NOK 21.17m which together with the technical result produced a combined result of NOK 40.5m. Tax costs were calculated at NOK 7.6m which gave a result after tax of NOK32.8m. A corporate contribution of NOK35.2m after tax was paid to the owner for the 2015 year. Combined equity capital at the end of 2016 was therefore NOK 280.3m kroner. Investment costs incurred in 2016 In 2016 TeFo had costs of NOK 0.38m in relation to investments. 2.4 Results from other activities of the business As Telenor s insurance unit the captive has authority from Telenor ASA to support the Group in connection with insurance related tenders, insurance placements and management and administration of the insurance programme placed with external insurers. The captive invoices Telenor ASA its incurred costs which for 2016 totalled NOK 1.1m. 3. System of Governance 3.1 General information on the system of governance TeFo Board and Board Audit Committee TeFo s Board of Directors consists of 5 members. The Board members have backgrounds in law and finance. The Board ensures that the company adheres to the principles for the governance and effective control of company activities set out under the EIOPA Solvency II system of governance. The Board s main responsibilities include the following: Objectives and strategies Approve TeFo s strategic objectives for both insurance and investment management. Operations and finances Monitor ongoing operating and financial conditions and controls, and approve the accounts. Monitor the development of the regulatory Solvency Capital Requirement and Solvency Ratio relative to approved risk appetite and risk tolerance levels. Monitor the development of the company risk profile. Organisation and employees Appoint the TeFo CEO and oversee the organisation of the company s operations. The Board has appointed a Board Audit Committee whose main focus and responsibility is to review the company accounts including the notes and other technical matters. Board and Board Audit Committee interface with TeFo Key Functions The Board interfaces with each key function as required under the Solvency II System of Governance. Risk Management function: The Board has a regular engagement throughout the year relating to the company risk management system including ORSA and risk management related governance policies. Solvency and Financial Condition Report 5
The Board Audit Committee assesses specific items as required. The risk manager attends Board and Board Audit Committee as required. Compliance Function: The Board receives an annual report summarizing the key findings from the compliance function activity plan. Actuary Function: The Board receives an annual report from the actuarial function which documents all material tasks performed and their results. Any deviations are highlighted. The actuary function attends Board and Board Audit Committee as required. Internal Audit Function: The Internal Audit function is appointed by the Board. The Internal Audit function reports its annual plan and audit findings to the Board Audit Committee. Material changes over the reporting period During 2016, one member of the Board resigned due to exit from the Telenor Group. A new Board member was appointed with a similar professional competence background. Renumeration Members of the TeFo Board are not explicitly remunerated for undertaking this role. Employees of TeFo As are remunerated on a fixed basis with no variable compensation. 3.2 Fit and proper requirements TeFo has a fit and proper policy which regulates how it manages the fit and proper assessment. In line with EIOPA System of Governance Guideline 11 Fit requirements, members of the Board and key functions collectively possess appropriate qualification, experience and knowledge about: o Insurance and financial markets o Business strategy and business model o System of governance o Financial and actuarial analysis o Regulatory framework and requirements Qualifications and experience of key employees - hereunder the CEO and Risk Manager and Compliance Officer - are additionally taken into account when assessing the professional skillsets required of members of the TeFo Board. Process for Fit evaluation The Board Chairman undertakes a collective competence evaluation of Board members based on the EIOPA criteria above. This evaluation is done in consultation with TeFo CEO, and is documented. TeFo CEO evaluates the knowledge, competence and experience required for key functions Risk Management, Compliance, Actuarial and Internal Audit. Where a key function is fully outsourced, TeFo uses authorized parties as determined by Finanstilsynet. Process for Proper evaluation A Politiattest is required to be provided by Board members, CEO and individuals responsible for key functions Risk Management, Compliance, Actuarial and Internal Audit. Solvency and Financial Condition Report 6
3.3 Risk management system including the own risk and solvency assessment Risk management system and its implementation including ORSA The goal of TeFo s risk management strategy is to enable the TeFo Board and administration to make risk-based decisions on strategic and operational direction. TeFo s risk management system comprises of its risk management strategy, risk management policies, overall risk appetite and risk tolerance definitions, and risk management process. In addition, risk appetite and risk tolerance are further defined at individual risk policy level. The risk manager is the responsible roleholder. TeFo s risk management process embeds a quarterly wheel of risk management activities to ensure adherence to Board approved overall risk appetite and risk tolerance. The steps involved are: There are further touchpoints with the Board throughout the year on risk management. These include the TeFo own risk and solvency assessment (ORSA) evaluation for which TeFo performs 4 different types of stress modelling, simulations and shock scenarios as part of strategy planning. The risk management annual wheel visualized below identifies matters evaluated by Board. Solvency and Financial Condition Report 7
Determination of solvency needs and interaction of risk management and capital management TeFo has defined overall risk appetite and overall risk tolerance in terms of maintaining the company s solvency capital requirement and its solvency ratio within designated ranges approved by the Board. This directly aligns capital management and risk management in the business. The quarterly process cycle and the stress modelling undertaken for the ORSA exercise provide a documented basis for the Board to assess: Whether or not the standard formula regulatory solvency capital requirement adequately reflects the company risk profile Whether the combination of stress tests, simulations and shock scenarios modelled provide a robust projection of future risk relative to the Board s capital management targets. Whether the company strategy can be approved in light of the risk appetite, capital management and expectations for the future. 3.4 Internal control system TeFo has established a system of governance based on 18 governance policies approved by TeFo Board. These cover insurance-related policies, investment related policies, organisational and reporting matters. The internal control system is the mix of processes and activities undertaken within TeFo that underpin the governance framework and risk management system. This helps ensure: - the implementation of efficient and effective operations; - that accountability obligations are defined and fulfilled; - the availability and reliability of financial and non-financial information; - compliance with applicable laws, regulations and administrative provisions; Solvency and Financial Condition Report 8
The key macro processes that manage the Company's activities and operations are: Underwriting management and claims management macro-processes are broken down into process steps which define how frequently the activity is undertaken, and which identify key inputs, key control activities involved and how the activity is linked to the Governance Policies. TeFo s internal control system ensures that there is an appropriate segregation of duties in place to enable the risk management, compliance, actuarial, and internal audit functions to perform their second and third line monitoring processes through business control, mitigation, and reporting. Compliance Function The compliance function is combined with the risk management function and reports to the CEO and TeFo Board. The risk manager and compliance officer is the responsible roleholder. The compliance function oversees a formal activity plan which consists of the following modular components: Monitoring of external laws/regulations. Maintenance of a compliance register. Compliance control reviews performed by a third party to avoid conflict of interest. Assessment of compliance risk. An annual report is provided to the TeFo Board summarizing key findings. 3.5 Internal audit function Under TeFo s governance model, internal audit is formally designated as the third line of defence. The Internal Audit function is regulated by the framework set out in the Internal Audit policy which states that the TeFo Board is responsible for selection of the internal audit service provider and the internal audit function shall report directly to the TeFo Board Audit Committee. TeFo has outsourced the key function Internal Audit to BDO who performed a series of internal audit projects throughout the year in areas such as governance and internal control, liquidity management, and information and communications technology. The appointment of an external organization provides necessary assurances regarding independence and objectivity. Solvency and Financial Condition Report 9
3.6 Actuarial function The actuarial function is regulated by the framework set out in the Actuarial policy approved by the TeFo Board. Responsibilities include valuation of the technical provisions, assessment of sufficiency and quality of data used in the estimation of technical provisions, evaluating models and assumptions, and comparing best estimate against experience. The actuarial function works in close cooperation with the risk management function, especially with regards to the SCR calculations, ORSA and QRT reporting processes. The actuarial function also participates in quarterly risk evaluation workshops. The actuary function is outsourced to an external service provider. 3.7 Outsourcing Outsourcing policy and localization of service providers The nature and limited scale of the captive insurance business necessitates that TeFo relies on expertise within outsourced service providers. TeFo s outsourcing policy defines a list of critical or important functions that can be outsourced as long as this does not materially reduce the quality of the system of governance, increase operational risk excessively or impair Finanstilsynet s monitoring of TeFo s compliance. The policy requires the Board to approve proposals to fully outsource critical or important functions whilst the CEO shall approve outsourced support for critical or important functions. The policy also sets out how outsourced functions shall be managed, both at the time of outsourcing and as existing service providers. TeFo has outsourced key functions Internal Audit and the Actuary function as well as Accounting and Personnel Claims Management to external service providers in Norway. Investment Management and IT are outsourced to internal service providers in Norway. 3.8 Evaluation of suitability of system of governance TeFo believes that the company s system of governance is appropriate to the nature, scale and complexity of its business. 4. Risk Profile 4.1 Underwriting risk Overall, TeFo s underwriting risk is evaluated to be relatively low due to the standardised nature of its product portfolio, its limited net retention on the All Risks property product, and the catastrophe reinsurance protections for the employee-related products. Exposure Measuring underwriting risk for the SCR standard formula calculation TeFo evaluates risk input factors for capital charge calculations in line with EIOPA guidance. In relation to employee related insurance products, capital charge elements are included for scenarios relating to Health Mass Accident catastrophe, Health Accident Concentration catastrophe and Health Pandemic catastrophe. Solvency and Financial Condition Report 10
In relation to the All Risks property insurance product, TeFo applies the catastrophe module for nonproportional reinsurance (Line of Business 28). A capital charge element is also included under the Natural Catastrophe module reflecting membership of the NNP. Premium and reserve risk in the SCR is calculated by using the standard formula standard deviation on volume of premium and reserves for Lines of Business 1 (Medical Expenses), 2 (Income Protection), 3 (Workers Compensation run off), 7 (Fire/Other damage to property insurance) and 28 (Nonproportional property reinsurance). In addition, TeFo underwrites a Group Life product which is designated as health insurance (Similar to Life). During 2016, there was a change to the calculation of premium and reserve risk for the Group Life product due to its treatment as health insurance (Similar to Life). The stress shock applied on the technical provisions for health (Similar to Life) products is lower than that applied to health (Not Similar to Life) which results in a significantly lower capital charge. For quantitative details on underwriting risk, please refer to the SCR tables in Chapter 6. Measuring underwriting risk by modelling TeFo models the impact on the SCR and solvency ratio with 4 stress test/scenario techniques. 1. Higher standard deviations TeFo has a small portfolio of employee related products with limited risk diversification compared to the average insurance company so the standard formula calculation may underestimate our exposure. Therefore we stress test the effect of double the standard deviation on health premium risk and an increased standard deviation on health reserve risk. 2. Risk Stressing TeFo models how much the SCR would rise if exposure within health and non-life risk areas is increased by a set percentage level, both individually and in combination with similar percentage increases in market and counterparty risk exposure. 3. Killer Scenarios Reverse stress tests are performed to model what percentage increase in exposure within the health and non-life risk areas can be absorbed before the solvency ratio (own funds =SCR) falls to 100%, both individually and in combination with similar increases in market and counterparty risk. 4. Simulating the effect of shock scenarios on results/balance over strategy period We stress the base case long-term forecast model assumptions with worse than forecast insurance results over consecutive years to test TeFo s financial capacity to withstand results shocks. Measuring underwriting risk for the own risk assessment Each quarter, TeFo re-evaluates its risk profile. Factors taken into account include the biggest net retained risk, average exposure, the nature of the Telenor Group business, geopolitical and societal risk, TeFo s risk appetite as defined in its governance policies, claims development, product pricing and potential future changes to the risk profile in relation to TeFo s strategic plan. Material underwriting risk exposures For the SCR calculation Employee related insurance products: The premium and reserve risk is the largest exposure. Solvency and Financial Condition Report 11
All Risks reinsurance product: Catastrophe risk is the largest exposure as TeFo s layer capacity as a reinsurer is fully capital-weighted. In addition, premium and reserve risk is material. For the own risk assessment Material risks identified are tail risk on historical claims, multiple casualty events, natural catastrophe events, and terrorism. Concentration Employee related insurance products: There is risk concentration at Telenor Group locations (statutory workers compensation top up) and when employees are convened off-site in situations which may not be defined as work-related under workers compensation coverage, i.e. social aspects of work events. Mitigation Employee related insurance products: TeFo limits its exposure through a catastrophe reinsurance contract which acts as an umbrella over all the underlying products in the TeFo employee insurance portfolio. The trigger for this reinsurance cover is when the incident involves several employees. All Risks reinsurance product: TeFo structures its participation as a reinsurance layer in conjunction with a commercial insurer fronting partner. Risk surveys are undertaken at key locations in conjunction with the commercial insurer fronting partner to control the risk. Sensitivity As part of its ORSA analysis, TeFo undertakes sensitivity analysis to stress the base case long-term forecast model for the financial results. The assumptions used in the insurance results shock scenario are that the combined ratio is dramatically worse than forecast in year 1 and gradually improves in years 2 and 3 before returning to the forecast level in year 4. 4.2 Market risk Overall, TeFo s market risk is evaluated to be limited due to a stable investment management strategy with predictable and conservative asset allocation working in conjunction with a series of risk limits designed to optimize the risk/return balance and ensure suitable diversification of assets. Exposure Measuring market risk for the SCR standard formula calculation TeFo includes capital charge elements for interest rate risk, credit spread risk, concentration risk, share portfolio risk, and currency risk in line with EIOPA guidance. For quantitative details on market risk, please refer to the SCR tables in Chapter 6. Measuring market risk by modelling 1. Risk Stressing TeFo models how much the SCR would rise if exposure within market risk is increased by a set percentage level, both individually and in combination with similar percentage increases in health, nonlife and counterparty risk exposure. Solvency and Financial Condition Report 12
2. Killer Scenarios Reverse stress tests are performed to model what percentage increase in exposure within the market risk area can be absorbed before the solvency ratio (own funds =SCR) falls to 100%, both individually and in combination with similar increases in health, non-life and counterparty risk. 3. Simulating the effect of shock scenarios on results/balance over strategy period We stress base case long-term forecast model assumptions with worse than forecast investment results over consecutive years to test TeFo s financial capacity to withstand results shocks. Measuring market risk for the own risk assessment TeFo s quarterly evaluation of its risk profile uses the standard formula calculations as proxy for the company s market risk. Material market risk exposures Equities represent the largest element in the capital charge calculation for market risk. Investment in accordance with the prudent person principle TeFo fulfills its obligation to invest in accordance with the prudent person principle through formal annual Board approval of both the investment strategy and the governance policies for investment risk management and liquidity and concentration risk management. The investment strategy and investment risk management policy identify TeFo s risk appetite level (neutral position) for various asset classes and the tolerance ranges that the Board approves around each allocation. In addition, the Board has set the neutral position and the risk tolerance range for other investment metrics such as duration risk on bond instruments, credit risk, the division of bond placement credit rating limits and the ratings of single counterparties. Regarding liquidity risk, the investment strategy and liquidity and concentration risk policy specify how TeFo ensures funds availability in circumstances where sudden liquidity is required during normal course of business to make a series of large claims or other payments. In addition, the liquidity and concentration risk policy specifies how TeFo ensures prompt funds availability in circumstances where sudden liquidity must be available following a mass casualty event. Regarding concentration risk, the investment strategy and liquidity and concentration risk policy specify how TeFo ensures suitable diversification of assets through, for example, division of sector level investment limits, setting a range for the size of the share instrument portfolio and setting limits for investments in individual share instruments relative to the reference index. Mitigation Telenor Forsikring s investment strategy, investment risk management policy and liquidity and concentration risk policy set out a series of risk limits designed to optimize the risk/return balance and to ensure suitable diversification of assets. These are managed through a formal contractual agreement with Telenor Group Treasury under which they monitor and ensure that investment management at all times is within the mandate approved by the TeFo Board. A quarterly report confirms the control routines they have performed and highlights any findings. Solvency and Financial Condition Report 13
Sensitivity As part of its ORSA analysis, TeFo undertakes sensitivity analysis to stress the base case long-term forecast model for the financial results. The assumptions used for the investment results shock scenario are that the investment result is dramatically worse than forecast in year 1 and gradually improves in years 2 and 3 before returning to the forecast level in year 4. 4.3 Counterparty risk Overall, TeFo s counterparty risk is evaluated to be very low. Exposure Measuring counterparty risk for the SCR standard formula calculation TeFo assesses both Type 1 and Type 2 exposures in line with EIOPA guidance. This covers counterparties underwriting the catastrophe reinsurance programme for employee-related insurances, the company s participation in the Norsk Naturskade Pool and receivables on the balance sheet. For quantitative details on counterparty risk, please refer to the SCR tables in Chapter 6. Measuring counterparty risk by modelling 1. Risk Stressing TeFo models how much the SCR would rise if exposure within counterparty risk is increased by a set percentage level, both individually and in combination with similar percentage increases in market, nonlife and health risk. 2. Killer Scenarios Reverse stress tests are performed to model what percentage increase in exposure within the counterparty risk area independently can be absorbed before the solvency ratio (own funds =SCR) falls to 100%, both individually and in combination with similar increases in market, health and non-life risk. Measuring counterparty risk for the own risk assessment TeFo s quarterly evaluation considers factors such as the structure of the company s retentions and reinsurance protections, TeFo s risk appetite as defined in its reinsurance policy and financial strength of reinsurer counterparties. Concentration TeFo assesses Lloyd s as a single counterparty because the Lloyd s market operates with a common LEI code and is supported by the Lloyd s Central Fund which could cover individual syndicate s liabilities in a default situation. Mitigation Despite the treatment of Lloyd s as a single counterparty for SCR purposes, there is diversity of quality credit counterparties within TeFo s catastrophe reinsurance protection covering employee related insurance products. Solvency and Financial Condition Report 14
4.4 Liquidity risk Overall, TeFo s liquidity risk is evaluated to be low due to the separate agreements that are in place to cover sudden liquidity required during normal course of business and emergency liquidity needs following a mass casualty event involving employees in Norway. Exposure Measuring risk TeFo undertakes liquidity stress tests which take the form of a stress increase in forecast claims payments during the year for the insurance products underwritten by the company. Material liquidity risk exposures TeFo s major exposure to liquidity risk is for scenarios where there is either a sudden series of employee death event claims under the Group Life insurance product within a short period, or the occurrence of a multiple casualty event requiring prompt payment of multiple employee death claims relatively simultaneously. Total of expected profit included in future premiums Expected profits included in future premiums (EPIFP) result from the inclusion in technical provisions of premiums that will be received in future for existing business, but which have not yet been received. TeFo has set this value to zero, due to the fact that all policies are written from April 1 st every year. Refer also to QRT s.23.01. Mitigation TeFo monitors its liquidity requirements through liquidity forecasts. Where sudden liquidity is required during normal business, TeFo has an agreement in place with its investment managers to make available different levels of funds within a pre-defined number of days. To cover liquidity needs following a mass casualty event involving employees in Norway, TeFo has in place an agreement with Telenor Group Treasury for a short-term emergency liquidity facility which can be triggered in such circumstances. This will provide liquidity prior to reimbursement of funds from reinsurers under the catastrophe reinsurance agreement covering employee-related insurances. Sensitivity The following is used as the basis for the liquidity stress test: The forecast level of claims payments during the year for the three main employee related insurance products are each stressed with an increase of 30%. The forecast level of claims payments during the year for the All Risks insurance product is stressed with an increase of 30%. 4.5 Operational risk Overall, TeFo s operational risk is evaluated to be relatively low due to clear lines of responsibility, a structured system of governance and an actively managed internal control system. For quantitative details on operational risk, please refer to the SCR tables in Chapter 6. Solvency and Financial Condition Report 15
Exposure and Mitigation Operational risk exposures During 2016, there were operational risks included in TeFo s risk register related to personnel, systems, processes, fraud, service providers, internal control, authority levels and money laundering. How TeFo manages sources of operational risk TeFo has established clear assignment of responsibilities and reporting lines. All internal positions have job descriptions including for the key functions risk management and compliance. Governance policies are in place to provide guidelines for managing areas in which operational risk can arise (as illustrated below): Solvency and Financial Condition Report 16
TeFo s internal control system ensures a segregation of duties to enable the risk management, compliance, actuarial, and internal audit functions to perform second and third line of defence monitoring processes. This includes compliance control projects which review operational processes as part of the compliance function annual plan. The key macro processes that manage the Company's activities and operations are identified in Chapter 3.4 above An operational contingency plan is in place which identifies how the company will respond in a crisis situation including one relating to outsourced service providers, and the roles that team members hold as part of the crisis management team. This plan is exercised annually. In-depth analysis also documents the basis for why operational risks are included in the risk register. This is reviewed in the quarterly risk workshop. 5. Valuation for Solvency Purposes 5.1 Assets There are no major differences of the valuation of the assets in the Solvency II-balance and in the financial statements. As at 31.12.2016 TeFo held the following assets: The valuation principles applied to these assets are as follows: - Stocks and funds are quoted instruments in active markets and market prices as of 31.12.16 have been used. - Government and corporate bonds are quoted instruments in active markets and market prices as of 31.12.16 have been used. - Reinsurance share of unearned premiums the reinsurance share of unearned premiums reserve comprises the reinsurer s share of the proportion of gross premiums written which is to be earned in the following or subsequent financial years. - Cash and equivalents are valued at the amount held at the period end. - Other assets valued based on the best estimate of the recoverable or realizable value. Solvency and Financial Condition Report 17
5.2 Technical provisions Values and calculations Technical provisions are valued in accordance with the Solvency II Directive which states that the value of technical provisions shall be equal to the sum of a best estimate and a risk margin. In the following table the value of technical provision in the Solvency II-balance, including the amount of the best estimate and the risk margin is given: Medical expence Income protection LoB Workers compensation Fire and other damage to property Non-proportional property reinsurance Health insurance Beste estimate (gross) - claim provisions Beste estimate (gross) - premium provisions 370 794 54 098 649 1 917 864 1 625 692 24 734 624 19 051 108 13 552 3 098 348 591 093 3 042 222 5 782 403 Risk margin 35 997 5 356 907 179 622 0 2 601 500 2 325 835 Total 420 342 62 553 904 2 097 485 2 216 785 30 378 345 27 159 346 The claim provisions consist of RBNS, IBNR and ULAE elements. The RBNS is estimated on individual claims by the claim managers, and the ULAE is an estimate of the expenses that are not attributed to the processing of a specific insurance claim. The IBNR reserves are estimated by wellknown actuarial methods such as the loss ratio method, Chain Ladder, Bornhuetter Ferguson and Benktander. Past claim payouts have been adjusted for inflation and future expected inflation added to the claim provisions. The claim provisions are thereafter discounted by the risk free rate published by EIOPA. The premium provisions are estimated by the unearned premium plus the expected profit from future premium income on policies currently written. The risk margin is calculated by the specifications from EIOPA, using the third simplification method. Uncertainties in the estimated technical provisions TeFo has a relatively small and volatile portfolio. It may thus be difficult to separate random variations from trends, in particular due to the relatively limited data available. The claim provisions (in particular the IBNR element) thus contains a moderate degree of uncertainty. Sensitivity analyses are performed by adjusting development factors in the Chain Ladder method, and comparing the correspondingly calculated reserves. The company manages this risk by ongoing monitoring of claims development, in particular by the actuarial function. Differences between the valuation for solvency purposes and for the financial statements The tables below compare the technical provisions in the Solvency II-balance and in the financial statements: Solvency and Financial Condition Report 18
Financial statement Gross Reinsurers share Net Premium provisions 13 616 824 347 250 13 269 574 Claim provisions 105 658 908 0 105 658 908 Total technical provisions 119 275 732 347 250 118 928 482 Solvency II balance Gross Reinsurers share Net SII/financial statement Premium provisions 12 527 618-12 527 618 94 % Claim provisions 101 798 730-101 798 730 96 % Risk margin 10 499 860-10 499 860 N/A Total technical provisions 124 826 208-124 826 208 105 % The differences between the valuations can be attributed to the following: Both claim and premium provisions are discounted in the Solvency II-balance, but not discounted in the financial statement In the financial statement the premium provisions consist only of unearned premium In the Solvency II-balance the reinsurers share is discounted and adjusted for expected losses on claims The Solvency II risk margin is not included in the financial statement The recoverables from reinsurance contracts TeFo has one reinsurance contract, described in section 4.1 under Mitigation. There have not been any recoverables from this contract in the time period covered by this report. 5.3 Other liabilities Garantiordingen : This post is recognized as a liability in the Solvency II-balance, but as equity in the financial statement. The valuation of the post is equal in both cases. In addition, deferred tax is treated differently in the Solvency II-balance and the financial statement. All other liabilities are treated equally. 5.4 Alternative methods for valuation Not applicable for TeFo. 5.5 Any other information The company do not consider that there is any further information which should be disclosed regarding the valuation for solvency purposes. 6. Capital Management The capital management function and its relation to the risk management function is described in section 4.2 Market risk. Solvency and Financial Condition Report 19
6.1 Own Funds TeFo classifies its own funds as tier 1, tier 2 or tier 3 depending on the characteristics of the capital. Tier 1 capital is the best form of capital for the purposes of absorbing losses. The company s own funds are as follows: Own funds 31.12.2016 31.12.2015 Basic own funds - Tier 1 220 773 982 225 883 510 - Tier 2 21 057 359 20 646 592 - Tier 3 0 0 Sum basic own funds 241 831 341 246 530 102 Ancillary funds 0 0 Total own funds counting towards the SCR 241 831 341 246 530 102 As seen from the table, there are no ancillary funds. The main changes in the own funds are due to dividends. There are no restrictions on the own funds, except the natural perils fund, assigned to tier 2 capital. 6.2 SCR and MCR TeFo uses the standard model for calculation of the SCR and the MCR, and does not use any undertaking specific parameters or other adjustments. Below is a table of the calculated SCR and MCR at 31.12.15 and 31.12.16. Solvency Capital Requirements (SCR) 31.12.2016 31.12.2015 Market risk 44 265 877 38 704 279 Counterparty risk 5 276 302 11 475 470 Health underwriting risk 31 023 758 38 859 647 Non-life underwriting risk 45 552 401 32 426 645 Diversification -41 509 644-41 541 317 Risks related to intangible assets 0 0 Operational risk 2 796 536 3 614 620 Loss absorbing effect of deferred tax 0 0 Add-on capital 0 0 Solvency Capital Requirements (SCR) 87 405 229 83 539 346 Ratio between available capital and SCR 277 % 295 % Minimum Capital Requirements (MCR) Linear MCR 26 998 044 22 877 390 Minimum capital upper bound (45% of SCR) 39 332 353 37 592 706 Minimum capital lower bound (25% of SCR) 21 851 307 20 884 836 Absolute minimum capital requirment (EUR 3,7 mill.) 22 586 250 24 047 500 Minimum Capital Requirments (MCR) 26 998 044 24 047 500 Availabe capital to cover MCR 226 173 591 230 693 010 Ratio between available capital and MCR 838 % 959 % Solvency and Financial Condition Report 20
The main changes in SCR and MCR since the last reporting at 31.12.15, can be explained as follows: - All risk (the property non-proportional reinsurance) is moved from LOB 7 to LOB 28, leaving only the natural peril cover in LOB 7. This implies: o Underwriting risk increases due to the fact that standard deviations are larger in LOB 28 compared to LOB 7 o The catastrophe module for non-proportional reinsurance is thus used instead of the manmade catastrophe module. The catastrophe risk has thus increased since there is not a diversification effect between non-proportional reinsurance catastrophe and nature peril. o In total this increases the non-life underwriting risk by about 13 MNOK (from appr. 32.4 MNOK to 45.5 MNOK). - Health underwriting risk: o Group life is moved to SLT (similar to life). This decreases the health underwriting risk module. - Counterparty risk: o New reinsurance cover with several reinsurers reduces the counterparty risk - Market risk has increased due to larger exposure 6.3 Non-Compliance with the MCR and Non-Compliance with the SCR There have been no periods of non-compliance with the MCR or SCR throughout the time period covered by this report. 6.4 Any other information The company does not consider that there is any further information which should be disclosed regarding the capital management. Appendices The following annual Quantitative Reporting Templates are included as Appendices: s.02.01 Balance Sheet s.05.01 Premiums, claims and expenses by line of business s.12.01 Life and Health SLT technical provisions s.17.01 Non-life technical provisions s.19.01 (aggregated version) Non-life insurance claims s.23.01 Own Funds s.25.01 Solvency Capital Requirement s.28.01 Minimum Capital Requirement Solvency and Financial Condition Report 21