Direct Line Insurance Group Plc, U K Insurance Limited and Churchill Insurance Company Limited
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DIRECT LINE INSURANCE GROUP PLC, U K INSURANCE LIMITED AND CHURCHILL INSURANCE COMPANY LIMITED SINGLE SOLVENCY AND FINANCIAL CONDITION REPORT FOR THE YEAR ENDED 31 DECEMBER 2020 CONTENTS Page Page INTRODUCTION 1 E. CAPITAL MANAGEMENT 50 EXECUTIVE SUMMARY 2 E.1 Own funds 51 E.2 Solvency capital requirement and minimum A. BUSINESS AND PERFORMANCE 6 capital requirement 55 E.3 Use of the duration-based equity risk sub- A.1 Business 7 module in the calculation of the solvency A.2 Underwriting performance 10 capital requirement 58 A.3 Investment performance 14 E.4 Use of the internal model 58 A.4 Performance of other activities 16 E.5 Non-compliance with the minimum capital A.5 Any other information 17 requirement and non-compliance with the solvency capital requirement 61 E.6 Any other information 61 B. SYSTEM OF GOVERNANCE 18 Introduction: Assessment of the adequacy of the Group’s system of governance 19 F. OTHER INFORMATION 62 B.1 General information on the system of F.1 Approval by the Boards 63 governance 20 F.2 Report of the external independent Auditor 64 B.2 Fit and proper requirements 24 F.3 Forward-looking statements disclaimer 69 B.3 Risk management system, including the F.4 Glossary Own Risk and Solvency Assessment 24 70 B.4.1 Internal control system 26 72 B.4.2 Compliance function 27 G. QUANTITATIVE REPORTING TEMPLATES B.5 Internal audit function 28 G.1 Summary of Quantitative Reporting Templates 73 B.6 Actuarial function 29 G.2 Direct Line Insurance Group plc 74 B.7 Outsourcing 29 G.3 U K Insurance Limited 89 B.8 Any other information 30 G.4 Churchill Insurance Company Limited 108 C. RISK PROFILE 31 Introduction: Prudent person principle and management of invested assets 32 C.1 Underwriting risk 32 C.2 Market risk 34 C.3 Credit risk 36 C.4 Liquidity risk 37 C.5 Operational risk 38 C.6 Other material risks 38 C.7 Any other information 39 D. VALUATION FOR SOLVENCY PURPOSES 40 D.1 Assets 41 D.2 Technical provisions 45 D.3 Other liabilities 48 D.4 Alternative methods of valuation 48 D.5 Any other information 49 INTRODUCTION Direct Line Insurance Group plc (the “Company”) together with its subsidiaries (the “Group”) has prepared a Single Solvency and Financial Condition Report (“SFCR”) as at 31 December 2020, in accordance with permission granted by the Prudential Regulation Authority (“PRA”) in December 2015 to produce a Single SFCR. This permission allows the Group to produce one SFCR that covers both the Group and its individual regulated subsidiaries and is valid until 31 December 2020. Further permission was given by the PRA on 3 December 2020 to continue to prepare a single SFCR for the period 1 January 2021 to 30 June 2025. The Group’s regulated entities are U K Insurance Limited (“UKI”) and Churchill Insurance Company Limited (“CIC”). In meeting the requirements for a Single SFCR, information is reported for the Group, UKI and CIC separately except where that information is equivalent in both nature and scope at Group level to that at regulated subsidiary level. The Boards of Directors of the Company, UKI and CIC (the “Boards”) have the same membership. Much of the information in the SFCR is equally relevant to the Group, UKI and CIC. Where this is not the case, this has been highlighted. The requirement to produce an SFCR follows the introduction of Solvency II as the solvency framework which was implemented on 1 January 2016 as the capital adequacy regime for the European insurance industry. Solvency II has established a set of EU-wide capital requirements and risk management standards with the aim of increasing protection for policyholders. HM Government and the UK regulatory authorities have undertaken a program of legislative activity to ensure that the UK continues to have a functioning financial services regulatory regime once EU law ceased to apply in the UK following the end of the Brexit transition period. The SFCR presents information on the business and performance, system of governance, risk profile, valuation for solvency purposes and capital management of the Group, UKI and CIC. Relevant information about the business of the Group is also included in the Group’s Annual Report & Accounts which is the primary vehicle for reporting performance, consolidated financial statements, corporate governance and risk management to the Group’s investors. The Group’s Annual Report & Accounts 2020 was published on its website in March 2021 and a copy can be found at: www.directlinegroup.co.uk/en/investors Some elements of this report are subject to external audit as detailed in the Auditor’s report, which can be found on page 64. 1 EXECUTIVE SUMMARY SECTION A – Business and performance summary The Group The Group’s vision is to create a world where insurance is personal, inclusive and a force for good and to deliver this it needs to build an insurance company of the future with technology and data at its core, adapting to an ever-changing world to deliver more for customers at speed. As the Group navigated the challenges that 2020 presented, it focused on supporting its customers, the wellbeing of its people, contributing to society and stepping up its plans to tackle climate change. This is because the Group believes embracing sustainable practices creates a better corporate culture, more reliable products and brings long-term rewards for its shareholders. The Group has demonstrated financial resilience by delivering another strong set of results, whilst supporting its customers, its people and local communities through the challenges of the pandemic. The Group is Britain’s leading personal motor insurer measured by in-force policies mainly represented through its well- known brands Direct Line, Churchill, Privilege, and its Darwin brand, and through its partners. The Group is one of Britain’s leading home insurers measured by in-force policies. The Group reaches its customers by selling home insurance products through its brands Direct Line, Churchill and Privilege, and its partners Royal Bank of Scotland and NatWest. The Group is also one of the leading providers of rescue, travel and pet insurance in the UK. Green Flag is the third largest recovery provider. The Group is also the second largest travel and the fourth largest pet insurer. The Group protects commercial businesses through its brands, including NIG and Direct Line for Business. Solvency II lines of business The policies underwritten by the Group are spread across the Solvency II lines of business including motor vehicle liability insurance, other motor insurance, fire and other damage to property insurance, general liability insurance, income protection insurance, legal expenses insurance, assistance and miscellaneous financial loss. Business performance in 2020 On an International Financial Reporting Standards (“IFRS”) basis in 2020 the Group delivered another year of strong profitability at the same time as growing its direct own brand policy count. The investments that have been made in systems and capability over the last few years are showing through in this growth and are contributing to underlying improvements in current year underwriting profitability. Overall Covid-19 led to a modest net benefit to the result. Despite the impact of the pandemic, the Group made further progress in delivering the change required to implement its transformation plans. The Group traded well through the year, delivering growth in its Home, Commercial and Green Flag Rescue businesses despite prolonged periods of lockdown when new business shopping dropped significantly. Retention has held up well. In contrast average premiums have fallen as risk mix has reduced, with fewer new drivers on the road as no driving tests have been conducted for parts of the year and fewer new cars have been purchased. In the midst of these trends the Group has experienced own brand policy growth of 2.2% with gross written premium broadly flat. Section A of the SFCR has more information on the Group’s business and performance in 2020: see pages 6 to 17 of this report. SECTION B – System of governance summary The Company’s Board of Directors (the “Board”) has overall oversight of the management of the Group. The Board is committed to underpinning all of the Group’s activities with the highest standards of corporate governance and seeks to ensure that we have effective corporate governance in place to help support the creation of long-term sustainable value for our shareholders and other stakeholders. The Board endorses the UK Corporate Governance Code 2018 (the “Code”), which applied to our 2020 financial year, and the related Guidance on Board Effectiveness. We seek to ensure that our governance framework remains aligned with best practice, consistent with the Code. Throughout the year ended 31 December 2020, the Company complied with the Principles and Provisions set out in the Code. The Board recognises the importance of its role in setting the tone of the Group’s culture, aligning it with our purpose, values and strategy, and embedding it throughout the Group. The Board aims to foster an open and collaborative culture based on our vision and purpose, supporting decisions that are best for our shareholders, whilst having regard to the interests of our other stakeholders. The Group’s governance framework is detailed in the Group’s High Level Control and System of Governance Framework document. This document details how the Group meets Solvency II and the PRA requirements to identify Key Functions and to have and maintain a Responsibilities Map in respect of the PRA and FCA’s Senior Managers and Certification Regime requirements. The Board reviews this document annually. The Group now has an embedded Enterprise Risk Management and Strategy Framework (“Risk Management Framework”) with clear accountabilities and risk ownership designed to ensure that the Group identifies, manages, mitigates and reports on all key risks and controls through the three lines of defence model: First line: Management is responsible for embedding risk management into business as usual and change processes whilst creating transparent reporting of risks and management actions.