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 2018 Contents Page Page Introduction 1 E. Capital management 52 Executive summary 2 E.1 Own funds 53 E.2 Solvency capital requirement and minimum A. Business and performance 6 capital requirement 57 A.1 Business 7 E.3 Use of the duration-based equity risk sub-module A.2 Underwriting performance 10 in the calculation of the solvency capital requirement 60 A.3 Investment performance 14 E.4 Use of the internal model 60 A.4 Performance of other activities 16 E.5 Non-compliance with the minimum capital A.5 Any other information 18 requirement and non-compliance with the solvency capital requirement 63 B. System of governance 19 E.6 Any other information 63 Introduction: Assessment of the adequacy of the Group’s system of governance 20 B.1 General information on the system of F. Other information 64 governance 21 F.1 Approval by the Boards 65 B.2 Fit and proper requirements 25 F.2 Report of the external independent Auditor 66 B.3 Risk management system, including the Own F.3 Forward-looking statements disclaimer 71 Risk and Solvency Assessment 26 F.4 Glossary 72 B.4 Internal control system 29 B.5 Internal audit function 30 G. Quantitative Reporting Templates 74 B.6 Actuarial function 31 G.1 Summary of Quantitative Reporting Templates 75 B.7 Outsourcing 32 G.2 Direct Line Insurance Group plc 76 B.8 Any other information 32 G.3 U K Insurance Limited 91 G.4 Churchill Insurance Company Limited 110 C. Risk profile 33 Introduction: Prudent person principle 34 C.1 Underwriting risk 34 C.2 Market risk 36 C.3 Credit risk 38 C.4 Liquidity risk 39 C.5 Operational risk 40 C.6 Other material risks 40 C.7 Any other information 40 D. Valuation for solvency purposes 41 D.1 Assets 42 D.2 Technical provisions 46 D.3 Other liabilities 49 D.4 Alternative methods of valuation 50 D.5 Any other information 51 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 2018, 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. 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 new 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. 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 2018 was published on its website in March 2019 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 67. 1 Executive summary Section A – Business and performance summary The Group The Group’s purpose is to give people the protection they need to do the things they love in life, whether that be driving their car, enjoying their home and possessions, exploring the world, caring for their pets or building their businesses. The Group’s strength lies in the diversity of it’s proposition, offering a range of powerful brands and multiple routes to market, underpinned by a determination always to aim higher for customers, people and shareholders. The Group delivered another strong set of results in 2018 in very competitive markets, again showing benefits of the Group’s diversified product and channel portfolio and disciplined underwriting. Sitting behind the Group’s strong financial results and growth in direct own brands was a highly engaged team. The Group provides motor, home, rescue and other personal lines and commercial insurance products and is represented through its highly recognised brands Direct Line, Churchill, Privilege, Green Flag and NIG, and also through DLG Partnerships and DLG Auto Services. The Group insures around one in six cars on the road in the UK, representing 4.1 million in-force policies, and is one of Britain’s leading personal home insurer measured by in-force policies. The Group provides roadside assistance and recovery for customers through its Green Flag roadside recovery provider. The Group also offers customers protection for their pets and holidays. The Group protects commercial business through its brands NIG, Direct Line for Business and Churchill. NIG sells its products exclusively through brokers operating across the UK. Direct Line for Business provides business, trades, from start-ups, to growing businesses, from renting out a property to working as a single tradesman products direct to customers via phone and online. Churchill sells business, landlord and van products direct to customers and through price comparison websites. 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 2018 On an International Financial Reporting Standards (“ IFRS ”) basis in 2018, the Group grew its direct own brands gross written premium by 1.8% and achieved an operating profit of £601.7 million (2017: £642.8 million). The reduction in operating profit was primarily due to lower prior-year reserve releases and investment return. Prior-year reserve releases were £404.4 million (2017: £435.4 million) with both years benefiting from reserve releases relating to the Ogden discount rate. In respect of 2018, the Group has now assumed a higher Ogden discount rate of 0%, following Royal Assent of the Civil Liability Act 2018 which contributed £55 million to operating profit of which £51 million related to the prior year (2017: £49 million relating to Ogden ). Weather returned close to normal levels in 2018 after a benign 2017 and this offset the non-repeat in 2018 of the £56.9 million non-cash impairment charge incurred in 2017. Normalised for weather and adjusted for the Ogden discount rate change, the combined operating ratio was approximately 93.5%, at the lower end of the Group’s medium-term target of between 93% and 95%. Section A of the SFCR has more information on the Group’s business and performance in 2018: see pages 6 to 18 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. A major focus of the Board continues to be maintaining high standards of corporate governance, which the Board seeks to achieve through the Group’s governance arrangements. The Board is committed to the principles of the UK Corporate Governance Code 2016 issued by the Financial Reporting Council (the “ Code ”) and has complied with all the principles of the Code throughout the financial year. The Board seeks to secure the long-term success of the Group and aims to deliver this by creating an open culture that encourages the Group to make decisions that are best for its shareholders and stakeholders. The Boards have resolved to approve and adopt a High Level Control and System of Governance Framework document as a statement of the governance structure and requirements applicable to each company and the Group. The Board has established a risk management model that separates the Group’s risk management responsibilities into Three Lines of Defence as follows: • the First Line of Defence is management who are responsible for owning and managing risks to achieve the Group’s business objectives on a day-to-day basis; 2 Executive summary continued • the Second Line of Defence is the Risk function which is responsible for the design and implementation of the Group’s Enterprise Risk Management Strategy and Framework, and the provision of proportionate oversight of and challenge to the business’ management of risks, events and management actions; and • the Third Line of Defence is Group Audit, which is responsible and accountable for providing an independent and objective view of the adequacy and effectiveness of the Group’s risk management, governance and internal control framework. Section B of the SFCR has more information on the Group’s system of governance: see pages 19 to 32 of this report.