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Committee reports

Risk Committee report

Howard Davies

Dear Shareholder

As Chairman of the Risk Committee, I am pleased to report on the Committee’s activities and focus during 2016.

The Committee assists the Board in providing leadership, direction and oversight of the Group’s overall risk appetite and limits, risk strategy and risk culture. We also oversee and advise the Board on current and future risk exposures of the Group, including those which have the potential to impact on the delivery of the Group’s business plan. The Committee reviews and approves the Group Risk Framework and monitors its appropriateness in identifying and managing the risks faced by the Group.

The committee met on eight occasions during the year. We work closely with the Audit Committee to ensure both Committees are updated on matters which impact on their responsibilities. Where a matter requires input from both Committees, joint meetings are held with the Audit Committee. In 2016, one joint meeting with the Audit Committee took place to discuss the Solvency II capital position as at 31 December 2015 and associated governance processes.

During 2016, we reviewed the Group’s risk policies and updated the Group’s risk appetite limits to reflect changes in the Group’s risk profile and the evolving regulatory and macroeconomic environments. We also reviewed the principal risks facing the Group and received regular updates on these through the course of the year. We receive regular reports from the Chief Risk Officers of our material subsidiaries.

Over 2016, we continued to focus on the key risks arising from the products we offer to our customers, the risks inherent in our investment portfolios, and the operational risks that arise from operating our businesses. We regularly reviewed the strength of our capital and liquidity positions, and the significant ongoing changes to the regulatory framework and environment. In addition, we closely monitored risks arising from the macroeconomic environment and regulatory developments such as the risks relating to prolonged low interest rates and the pace of regulatory developments across the globe.

During 2016, we oversaw the work required as a result of the Group’s continuing designation as a Global Systemically Important Insurer, including the development of the Systemic Risk Mitigation Plan, the Liquidity Risk Mitigation Plan and the Recovery Plan. We also considered the methodology underpinning and validation of our Solvency II internal model, oversaw the delivery of the Group’s major Model Change application to the PRA, and risks arising from the Solvency II regime.

We provided oversight of the Group’s planning for, and response to, the results in the Brexit referendum and US presidential election that have driven increased uncertainty in markets and the macroeconomic environment. We reviewed in depth the risk arising from our business, including examining the hedging programme in Jackson, and persistency and policyholder behaviour risks across the Group. Other areas of focus in 2016 included reviewing our cyber defence resilience and defence strategy, and reviewing the effectiveness of the risk management functions across the Group. We commissioned a number of ‘deep dive’ reviews to support these areas, and monitored the implementation of recommendations arising.

We also refined our governance processes during the year to enhance the information the Committee receives on the activities of our business unit risk committees and ensure key issues are escalated appropriately. I maintain regular contact with the risk committee chairs of our material subsidiaries and report to the Committee on issues we discuss.

Looking forward into 2017, the Committee will remain focused on monitoring the Group’s principal risks and those posed by regulatory developments and macroeconomic conditions. We approved the 2017 plans for the Risk function, and will continue to adapt our plan of work to respond to any changes in the business environment or the Group’s strategy.

As Chairman of the Committee, I have responsibility for ensuring the Committee operates effectively. To ensure we do so and provide constructive challenge to management, I encourage open debate and contributions from all Committee members. An annual review of our effectiveness was carried out as part of the Board evaluation, described in more detail in How we operate. The Committee was found to be functioning effectively.

Howard Davies
Chairman of the Risk Committee

Committee members

  • Howard Davies (Chairman)
  • Ann Godbehere
  • Kai Nargolwala
  • Lord Turner

Regular attendees

  • Chairman of the Board
  • Group Chief Executive
  • Group Chief Risk Officer
  • Chief Financial Officer
  • Group Regulatory and Government Relations Director
  • Group General Counsel and Company Secretary
  • Director of Group-wide Internal Audit

Number of meetings in 2016: eight (in addition, a joint meeting was held with the Audit Committee)

How the Committee spent its time during 2016

The table below provides an overview of how the Committee spent its time in 2016.

  Feb Apr May Jul Sep Oct Nov

Markets and Group risk updates

             
Market conditions and impact
 
 
 
 
 
 
 
Group risk update
 
 
 
 
 
 
 

Risk management

             
Group top risk identification
 
         
 
Top risk discussions
 
 
 
 
 
 
 
Business unit specific risk matters
 
 
 
   
 
 
Risk assessment of business plan            
 
Risk function effectiveness
 
   
 
 
 
 

Regulatory matters

             
Regulatory matters  
 
 
     
 

Risk framework

             
Solvency II internal model development
 
 
 
 
 
 
 
Risk limit updates
 
 
 
 
     
Risk policy framework refresh
 
 
 
 
 
 
 
Year end E-cap results    
 
 
 
 
 

Governance and reporting

             
Year end risk disclosures
 
         
 
Policy compliance
 
   
 
   
 
Own Risk and Solvency Assessment
 
   
 
     
Compliance report    
 
 
 
 
 
Global Systemically Important Insurer: Liquidity Risk Management Plan, Systemic Risk Management Plan and Recovery Plan          
 
 
Solvency II reporting and governance processes
 
 
 
     
 
IFRS Phase II            
 
Environmental Social Governance (ESG) reporting          
 
 
Committee terms of reference    
 
     
 

Key matters considered during the year

Matter considered

 

How the Committee addressed the matter

Risk appetite

 

As part of the Group’s business plan, risk appetite limits were reviewed and updated. The primary driver of the changes was the increased macroeconomic uncertainty and market volatility, while regulatory and business change continued.

In order to be confident that the business continued to remain within risk appetite, risk limits were reviewed and several new measures introduced.

Risk management

 

Annually, business units must assess and certify their compliance with the Group Risk Framework and risk policies as part of the annual Group Governance Manual certification. The annual certification process for risk policies is facilitated by Group Risk and subject to oversight by the Risk Committee. In 2016, the Group Risk Framework and risk policies were subject to their annual review, with changes being approved by the Risk Committee.

The Risk Committee approved a number of deep dives to be undertaken during 2016. These focused on risks embedded within the existing portfolio of products in our US, Asia and UK businesses.

The Group Cyber Risk Strategy was overseen by the Risk Committee in mid 2016. The Committee reviewed the Cyber Defence Plan, providing further detail around the implementation of the cyber strategy at the end of 2016. The Cyber Strategy and Defence Plan articulate the strategic outcomes and key deliverables relating to our cyber resilience.

The Committee also agreed the characteristics of an effective risk function and conducted its first annual review of risk effectiveness in May.

Group top risks

 

The Committee evaluated the Group’s top risks, considering recommendations for promoting additional risks, expanding the scope of existing risks, and removing those risks no longer requiring particular focus from the Committee. The Committee received regular reporting on the top risks and mitigating actions over the course of the year.

The Group Chief Risk Officer’s reports also provided the Committee with regulatory updates, particularly regarding Solvency II, the Group’s Internal Model, development of the Group’s global capital standards and the deliverables required as a result of the Group’s designation as a Global Systemically Important Insurer.

Solvency II and Pillar 3 reporting

 

The Committee considered the Own Risk and Solvency Assessment report based on the outcomes of the Group’s business plan, the results of the Group’s regular stress and scenario testing, and the current and projected risk and solvency positions prior to its approval by the Board.

The approval of the Solvency II Internal Model formalised the Group’s Model change process, which records, evaluates and reports changes to management and the regulator. The Major Model Change application was closely overseen by the Risk Committee throughout 2016 and approved before submission to the regulator.

Solvency II results and associated governance processes were considered in a separate meeting held jointly with the Audit Committee.

Global Systemically Important Insurer

 

The Financial Stability Board announced on 3 November 2015 that the Group continues to be designated as a Global Systemically Important Insurer. In 2016, the Group was required to update the 2015 Global Systemically Important Insurer deliverables – these include the Systemic Risk Management Plan, Recovery Plan and Liquidity Risk Management Plan. The Committee played a key part in considering and approving a number of these, including the Group’s Liquidity Risk Management Plan, Systemic Risk Management Plan and Recovery Plan.

Reverse stress testing

 

Stress and scenario testing is a key risk measurement and management tool for the Group. The Reverse Stress Test exercise was carried out to confirm the Group’s position as being significantly resilient to certain business failure scenarios. The report related to the Group’s year end 2016 position and was submitted to the PRA.

Committee effectiveness

 

A review of the Committee’s activities was conducted against applicable regulation and codes of conduct. The results of this assessment were provided to the Committee alongside the outcome of the part of the annual Board evaluation relating to the Committee.

Compliance reporting

 

The Committee received reporting on key compliance risks and mitigation activity, including customer risk, conflicts of interest, financial crime and the implementation of the Senior Insurance Managers Regime.

The Committee also reviewed and approved a number of regulatory compliance risk-related policies.

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