solvency and financial condition report (sfcr) 2020

Solvency and Financial Condition Report (SFCR) 2020

Canada Life Limited – Solvency and Financial Condition Report 2020 2

Contents

Contents ................................................................................................ 2

Director’s Statement ................................................................................ 4

Report of the External Independent Auditor ............................................. 5

Summary ...............................................................................................13Company Information ........................................................................ 13Purpose of the Solvency and Financial Condition Report ................ 13Business and Performance Summary................................................ 13System of Governance Summary ....................................................... 14

The First Line of Defence – Business Management ................... 14The Second Line of Defence – Oversight ................................... 14The Third Line of Defence – Assurance ...................................... 14

Risk Profile Summary ......................................................................... 14Valuation for Solvency Purposes Summary ...................................... 15Capital Management Summary ......................................................... 15

A Business and Performance ..................................................................16A.1 Business ...................................................................................... 16

A.1.1 About Canada Life Limited ............................................. 16A.2 Underwriting Performance ........................................................ 19A.3 Investment Performance ............................................................ 21

A.3.1 Securitisation Assets ...................................................... 22A.4 Performance of Other Activities ................................................. 22

A.4.1 Operating Leases ............................................................ 22A.5 Any Other Information ................................................................ 22

A.5.1 Significant Business and Other Events .......................... 22A.5.2 Results and Dividends .................................................... 23

B System of Governance ........................................................................24B.1 General Information on the System of Governance .................. 24

B.1.1 Board ............................................................................... 24B.1.2 Executive Management Committees ............................. 25 B.1.3 Remuneration and Benefits ........................................... 25B.1.4 Material Transactions During the Reporting Period ...... 27

B.2 Fit and Proper Requirements ..................................................... 27B.3 Risk Management System Including the Own Risk

and Solvency Assessment .......................................................... 28B.3.1 Risk Management ........................................................... 28B.3.2 Implementation of the Risk Management System ........ 28B.3.3 Own Risk and Solvency Assessment .............................. 31

B.4 Internal Control System ............................................................. 32B.4.1 Compliance Function ..................................................... 33

B.5 Internal Audit Function .............................................................. 34B.5.1 Overview of Internal Audit ............................................. 34B.5.2 Independence and Objectivity of

Internal Audit Function ................................................... 34B.6 Actuarial Function ...................................................................... 35B.7 Outsourcing ................................................................................ 35 B.8 Any Other Information ................................................................ 36

C Risk Profile .........................................................................................37C.1 Underwriting Risk ....................................................................... 40

C.1.1 Longevity Risk ................................................................. 43C.1.2 Catastrophe Risk ............................................................. 43

C.2 Market Risk .................................................................................. 44C.2.1 Fixed Income Investment Risk ....................................... 46C.2.2 Interest Rate Risk ............................................................ 47C.2.3 Property Risk ................................................................... 47C.2.4 Equity Risk ....................................................................... 48C.2.5 Currency Risk .................................................................. 48

C.3 Credit Risk ................................................................................... 48C.3.1 Reinsurance Counterparty Default Risk ......................... 50

C.4 Liquidity Risk .............................................................................. 50C.5 Operational Risk ......................................................................... 51C.6 Other Material Risks.................................................................... 52

C.6.1 Conduct Risk ................................................................... 52C.6.2 Strategy, Business Planning and Execution Risk .............. 54C.6.3 Business Environment Risk ............................................... 54


D Valuation for Solvency Purposes .........................................................55 D.1 Assets ......................................................................................... 55 D.1.1 Solvency II Balance Sheet Asset Values ......................... 55 D.1.2 Methods, Bases and Assumptions for Solvency II

Balance Sheet Valuation ................................................. 55 D.1.3 Asset Valuations – Solvency II and UK GAAP.................. 59 D.2 Technical Provisions ................................................................... 60 D.2.1 Technical Provisions: Level of Uncertainty

in Valuation ..................................................................... 60 D.2.2 Transitional Measure on Technical Provisions .............. 61 D.2.3 Volatility Adjustment ...................................................... 61 D.2.4 Matching Adjustment ..................................................... 61 D.2.5 Recoverables from Reinsurance and

Special Purpose Vehicles ................................................ 62 D.2.6 Simplifications in Calculating Technical Provisions ...... 62 D.3 Other Liabilities .......................................................................... 62 D.3.1 Deposits from Reinsurers ............................................... 62 D.3.2 Deferred Tax Liabilities ................................................... 63 D.3.3 Derivatives....................................................................... 63 D.3.4 Insurance & Intermediaries Payable .............................. 63 D.3.5 Payables (trade, not insurance) ...................................... 63 D.3.6 Subordinated Liabilities ................................................. 63 D.3.7 Reinsurance Payable ....................................................... 63 D.3.8 Provisions other than technical provisions ................... 63 D.3.9 Any Other Liabilities, not elsewhere shown .................. 63 D.3.10 Liability Valuations – Solvency II and UK GAAP ............. 63 D.4 Alternative Methods for Valuation ............................................. 64 D.4.1 Equity Release Mortgage Assets ..................................... 64 D.4.2 Senior Trust Note ............................................................ 64 D.4.3 Junior Trust Note ............................................................ 64 D.4.4 Valuation Uncertainty ..................................................... 64 D.5 Any Other Information ................................................................ 64

E Capital Management ...........................................................................65 E.1 Own Funds .................................................................................. 65 E.1.1 Own Funds ...................................................................... 65 E.1.2 With-Profit Funds ............................................................ 65 E.1.3 Own Funds to Meet Solvency Capital Requirement ...... 66 E.1.4 Own Funds to Meet Minimum Capital Requirement ..... 66 E.1.5 Subordinated Liabilities ................................................. 67 E.2 Solvency Capital Requirement and

Minimum Capital Requirement .................................................. 68 E.3 Use of the Duration-based Equity Risk Sub-module

in the Calculation of the Solvency Capital Requirement .......... 68 E.4 Differences between the Standard Formula and

any Internal Model Used............................................................. 68 E.4.1 Purpose and Scope ......................................................... 68 E.4.2 Methodology ................................................................... 69 E.4.3 Differences to Standard Formula ................................... 69 E.4.4 Nature and Appropriateness of Internal Model Data .... 69 E.5 Non-compliance with the Minimum Capital Requirement and

Non-compliance with the Solvency Capital Requirement ......... 70 E.6 Any Other Information ................................................................ 70

F Appendix .............................................................................................71

G Annex .................................................................................................74

H Glossary .............................................................................................86

Contents


Director’s Statement

Canada Life Limited (the “Company”) Solvency and Financial Condition Report (“SFCR”)

For the year ended 31 December 2020

1. The directors of the Company are satisfied that, to the best of their knowledge:

1. the SFCR has been prepared in all material respects in accordance with the PRA rules and Solvency II regulations, asapplicable to the Company;

2. throughout the financial year in question, the Company has complied in all material respects with the requirements of the PRArules and Solvency II regulations as they apply to the Company; and

3. it is reasonable to believe that, at the date of publication of the SFCR, the Company has continued to comply with the PRA rulesand Solvency II regulations; and the Company intends to so comply in the future.

Approved by the Board of Directors

and signed on behalf of the Board

Director


Report of the External Independent Auditor

REPORT OF THE EXTERNAL INDEPENDENT AUDITOR TO THE DIRECTORS OF CANADA LIFE LIMITED (‘THE COMPANY’) 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 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 2020:

• the ‘Valuation for solvency purposes’ and ‘Capital Management’ sections of the SFCR of the Company as at 31 December 2020 (‘theNarrative Disclosures subject to audit’); and

• Company templates S.02.01.02, S.12.01.02, S.22.01.21, S.23.01.01 and S.28.01.01 (‘the Templates subject to audit’).

The Narrative Disclosures subject to audit and the Templates subject to audit are collectively referred to as the ‘relevant elements of the 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 SFCR set out about above which are, or derive from the Solvency CapitalRequirement, as identified in the Appendix to this report;

• the ‘Executive summary’, ‘Business and performance’, ‘System of governance’, ‘Risk profile’ and ‘List of Undertakings’ elements of theSFCR;

• Company templates S.05.01.02, S.05.02.01, S.19.01.21, S.25.02.21, S.25.03.21;

• 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 SFCR (‘the ResponsibilityStatement’).

To the extent the information subject to audit in the relevant elements of the 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 SFCR of the Company as at 31 December 2020 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 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 SFCR in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standards as applied to public interest entities, and we have fulfilled our other 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 ‘Capital Management’ sections of the SFCR, which describe the basis of accounting. The 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 SFCR is required to be published, and intended users include but are not limited to the PRA. As a result, the SFCR may not be suitable for another purpose. Our opinion is not modified in respect of these matters.

Conclusions relating to going concern

In auditing the SFCR, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the SFCR is appropriate.

Our evaluation of the directors’ assessment of the company’s ability to continue to adopt the going concern basis of accounting included:

• Considering as part of our risk assessment, the nature of the company, its business model and related risks including, where relevant, theimpact of Brexit and COVID-19, the requirements of the applicable financial reporting framework and the systems of internal control;

• Evaluating management’s method to assess the entity's ability to continue as a going concern, determining if the method selected isappropriate in the context of the applicable financial reporting framework and our understanding of the entity;

• Challenging the reasonableness of the 5-year earnings forecasts by evaluating the historical accuracy of forecasts prepared bymanagement;

• Evaluating the company’s current year performance including ongoing liquidity and solvency monitoring; and• Assessing the reverse stress tests and pandemic scenario analysis performed by management.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.



Other Information

The Directors are responsible for the Other Information.

Our opinion on the relevant elements of the SFCR does not cover the Other Information and, we do not express an audit opinion or any form of assurance conclusion thereon.

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 SFCR, or our knowledge obtained in the course of 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 SFCR themselves. 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.

Responsibilities of Directors for the Solvency and Financial Condition Report

The Directors are responsible for the preparation of the 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 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 Solvency and Financial Condition Report

It is our responsibility to form an independent opinion as to whether the relevant elements of the 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 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 aggregate, they could reasonably be expected to influence the decision making or the judgement of the users taken on the basis of the SFCR.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: https://www.frc.org.uk/auditorsresponsibilities. The same responsibilities apply to the audit of the SFCR.

Extent to which the audit was considered capable of detecting irregularities, including fraud



Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.

We considered the nature of the company’s industry and its control environment, and reviewed the company’s documentation of their policies and procedures relating to fraud and compliance with laws and regulations. We also enquired of management and internal audit about their own identification and assessment of the risks of irregularities.

We obtained an understanding of the legal and regulatory framework that the company operates in, and identified the key laws and regulations that:

• had a direct effect on the determination of material amounts and disclosures in the SFCR. These included Solvency II as implemented inthe UK and the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), the pensions legislation and relevant taxlegislation.

• do not have a direct effect on the SFCR but compliance with which may be fundamental to the company’s ability to operate or to avoid amaterial penalty. These included Companies Act 2006 and related Company Law.

We discussed among the audit engagement team including relevant internal specialists, including IT, Tax, Actuarial, Valuations, Financial Instruments, Real Estate and Credit Risk regarding the opportunities and incentives that may exist within the organisation for fraud and how and where fraud might occur in the financial statements.

As a result of performing the above, we identified the greatest potential for fraud in the following areas: valuation of equity release mortgages (ERMs), significant assumptions used for actuarial reserving and fair value adjustments in relation to mortgages and subordinated liabilities. For the valuation of equity release mortgages, we performed the following procedures:

• We obtained an understanding of the relevant controls over the valuation process, including the company's review and approval of the keyjudgments and assumptions used to value the ERMs;

• We inspected management’s basis papers and challenged the assumptions applied, in particular the valuation interest rate and housepricing inflation assumptions, by comparison with those used by peers and in industry studies, and benchmarked these to industry dataincluding Land Registry indices, and using our real estate specialists where appropriate; and

• To assess the model used to value ERMs is functioning as intended, we recalculated the fair value of a sample of ERM policies using ourindependent ERM valuation model.

For the significant assumptions used for actuarial reserving, we performed the following procedures:

• We obtained an understanding of the controls over the assumption-setting process;



• We substantively tested (including recalculation) a sample of in-year experience studies relating to the significant assumptions identified above. This included testing the data and calculations used in the experience study, assessing the appropriateness of the experience study methodology for each sample selected, and assessing the resulting conclusions with respect to the revised assumptions;

• Where the timing and amount of an assumption change, or a decision not to make a change required significant management judgement, we examined on a sample basis the supporting documentation to validate the reasonableness of the assumption change, including consideration of possible management bias;

• Where externally available models or data are used in the assumption setting-process, we assessed, on a sample basis, management’s use of this information in the assumption setting process and its relevance;

• Where appropriate, we compared the assumptions selected by management to those used by peer companies i.e. those with significant exposure to similar risks; and

• We challenged the appropriateness of holding short-term COVID-19 reserve adjustments versus making adjustments to the long-term assumptions.

For the fair value adjustments in relation to mortgages and subordinated liabilities, we performed the following procedures:

• We obtained an understanding of the relevant controls over the valuation process, including the key judgements and assumptions used to value the mortgages and subordinated liabilities;

• We assessed the models used to calculate the fair value of mortgages;• We substantively tested the inputs and valuation data used in the commercial mortgages model including:

o Agreeing the contractual cash flows are those which have been used in the model;o Assessing the appropriateness of the 5, 10 and 15 year gilt curve used;o Assessing the accuracy of the components of the discount margin (liquidity premium, default spread, cost of capital and fixed

additional spread); ando Performing specific procedures over the application of the model and changes to the model from the prior year;

• We engaged our financial instruments specialists to recalculate independent fair values of the subordinated liabilities and compared against management’s own valuation.

In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. In addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

In addition to the above, our procedures to respond to the risks identified included the following:

• reviewing SFCR disclosures by testing to supporting documentation to assess compliance with provisions of relevant laws and regulationsdescribed as having a direct effect on the financial statements;

• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due tofraud;



• enquiring of management, internal audit and in-house legal counsel concerning actual and potential litigation and claims, and instances ofnon-compliance with laws and regulations; and

• reading minutes of meetings of those charged with governance, reviewing correspondence with the PRA and FCA and reviewing internalaudit reports.

Other Matter

The Company has authority to calculate its 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.

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 Canada Life 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 relation to this matter.

Use of our Report

This report is made solely to the Directors of Canada Life 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 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.

Andrew Holland, FCA (Senior Statutory Auditor) For and on behalf of Deloitte LLP Bristol, United Kingdom 01 April 2021

hedwards

Stamp



Appendix – relevant elements of the Solvency and Financial Condition Report that are not subject to audit

Solo partial/internal model

The relevant elements of the SFCR that are not subject to audit comprise:

• The following elements of template S.02.01.02:

− Row R0550: Technical provisions – non-life (excluding health) – risk margin

− Row R0590: Technical provisions – health (similar to non-life) – risk margin

− Row R0640: Technical provisions – health (similar to life) – risk margin

− Row R0680: Technical provisions – life (excluding health and index-linked and unit-linked) risk margin

− Row R0720: Technical provisions – Index-linked and unit-linked – risk margin

• The following elements of template S.12.01.02

− Row R0100: Technical provisions calculated as a sum of BE and RM – Risk margin

− Rows R0110 to R0130 – Amount of transitional measure on technical provisions


− Column C0030 – Impact of transitional measure on technical provisions

− Row R0010 – Technical provisions

− Row R0090 – Solvency Capital Requirement

− Row R0110: Minimum Capital Requirement




− Row R0580: SCR

− Row R0600: MCR

− Row R0620: Ratio of Eligible own funds to SCR

− Row R0640: Ratio of Eligible own funds to MCR

− Row R0740: Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds


− Row R0310: SCR

− Row R0320: MCR cap

− Row R0330: MCR floor

− Row R0340: Combined MCR

− Row R0400: Minimum Capital Requirement

• Elements of the Narrative Disclosures subject to audit identified as ‘unaudited’.


Company InformationCanada Life was founded in Canada in 1847 and is the oldest Canadian life assurance company. In the United Kingdom (UK), Canada Life Limited (CLL) trades as Canada Life (the Company) providing financial solutions for UK customers since 1903 including pensions, life assurance and investment products.

The Company is wholly owned by The Canada Life Assurance Company, a subsidiary of Great-West Lifeco Inc.

Purpose of the Solvency and Financial Condition ReportThis report will assist the Company’s customers and other stakeholders in understanding the Company’s regulatory position and financial strength under Solvency II regulations.

This report also covers the business performance of the Company, its system of governance, risk profile and the Solvency II balance sheet valuation methodology.

In accordance with the Prudential Regulation Authority (PRA) requirements, Sections D (Valuation for Solvency Purposes) and E (Capital Management) have been audited, excluding those tables marked “unaudited”. Sections A (Business and Performance), B (System of Governance) and C (Risk Profile) are unaudited.

Business and Performance SummaryThe Company predominantly writes individual single premium and group insurance contracts, to meet the retirement, investment and protection needs of individuals and companies. The single premium business is dominated by pension annuities where the Company is one of the largest providers in the UK. The Company also offers life and pension unit-linked funds, which are made available to customers through its own investment bonds and also through the pension products offered by other companies in the group.

The Company calculates its Solvency Capital Requirement (SCR) using a Partial Internal Model (PIM) which was approved by the PRA in December 2019. The ratio of the Company’s available capital to its regulatory SCR (unaudited) was 162% as at 31 December 2020 (2019: 157%), indicating that capital resources were in excess of the regulatory minimum.

The Company’s financial performance resulted in a profit for the financial year, after taxation, of £149m.

The Company’s financial performance is discussed in more detail in Section A of this report while Section E details the capital management and metrics under which the Company controls and reports solvency capital.

Summary

Table 1: Summary Solvency position * SCR unaudited

Solvency 2020£m

2019£m

Solvency II Own Funds 4,036 4,003

Solvency Capital Requirement* 2,484 2,551

Excess Solvency II Assets 1,552 1,452

Solvency Ratio 162% 157%


System of Governance SummaryThe board of directors of the Company (the Board) is responsible for, amongst other things, setting the Company’s strategy, approving its risk appetite and overseeing implementation of that strategy. The Board approves the components of the risk management framework and sets the risk strategy for the Company in relation to the types and level of risk that the Company is prepared to assume.

The Company operates a three lines of defence model in its management of risk:

• The first line of defence is the responsibility of operational departmentsas the owners and managers of the risks associated with their business activities;

• The second line of defence is the responsibility of the Risk andCompliance functions as they challenge and provide oversight of the firstline of defence; and

• The third line of defence is the responsibility of the Internal Auditfunction. The function is fully independent from, and tests the effectiveness of the control framework for, both the first and second linesof defence.

The Company ensures that all people who effectively run the Company or have other key functions, are fit to provide sound and prudent management through their professional qualifications, knowledge and experience and are proper by being of good repute and integrity.

The Board has ultimate responsibility for the performance and strategy of the Company and it delegates authority within the organisation as it sees fit.

The Company’s system of governance is described in detail in Section B.

Risk Profile SummaryThe Company’s objective in the management of risk is to operate within the risk limits it defines. This supports the controlled delivery of the Company’s business objectives, in line with its risk strategy, ensuring a balanced approach to risk and reward.

The Company’s SCR (unaudited) is the amount of capital that the Company is required to hold against its risk profile.

The SCR (unaudited) is split by risk category in the following table.

A detailed analysis of the Company’s risk profile, including its appetite for risk, risk management techniques and sensitivity analysis, is provided in Section C.

Summary

Table 2: Solvency Capital Requirement split by risk category

Risk2020

£m2019

£m

Credit Risk SCR 1,321 1,502

Longevity Risk SCR 851 788

Catastrophe Risk SCR 352 341

Sum of other (SF) SCRs 1,160 1,145

Total Undiversified SCR 3,686 3,776

Diversification (1,266) (1,237)

SCR after diversification 2,419 2,539

Operational Risk SCR 105 95

Loss absorbing capacity of Deferred Tax (40) (83)

Solvency Capital Requirement 2,484 2,551


Valuation for Solvency Purposes Summary The main focus of Solvency II reporting is the Company’s financial strength, in the form of available capital resources. As such, the Solvency II balance sheet is intended to reflect a valuation of all assets and liabilities at the balance sheet date. The financial statements have been prepared in accordance with local Financial Reporting Standards (FRS102/103).

The valuation of assets and liabilities for Solvency II purposes is materially the same as Financial Reporting Standards except for:

• differences in the valuation of technical provisions and associated reinsurance recoverables;

• loans and receivables are valued at amortised cost in the financial statements and at fair value under Solvency II;

• differences in the valuation of assets held in subsidiary companies; and

• subordinated liabilities valued at nominal amount in the financial statements and at fair value under Solvency II.

An analysis of the valuation of the Company’s assets and liabilities per the Solvency II balance sheet (see the Annex) is provided in the report in Sections D.1 and D.3. Technical provisions are discussed in Section D.2.

Capital Management SummaryThe aim of the Company’s Capital Management Operating Policy is to ensure that the Company has sufficient capital reserves and liquidity to meet its liabilities as they fall due and to meet regulatory solvency requirements. The policy is approved by the Board. The ratio of the Company’s available capital to its regulatory SCR (unaudited) was 162% as at 31 December 2020 (2019: 157%), indicating that capital resources were in excess of the regulatory minimum.

Further details of how the Company manages its capital can be found in Section E.

Summary

2020£m

2019£m

Total Equity in Financial Statements 2,958 3,054

Adjustments for Solvency II

Subordinated Liabilities Classed as Own Funds Under Solvency II 330 330

Differences in Technical Provisions (136) 277

Differences in Reinsurance Recoverables 9 (296)

Differences in Value of Loans & Receivables 394 276

Differences in Value of Investments in Subsidiary Companies 466 348

Other 15 14

Total Own Funds Under Solvency II 4,036 4,003

Table 3: Assets and liabilities valuation differences between financial statements and Solvency II


A.1 BusinessThe Company is a private limited company. It is incorporated in the UK and its company registration number is 00973271. The registered office is:

Canada Life LimitedCanada Life PlacePotters BarHertfordshire EN6 5BAUnited Kingdom

The Company is authorised by the PRA and regulated by the Financial Conduct Authority (FCA) and the PRA.

The contact details for the PRA are:20 MoorgateLondonEC2R 6DAhttp://www.bankofengland.co.uk/pra/Pages/default.aspx

The contact details for the FCA are:FCA Head Office12 Endeavour SquareLondonE20 1JNhttps://www.fca.org.uk/

The external auditors of the Company are:Deloitte LLPStatutory AuditorLondonhttps://www2.deloitte.com/uk/en.html

A.1.1 About Canada Life LimitedThe Company is a member of Great-West Life Inc. group of companies with interests in life insurance, health insurance, retirement and investment services, asset management and reinsurance businesses. The Company is a wholly owned subsidiary of The Canada Life Group (U.K.) Limited (incorporated in England and Wales), which itself is a subsidiary of The Canada Life Assurance Company providing insurance and wealth management products and services in Canada, the United Kingdom, Isle of Man and Germany, and in Ireland through Irish Life.

Great-West Lifeco Inc. and its subsidiaries, including Canada Life, have approximately 2.0 trillion Canadian dollars as at 31 December 2020 in consolidated assets under administration and are members of the Power Financial Corporation Group of companies.

A simplified organisational structure is as follows:

A Business and Performance

Great-West Lifeco Inc.

The Canada Life Group(U.K.) Limited

Canada Life Limited

Irish Life Group Limited

Irish Life Assurance plc Irish Life Health DAC

Figure 1: Canada Life Limited simplified organisational structure



In the UK, the Company trades as Canada Life, providing financial solutions for UK customers since 1903, to meet the retirement, investment and protection needs of both individuals and companies in the UK. The Company sells exclusively through third party advisors.

Key Performance Indicators of the Company 2020 2019

Gross written premiums £m £m

Insurance products 1,543 1,513

Investment products 136 168

Investment assets £m £m

Investments held to meet policyholder obligations

23,145 20,707

Investments for the benefit of policyholders who bear the investment risk

2,826 2,272

Number of Policies/Lives covered

Insurance products 3,350,000 3,315,000

Table 4: Key Performance Indicators

The numbers included in Section A are taken from the financial statements of the Company, unless otherwise stated. As a result they may differ from those shown elsewhere in this report, which are calculated using methodologies and assumptions appropriate for regulatory (i.e. Solvency) reporting.

The business conducted by the Company is in three main areas:

• life insurance;• health insurance; and• unit-linked investment products.

Financial reporting standards require that investment products are accounted for as deposits in the financial statements of the Company. This means that investment inflows (premiums) and withdrawals (claims) related to these products are not shown on the Company’s financial statements. Consequently, the inclusion of these products in the data shown in this section differs from the presentation adopted in the financial statements but has been presented to enhance understanding.



The relative size of each type of business is shown as a percentage in the following charts:

Figure 2: Gross written premiums and Technical provisions (including investment business) by product type (Solvency II basis)

2020 2020

2019 – Total Premium £1,681m2020 - Total Premium £1,679m

2019 – Total Technical Provisions £21,190m2020 - Total Technical Provisions £24,596m

Life Insurance

Health InsuranceUnit-linked Investment

80

1010

10

80

81

8

11

Life Insurance


80

1010

10

80

81

8

11

Life Insurance


80

1010

10

80

81

8

11

Life Insurance


80

1010

10

80

85

114

10

85

114

2019 2019


(1) Life insurance – this represents the majority of the in-force policies of the business.

• annuities – products that provide a level of income to the policyholder over a fixed term or their life

• group life – products that provide life insurance through employer-sponsored schemes

• individual life – products that provide life insurance to individuals

(2) Health insurance – this mainly represents group permanent health insurance policies, provided through employer-sponsored schemes. The Company also has a small number of policies with individuals but while premiums can be paid on pre-existing policies the Company is not writing new policies at this time.

(3) Unit-linked investment – the Company offers unit-linked products, where policyholders bear all the risk and reward on the underlying investment assets. Examples of such products include investment bonds, including those for pension saving. Within this category the Company has a number of products that are open to new business.

As of 31 December 2020, the Company directly or indirectly held shares in the companies listed in the Appendix, which also shows details on country of incorporation, the size of holding and voting rights and each company’s principal activity.

The principal subsidiary is Irish Life Group Limited (ILG). The principal trading subsidiaries of ILG are Irish Life Assurance plc and Irish Life Health dac. Further details on the operations of these companies are available in their respective Solvency and Financial Condition Reports.

The Company does not directly employ any staff as they are provided by CLFIS (U.K.) Limited, a fellow subsidiary of The Canada Life Group (U.K.) Limited. The Company is charged for the services provided by CLFIS (U.K.) Limited.

A.2 Underwriting PerformanceThe table below shows the Company’s performance in the technical account for long-term business as shown in the financial statements for the year.


2020£m

2019£m

Net Written Premiums (1,523) 864

Investment Return 1,356 1,658

Other Technical Income 20 31

Net Claims Incurred (966) (1,521)

Net Change in Technical Provisions 1,341 (683)

Net Operating Expenses (158) (166)

Investment Expenses & Charges (25) (20)

Other Items in Technical Account 5 45

Taxation on Technical Account 24 (32)

Balance on Technical Account 74 176

Table 5: Performance in the Technical account for long-term business

Other technical income largely represents the fees earned on unit-linked investment contracts.


Further details of premiums and claims by product line are shown here:

Reinsurance premiums paid include the impact of quota share described further in Section A.5.

Changes in technical provisions

Technical provisions for linked-liabilities cover those products where the policyholders bear all the risk and reward on the underlying investment assets. The change in these technical provisions is the sum of net investment gains less any fees and expenses charged for management of the policies and investment assets.

Other technical provisions represent the liability of the Company in respect of policies in-force at the end of the year other than for the unit-linked liabilities noted above. The change in other technical provisions is the change in value of technical provisions over the year for these products after the impact of reinsurance. These liabilities are calculated on a best estimate assessment of the future liabilities plus additional margins for adverse deviation in accordance with financial reporting standards. These liabilities reflect the value and the yield of the investment assets held specifically to meet these liabilities as they fall due.

The process for establishing technical provisions follows generally accepted actuarial practice, however, the provisions that result from the process remain uncertain. As a consequence of this uncertainty, the eventual value of claims could vary from the amounts provided to cover such future claims. The Company seeks to hold appropriate levels of technical provisions taking known facts and experience into account but nevertheless such provisions remain uncertain.

Drivers of the change in other technical provisions include the impact of new policies sold in the year, claims experience on in-force policies, investment experience on assets held, changes in the underlying assumptions regarding the estimation of future liabilities and the impact of changes in reinsurance arrangements and business transfers.

Net operating expenses represent the operating costs of the business, including commission payable.


2020 Life£m

Health£m

Total £m

Gross written premiums - Insurance

1,363 180 1,543

Reinsurance premiums paid (3,052) (14) (3,066)

Net written premiums (1,689) 166 (1,523)

Gross claims incurred - Insurance

1,804 142 1,946

Reinsurers share of claims (960) (20) (980)

Net claims incurred 844 122 966

Gross written premiums - Investments

136 - 136

Gross claims incurred - Investments

198 - 198

Table 6: Premiums and claims by Solvency II product line

Table 7: Changes in technical provisions

2020£m

2019£m

Change in technical provisions for linked liabilities (56) (101)

Change in other technical provisions 1,397 (582)

Total 1,341 (683)


Investment returns on assets held to meet insurance liabilities are shown in more detail below. The amount of the investment return that is due to reinsurers under the various arrangements entered into by the Company is shown separately and accrues to the reinsurers in line with specific treaty terms.

Investment expenses are those operating expenses incurred by the Company in the management of the Company’s portfolio of investment assets.

The table below illustrates investment income and investment performance during the year on assets held to meet the insurance liabilities of the Company.

Income received includes interest, property rental income and dividends.

A.3 Investment Performance The Company invests its funds by considering the nature of the liabilities as well as the solvency and liquidity requirements for meeting these liabilities, including requirements and guidelines set by regulators.

Investment return on assets held to meet insurance liabilities increased in comparison to the previous year due to an increase in value on fixed income securities. This has been driven by falling gilt yields and lower corporate spreads.

The investment return attributable to unit-linked policyholders arises on the portfolio of assets set aside specifically for unit-linked policyholders and the investment return on those assets accrues to those policyholders.


2020

Income Received

£m

Realised and unrealised gains

£m

Total£m

Fixed income securities 509 907 1,416

Loans & receivables 103 (5) 98

Property 86 (61) 25

Equities & collective investment undertakings

2 (1) 1

Cash and other investments (2) 11 9

Total 698 851 1,549

Table 9: Income and investment performance

Table 8: Investment returns

2020£m

2019£m

Investment return attributable to unit-linked policyholders

69 444

Investment return on assets held to meet insurance liabilities

1,549 1,446

Reinsurers share of investment return (262) (232)

Net Investment Return 1,356 1,658

Investment expenses (25) (20)


Realised and unrealised gains are the net movements in asset values, including any impairment charges where appropriate. More detail on asset valuations are given in Section D.

Income received during 2020 is higher compared to prior year due to the MGMA business transfer. Realised and unrealised gains on fixed income securities was also higher than prior year primarily due to a fall in gilt yields. Total property investment return was in line with prior year primarily due to decreases in fair value on commercial properties exposed to the retail sector.

A.3.1 Securitisation AssetsIncluded within fixed income securities are a small number of assets that meet the Solvency II definition of securitisation assets. These assets are managed in line with other fixed income securities. As at 31 December 2020 the Company’s holding of such assets (type 1 and type 2) amounted to a value of £125m, a small decrease from 2019 of £9m.

A.4 Performance of Other ActivitiesThe table below shows the performance on the Company’s non-technical account during the year as taken from the Company’s financial statementsfor the year.

Investment Return represents the investment experience on assets not directly held to meet long-term business liabilities. This includes dividends received from the ILG and the impact of foreign currency swaps purchased to reduce currency risk on the investment in ILG.

A.4.1 Operating LeasesThe Company lets its investment properties through operating leases. Further details on the valuation of these assets are included in Section D.

A.5 Any Other Information

A.5.1 Significant Business and Other EventsIn 2019 court approval was received to transfer the insurance business of MGMA (now renamed to Canada Life Platform Limited), a wholly-owned subsidiary of CLG, across to the Company. On 1 January 2020, the scheme effective date, the Company completed the business transfer.

This resulted in the transfer of £2,894m of assets and £2,832m of liabilities covering 32,000 policies across both the linked and non-linked portions of the Statement of Financial Position.

Effective from 1 April 2020, the Company reinsured a £2,473m block of Compulsory Purchase Annuity business under a 90% quota share treaty with Canada Life Assurance Company, Barbados Branch (CLACBB), an internal reinsurer. This treaty replaces a longevity swap with the same internal reinsurer, which previously covered 50% of only the longevity risk on this portfolio.

On 31 January 2020 the UK formally exited the European Union (“Brexit”) and entered into a transition period which came to an end on 31 December 2020. Given the majority of the Company’s business is conducted domestically, the overall impact from Brexit (aside from any economic implications) is considered to be low.


2020£m

2019£m

Investment Return 91 247

Other Items in Non-Technical Account (14) (15)

Taxation on Non-Technical Account (2) (1)

Balance on Non-Technical Account 75 231

Table 10: Performance on the Company’s non-technical account


Following the guidance issued by the European Insurance and Occupational Pensions Authority (“EIOPA”), a small number of CLL policies, where the policyholder was resident in Ireland or Germany when their policies were sold, needed to be transferred to an EU registered affiliate. On 31 December 2020, the Company completed the business transfer to Irish Life Assurance plc (a wholly-owned subsidiary of CLL). This resulted in the transfer of £81m of assets and £77m of liabilities.

The coronavirus pandemic (Covid-19) is an ongoing event to which the Company is exposed. The Company is continuing to monitor the situation closely, including carrying out stress and scenario testing, which includes both pandemic and economic shock scenarios, and has made preparations to ensure that it will continue to operate effectively while ensuring the safety and well-being of customers, employees and wider communities.

A.5.2 Results and DividendsThe profit after tax for the year was 2020: £149m (2019: £407m).

The Company had no other gains or losses recognised directly in equity. The Company declared and paid dividends of £245m during the year.



B.1 General Information on the System of GovernanceThe Company operates a three lines of defence risk governance model. In this model, the first line of defence against risk is the business functions. The second line of defence is the oversight and control functions of the business which control, monitor and report risks within the group risk governance structure. The third line of defence is the independent assurance provided by the Internal Audit function.

The Board is responsible for ensuring an appropriate system of governance is in place throughout the Company. The diagram below shows the current governance structure:

B.1.1 BoardThe Board is collectively responsible for the long-term success of the Company and its subsidiaries. Its role is to provide leadership, oversee the design and implementation of the Company’s strategy and set a framework of prudent and effective controls. The Board ensures that these are in place to allow the Company to meet its strategic aims. It sets Company values and culture and ensures that obligations to its shareholder, customers and other stakeholders are understood and met. The ultimate responsibility for management of the Company rests with the Board. Responsibility for the day to day management and operations of the Company is delegated to the Chief Executive Officer (CEO) who is supported by the executive team.

The Board is responsible for the governance and oversight of all of the operations and risks of the Company. The objectives of the governance arrangements are to ensure that:

• the Board has the right structure, composition and resources;

• the operations of the Board and committees meet the Board’s expectations and needs, and

• there is a consistent and effective culture within the Company from Board level down.

There has been no material change in the system of governance during the year.

B System of Governance

Figure 3: Current Governance Structure

Executive RiskManagement

Committee

ExecutiveManagement

CommitteeFinance

Committee

BOARD

Board RiskCommittee

Board AuditCommittee

Board NominationsCommittee

Board Human Resources

Committee


B.1.1.1 Board CommitteesThe Board is supported in its oversight and decision making responsibilitiesby four governance committees: the Board Risk Committee (BRC), Board Audit Committee (BAC), Board Nominations Committee (BNC) and Board Human Resources Committee (BHRC), collectively known as the board committees. The Company has a number of executive management committees that further support the governance structure.

The membership, duties and responsibilities of the board committees are defined within their respective charters which require them to act within the powers and authority delegated to them. To facilitate the discharging of their duties, the board committees may invite representatives from the Risk, Compliance, Actuarial, Finance, Internal Audit or other functions, as appropriate, to attend or present at meetings.

B.1.1.1.1 Board Risk CommitteeThe role of the BRC is to support the Board in overseeing the integration and effectiveness of the Company’s risk strategy by supporting and informing strategic objectives and business planning, ensuring that risks are identified,assessed and monitored in line with overall risk appetites and risk limits. The BRC also provides oversight of the Company’s Risk and Compliance functions. The BRC is chaired by an independent non-executive director and is required to meet, at least annually, with the BAC.

B.1.1.1.2 Board Audit CommitteeThe role of the BAC is to review financial reporting and disclosures as well as monitoring the effectiveness of internal controls. The BAC provides oversight of the Company’s Finance, Actuarial and Internal Audit Functions. The BAC is chaired by an independent non-executive director and is required to meet, atleast annually, with the BRC.

B.1.1.1.3 Board Nominations CommitteeThe role of the BNC is to identify and nominate candidates to fill vacancies on the Board and board committees as and when they arise, and to ensure that a formal review of the Board’s effectiveness, including the composition of the Board and its committee structure, is undertaken annually. The BNC ischaired by an independent non-executive director.

B.1.1.1.4 Board Human Resources CommitteeThe role of the BHRC is to support the Board’s oversight of the Company’s Remuneration Operating Policy to ensure it does not promote excessive risk-taking and has appropriate regard for best practice and regulatory requirements, including Solvency II. The BHRC also reviews the successionplans for the CEO and other senior executives and the Company’s talent management programs. The BHRC is chaired by an independent non-executive director.

B.1.2 Executive Management CommitteesThe Board and its committees are supported by various management committees that monitor and report on the day-to-day activities of the Company, escalating matters and making recommendations, as appropriate, to the Board and board committees.

B.1.3 Remuneration and BenefitsThe Company has a Remuneration Operating Policy which is approved by the Board. The policy sets out the:

• underlying remuneration principles;

• key requirements to ensure that these remuneration principles areapplied consistently and fairly across the business; and

• governance framework around remuneration practices.

The Board receives a remuneration policy compliance (attestation) report on an annual basis.



The Company’s remuneration is intended to attract, retain and reward employees with relevant skills and competencies who will contribute to the success of the Company. The Company utilises the remuneration policy to:

• support the Company’s objective of generating value for shareholdersand customers over the long term;

• motivate employees to meet annual corporate, divisional and individualperformance goals;

• promote the achievement of goals in a manner consistent with theCompany’s Code of Business Conduct and Ethics; and

• align with sound risk management practices and regulatoryrequirements.

The remuneration policy is supported by a performance management process that promotes the development of a high performance culture in line with the Company’s vision and values. This process is characterised by the core principles of:

• quality feedback and open conversations;

• shared responsibility for the process;

• equitable treatment of colleagues; and

• acknowledgement of the positive contribution of colleagues.

The Company uses the principles set out in the Great-West Life Code of Business Conduct and Ethics to establish the principles of the Remuneration Operating Policy. The principles are:

• the remuneration programmes promote sound and effective riskmanagement and align with the risk strategy and preferences as approved by the Board;

• the remuneration programmes are consistent with the business and riskstrategy and long term shareholders’ interests;

• the Remuneration Operating Policy is available for colleagues on theCompany intranet site;

• the remuneration programmes are competitive and fair;

• the remuneration programmes attract, reward and motivate staff todeliver on objectives and success; and

• that there is clear, effective and transparent governance in relation toremuneration.

B.1.3.1 Share Options, Shares or Variable Components of RemunerationRemuneration programmes consist of four primary elements; a base salary,annual incentives, retirement benefits and benefits during the course of employment. The proportion of each element within the overall package will vary according to role. Senior positions include a fifth element which is a long term incentive.


FixedRemuneration

Base Salaryand Benefits

Salary level based on job responsibilities,

experience and market conditions

VariableRemuneration

(Incentive Bonus)

Short TermIncentive

Long TermIncentive

Variable remunerationawards are discretionarybased on company and individual performance

Figure 4: Remuneration summary


The base salary reflects the skills, competencies and performance level of each individual. Base salaries are determined based on the market rate of the role as defined by independent salary surveys.

An annual incentive bonus scheme is in place which relates the overall remuneration to the performance of the Company. Any bonus award is based on the delivery of objectives that are closely aligned to the business goals within the Company’s critical priorities. A number of incentive schemes exist which are linked to the level of the role in the organisation and, where appropriate, the type of role. Each employee has a number of company and personal objectives set annually which include objectives covering risk management and control. The proportion of remuneration that is fixed and that which is variable is dependent on a number of factors including an employee’s role and their department.

Variable pay for Compliance, Risk and Internal Audit staff is not materially dependent on the performance of the areas they oversee.

B.1.3.2 Supplementary Pension or Early Retirement Schemes The Company’s remuneration policy does not include supplementary pension or early retirement schemes for members of the Board or other key function holders or employees. All employees are permitted to request a cash allowance up to the value of the standard pension scheme contribution, if they have surpassed the annual allowance entitlements.

B.1.4 Material Transactions during the Reporting PeriodAside from remuneration, there were no material transactions during the reporting period.

B.2 Fit and Proper Requirements The Company is committed to ensuring that all fit and proper regulatory requirements are met under the Senior Managers and Certification Regime (SM&CR). The Company ensures that all people, subject to the fit and proper requirements, have appropriate qualifications, knowledge, skills and experience required to carry out their role (fitness assessment) and are honest, ethical, and act with integrity (propriety assessment). The Fitness and Propriety Assessment is carried out for new starters, internal movers and on an annual basis to ensure those in regulated roles are re-assessed. Before an appointment is made in respect of such individuals, a due diligence process is undertaken to ensure that the person is fit and proper for the role. The criteria for assessing whether a person is fit and proper and is financially sound are set out in the Fit and Proper Operating Policy. An external vetting company carry out all background checks which include a credit and criminality check (levels dependent on which regime an individual is in), in addition to Regulatory Referencing (if required).

Adherence to the fit and proper requirements is subject to annual attestations occupying fit and proper roles. Where the Company becomes aware of concerns regarding the fitness and propriety of a person in a role subject to the fit and proper policy, it will investigate and take action as appropriate without delay. The Company will notify the regulator of any action taken and conclusions reached of such an investigation.



B.3 Risk Management System including the Own Riskand Solvency Assessment

B.3.1 Risk ManagementThe Company’s risk management system is articulated through its Enterprise Risk Management (ERM) framework. The framework allows the Board and management to:

• establish their strategy towards risk taking;

• communicate and monitor adherence to the appetite for risks throughthe use of risk limits and risk indicators; and

• identify, measure, monitor, manage and report on risks.

The following table explains how the Company carries out these tasks effectively.

B.3.2 Implementation of the Risk Management SystemThe Company has a risk governance structure based on a three lines of defence model which is widely used within the financial services industry. This model separates ownership and management of risk from oversight and independent assurance.


Identify Risk identification is the structured analysis of any current and emerging risks which the Company faces so that risks can be understood and appropriately controlled. The key elements of the ERM framework, which are relevant to risk identification, are the formation and regular review of the risk categories within the Company’s risk strategy as well as the Emerging Risk and Risk Event Identification processes.

Measure Risk measurement relates to the quantification of the risk profile of the Company. It allows comparison of the size of risk compared to agreed limits and appetite. Key elements of the ERM framework relevant to risk measurement are the actuarial capital models and methodology, and the risk appetite assessment models.

Monitor Risk monitoring relates to overseeing and tracking the Company’s risk profile on an ongoing basis. The key elements of the ERM framework, which are relevant to risk monitoring, are the risk function’s oversight and assurance activities, as well as the Risk and Control Self-Assessment and Risk Indicator processes.

Manage Risk management relates to the selection and implementation of approaches to accept, reject, transfer, avoid or control risk. It includes risk mitigation such as reinsurance and hedging which is in place to limit the impact of risk events. The key elements of the ERM framework, which are relevant to risk management, are the risk mitigation strategies, the policy and internal control frameworks as well as governance and the control functions. Details on the Company’s risk management processes are described in Section C.

Report Risk reporting gives an accurate and timely picture of any existing and emerging risk issues and exposures together with their potential impact on business activities. Risk reporting evidences that the Company manages its risks. The key elements of the ERM framework, which are relevant to risk reporting, are the annual Own Risk and Solvency Assessment report and the Chief Risk Officer reports, which are presented to the BRC. These reports provide information on changes in key risks over the period and how these are being managed.

Table 11: The core ERM framework components


The table below shows the high level responsibility for each line of defence together with the operational responsibilities:

Under the Company’s governance structure, committees are set up to facilitate efficient and appropriate risk oversight, management and decision-making. The Chief Risk Officer (CRO), as the head of the risk function, is a member of several committees which allows the risk function to keep abreast of developments across the business, providing direction, oversight and challenge on a wide variety of risk related matters.


Line of Defence Function High Level Responsibilities

First LineOwn and manage the risks

Business andsupport functions

Business areas are the owners of risks.

They are primarily responsible and accountable for the day-to-day risk management operations within the established risk management framework, including designing and implementing risk mitigation techniques and internal controls.

Primary responsibility and accountability for risk identification, measurement, management, monitoring and reporting lies with first line operational business areas.

Responsible for ensuring the Company’s business strategies align with the ERM and Risk Appetite Frameworks.

Second LineOversee and provide specialist support

Risk and compliance functions

The Risk and Compliance functions are primarily responsible and accountable for the oversight of all risk-related activities and processes across the Company.

The second line of defence challenges and assesses the first line of defence’s operation of the risk management framework and provides oversight of compliance with applicable laws and regulation.

Third LineIndependent process assurance

Audit Internal Audit is responsible for the provision of comprehensive assurance to the Board and senior management about the operational effectiveness and design of the risk management framework based on the highest level of independence and objectivity within the Company.

The third line provides an independent assessment of the effectiveness of the first two lines of defence.

Table 12: Three Lines of Defence Responsibilities



B.3.2.1 PIM Governance In December 2019, the Company’s parent CLG received approval from the PRA to use an internal model. The approved internal model is applicable to the Company and its parent CLG.

The Board is supported in its governance, oversight and decision making responsibilities for the internal model by the Internal Model Governance Committee (IMGC) which is a sub-committee of the Executive Risk Management Committee (ERMC).

The IMGC has delegated authority to oversee the development, operation, validation and use of the internal model and the internal model governance framework and is supported by the Internal Model Expert Group (IMEG).The purpose of the IMGC is to:• provide governance oversight of the internal model; and • oversee the development and maintenance of the Internal Model

Governance Framework

The IMEG provides technical oversight for developments and checks for ongoing appropriateness of internal model components through the application of expert reviews and judgements and challenge of the methodology.

The Risk function has responsibility for developing the validation framework and carrying out an independent validation of the internal model and its components which includes an assessment of the ongoing appropriateness of the internal model for the risk profile of the business. This is reviewed at least annually by the Board.

There were no significant changes made to internal model governance across the year.

B.3.2.2 PIM Validation ProcessThe validation framework ensures that over a cycle of three years all internal model components and all relevant Solvency II requirements are validated independently in accordance with the principle of proportionality. Terms of reference are agreed in advance of each component validation and the results and findings are presented to the IMGC.

The validation process includes first line validation of the data, methodology, calibration and results of the internal model. A summary of the outcomes is presented to the Board when the internal model or its components are considered for approval or when material assumptions for the model or its components are approved.

At least annually, the CRO issues to the Board a report covering the validation process. The report includes:• an analysis of the performance of the internal model and an assessment

of whether the internal model is appropriate and effective (the top-down assessment);

• a review against the relevant Solvency II regulations (the bottom-up assessment); and

• an update on any previously identified limitations.


B.3.3 Own Risk and Solvency AssessmentThe Own Risk and Solvency Assessment (ORSA) aims to provide a holistic picture of the risk and solvency environment. The ORSA provides an ongoing, forward-looking assessment of the risk profile and overall solvency needs of the Company, given its business plan, and taking into account its available capital resources.

B.3.3.1 Own Risk and Solvency Assessment MethodologyThe ORSA is a key process within the ERM Framework. The ORSA process integrates a number of elements of business and risk management. These include:

• Business Planning – The ORSA process links to the business planning processes through the assessment and identification of the risks associated with the Company’s business plan, including the risks to achieving the plan.

• Risk Assessment – This process involves analysing the material risk exposures arising from the business plan and how the risk profile is expected to change in the future. It also covers non-quantifiable risks.

• Forward Looking Solvency Assessment – This process focusses on analysing the Company’s solvency needs in the future, on a regulatory basis. This assessment is used to identify sources of emerging surplus, and the capacity for the Company to pay dividends in the future.

• Own Solvency Needs Assessment – This process evaluates the Company’s own view, as opposed to the regulatory review, of solvency needs. This includes consideration of any specific aspects of the Company’s business which are not appropriately allowed for under Solvency II reporting.

• Stress and Scenario Testing – This process involves modelling material risks identified using a wide range of stresses, scenarios and reverse stress tests, taking into account both internal and external factors.

• Capital Management - The Company needs to identify the risks that it faces in order to determine an appropriate level of capital to hold. The Company’s capital management activities are closely linked to its risk management system. The ORSA, and in particular stress and scenario testing, is used to inform an appropriate level of capital for the Company to hold as a buffer over and above its SCR. This buffer is intended to ensure that the Company has sufficient assets to continue to cover its liabilities and to meet its SCR under adverse conditions. This information is then used to determine appropriate risk appetite limits against which risks can be measured, managed and monitored.

• Continuous Compliance – This process ensures that the Company meets its SCR, Minimum Capital Requirement (MCR) and Technical Provisions requirements on an ongoing basis. Processes are in place to monitor these requirements on a daily basis.

The risk function coordinates the integration of these processes to deliver the ORSA. As part of the ORSA process, an annual report is produced which takes into account the Company’s business planning and helps inform the next business planning cycle. Additional ORSA activity and reporting, governed appropriately through the risk committees, is performed if the risk profile of the Company changes significantly.

B.3.3.2 Use of Own Risk and Solvency Assessment in Decision-MakingThe ORSA process is an integral part of the Company’s business processes. Its outputs are used to inform and influence the Company’s business plan in line with strategy. The business plan, which is reviewed by the risk function, sets out how the Company’s strategy will be delivered and assesses the risks associated with the plans and their impact on the solvency position of the Company. The outcomes of these assessments are used either to inform the business plan or to develop potential management actions. This process is iterative and takes into account a wide range of risks and controls.



The ORSA outputs play an important role in the strategic decision framework of the Company. Any material acquisition or disposal of a portfolio or block of business, a merger or acquisition, or a material change to the risk profile would trigger an ORSA review. Any recommendations for improvements, observations, or conclusions from the ORSA process would be recorded within an ORSA Recommendations and Future Development Log. This ensures that any actions related to the ORSA are monitored and addressed.

B.3.3.3 Own Risk and Solvency Assessment Governance The approach to the ORSA is reviewed and approved by the BRC, including the basis for the Own Solvency Need Assessment (OSNA), the stresses and scenarios performed and the evidence of the embedding of the ORSA process within business decision-making.

The Board reviews and approves the ORSA report. In addition, the BRC is informed about developments in the ORSA, including progress against actions identified in the ORSA, changes in high-level processes and any material results arising from the ORSA processes.

B.4 Internal Control System The Board is responsible for the internal control system and for ensuring that the controls remain effective.

The Company operates a robust internal control system which is appropriate for its size, the nature of risks it faces and the complexity of its operations. The internal control framework is designed to ensure that controls are aligned to risk exposures, providing reasonable assurance regarding the achievement of the following objectives:

• effective and efficient operations;

• integrity of reporting;

• compliance with laws, regulations and internal operating policies; and

• effective risk management within approved risk appetite limits.


To achieve the objectives, the Company uses a three lines of defence model to support and monitor the various control activities undertaken by staff. These activities are described in Section B.3.2. The model clearly articulates the division of responsibilities for risk management between the three lines, the business and support functions, the Compliance and Risk Functions and Internal Audit.

The objectives are supported by a suite of Board-approved policies which sets out the Board’s expectations of how risks are managed and how controls are designed and operated to mitigate risks in line with business strategy. A process of annual attestation provides assurance on the key requirements defined within the policies.

The Company has processes in place to evidence:

• controls over financial results;

• the identification, assessment and management of risks and controls;

• the reporting and analysis of risk events;

• documentation and assessment of key business processes; and

• the identification and assessment of emerging risks.

The BAC provides oversight of the framework of controls within respective areas.

The Internal Control Operating Policy establishes the minimum requirements for the internal control system. The policy is owned by the CEO and is reviewed and approved on an annual basis by the Board. The CEO is responsible for ensuring the appropriateness of the policy. The internal control system is assessed annually for continued appropriateness of the components of the internal control system. The findings of the review are presented by the CEO to the BAC.


The Money Laundering Reporting Officer (MLRO) is accountable for the Company’s compliance with financial crime regulatory requirements and for overall financial crime risk management. Compliance is responsible for ensuring the Company’s financial crime controls meet all relevant regulatory and legal requirements, including compliance with regulation on Anti-Money Laundering, Anti-Terrorist Financing, Sanctions, Anti-Bribery and Corruption and Fraud. The key responsibilities of the MLRO are set out in the Money Laundering Reporting Officer mandate which is approved by the BRC.

The Data Protection Officer is accountable for the Company’s compliance with data protection and privacy regulation and for establishing and maintaining privacy risk policies and procedures.

Compliance is responsible for managing the relationship with the PRA and FCA and ensures that the timely and accurate reporting required by regulators is delivered. Compliance provides regular or one-off notifications and returns as required by UK or Canadian regulators and other authorities.

Compliance reports quarterly to the BRC on the effectiveness of day-to-day compliance controls and regulatory risks, as well as on the adequacy of key controls to manage those risks. It also advises the BRC on forthcoming regulatory developments. It provides an annual opinion, based on the independent monitoring and testing conducted, on whether the Company is in compliance with applicable regulatory requirements and is managing customer outcomes appropriately.

The Director of Compliance and Regulatory Affairs has a direct reporting line and responsibility to the BRC for oversight of Compliance.

B.4.1 Compliance FunctionThe Compliance function provides independent compliance oversight of all regulatory and conduct risks across the Company.

The Compliance function sits in the second line of the Company’s three lines of defence model and is independent of business management. This enables it to carry out its primary function which is to be responsible and accountable for providing oversight and challenge to the business. In addition, it provides assurance and advice to management and committees on compliance with regulatory requirements, the management of regulatory compliance, conduct risk requirements and performance across the Company, with a particular emphasis on the delivery of fair outcomes for customers.

The key responsibilities of the Compliance function are set out in the compliance mandate which is approved by the BRC. Compliance assesses and oversees regulatory and conduct risk through the preparation and delivery of a Corporate Compliance and Conduct Risk Plan. Compliance operates an annual risk based compliance review programme to assess whether key business processes are delivering appropriate customer and regulatory outcomes. It advises the business on current and future regulatory requirements and expectations, so as to enable the business to assess and manage its exposure to regulatory compliance risks and to change business processes where necessary. The function provides technical knowledge support and advises on the SM&CR in relation to the approval processes.



B.5 Internal Audit FunctionThe role of Internal Audit is to provide independent assurance that the organisation’s risk management, governance and internal control processesare operating effectively.

B.5.1 Overview of Internal AuditThe Internal Audit function applies a global comprehensive methodology framework and procedures which are adopted by all companies in the Great West Lifeco group. These are in accordance with accepted industry practice including the International Professional Practices Framework as set out by the Institute of Internal Auditors and the Chartered Institute of Internal Auditors’ Financial Services Code of Practice. The global Methodology & Standards team, within the Great West Lifeco Internal Audit function, monitors that audit staff utilise and comply with approved methodology and procedures. As part of the on-going quality assurance and improvement programme an external assessment is conducted every five years and the results are communicated to senior management, the BAC and the Board.

Internal Audit activity is carried out based on the framework of a risk-based audit plan which is approved by the BAC on an annual basis. Internal Audit prepares quarterly reports to the BAC summarising audit activity in the quarter, identified weaknesses in the internal control environment, recommendations to remedy weaknesses and updates to previous recommendations.

B.5.2 Independence and Objectivity of Internal Audit FunctionInternal Audit is independent of the business management activities of the firm, thus enabling the businesses to carry out their work with full accountability. Internal Audit is not involved directly in revenue generation or in the management and financial performance of any business line. Internal auditors have neither direct responsibility for, nor authority over, any of the activities reviewed, nor do their reviews and appraisal relieve other persons in the Company of responsibilities assigned to them. Internal auditors are not responsible for developing, revising or installing systems, policies or procedures, or for appraising an individual’s performance related to operations audited.

The Chief Internal Auditor, UK (CIA) has a direct reporting line and responsibility to the Chief Internal Auditor (Great-West Lifeco) and to the BAC for oversight matters. The BAC has sufficient authority to promote independence and to ensure broad audit coverage and adequate consideration of audit reports. The BAC annually reviews and approves the mandate of the CIA, reviews and recommends the appointment/removal of the CIA to the Board and annually assesses the performance of the CIA and the effectiveness of the Internal Audit function. The BAC also reviews and approves the organisational and reporting structure, the Internal Audit department budget and resources and can communicate directly with the CIA. The CIA maintains direct and unrestricted access to the BAC, and meets with the Chair of the BAC on a regular basis, without management present. The CIA is responsible to the Company’s CEO for operating matters and day to day management.

The CIA Mandate, as approved by the BAC, notes that the CIA and Internal Audit function is independent of the activities that they audit and free from conditions that threaten their ability to carry out Internal Audit responsibilities in an objective manner. The internal audit activity is free from interference for matters of audit selection, scope, procedures, frequency, timing, or report content to permit maintenance of a necessary independent and objective attitude.



B.6 Actuarial FunctionThe Actuarial function is led by the Chief Actuary. The function is staffed and resourced by appropriately skilled and experienced actuarial professionals. The authority and responsibilities of the Chief Actuary are set out in the Chief Actuary Mandate which is approved by the BAC. The mandate is reviewed on an annual basis. Compliance with the mandate and an assessment of the performance of the Actuarial function is also carried out each year.

The key responsibilities of the Actuarial function are:

• to co-ordinate the calculation of technical provisions in line with the requirements under Solvency II and to report to the BAC on the reliabilityand adequacy of technical provisions;

• to co-ordinate the calculation of the SCR and MCR;

• to support annual Solvency II reporting by producing the actuarial inputsfor the Quantitative Reporting Templates (QRT) and contributing to the narrative reports for the regulator and for the public;

• to contribute to the effective implementation of the risk managementframework including carrying out stress and scenario testing;

• to support the Risk Function and business in the ongoing developmentand maintenance of the Company’s PIM;

• to review the asset liability management, including calculation andmonitoring of the matching adjustment portfolio;

• to monitor the Company’s capital position, and financial condition and toreport to the Board on any findings; and

• to oversee product development, pricing and reinsurance activities.

The Chief Actuary is independent of income generating lines of business. This allows the businesses to carry out their work with full accountability having access to objective actuarial advice and information to support the achievement of goals.

The Chief Actuary has a direct reporting line and responsibility to the BAC for oversight matters. The Chief Actuary is responsible to the Chief Financial Officer for operating matters and day to day management.

B.7 OutsourcingOutsourcing of specific business functions can be used to reduce or control costs, to free internal resources and capital, and to utilise skills, expertise and resources not otherwise available to the Company. The outsourcing of specific business functions may also expose the Company to additional risks, and those risks must be identified and managed.

The Company takes a prudent and conservative approach to outsourcing, designed to ensure that no outsourcing arrangement will be entered into if it would entail unacceptable risk. While an outsourced activity will be performed directly by the Outsource Service Provider, the Company recognises that it remains fully responsible for discharging all its obligations when outsourcing any activity or function and must ensure the service provided is satisfactorily performed.

Outsourcing of critical or important operational functions or activities shall not be undertaken in such a way as to lead to any of the following:

• materially impairing the quality of the system of governance of theundertaking concerned;

• unduly increasing the operational risk;

• impairing the ability of the supervisory authorities to monitor thecompliance of the undertaking with its obligations;

• undermining continuous and satisfactory service to policy holders.

Where critical functions and activities of the Company are outsourced, the Board and its senior management retain ultimate responsibility for such outsourced functions and activities. The Board and senior management retain the necessary expertise to manage outsourcing risks and provide oversight of outsourcing arrangements.



The Company’s Outsourcing and Supplier Risk Operating Policy sets out the following main components: • the approaches to assessing and monitoring outsourcing arrangements to

ensure that the arrangements are suitable for the Company’s customers and are consistent with the Company’s risk appetite and business objectives as well as legal and regulatory requirements; and

• the approaches to identify, measure, manage, monitor and report the operational risks that arise from the Company’s outsourced activities.

The key requirements of the policy are to ensure that:• all service provider arrangements are appropriately identified and

approved;• procedures are in place to continuously assess the capability of the

service providers;• appropriate contractual agreements are in place between the Company

and the service providers;• key risks, especially operational risks, arising from the outsourcing

arrangements are assessed and managed on an ongoing basis; and• the governance framework around outsourcing arrangements is

appropriate.

The Company employs several service providers which undertake functions on the Company’s behalf. Details of the functions and activities they provide, and the jurisdictions in which they operate, are shown in the following table.

B.8 Any Other InformationNo other material information about the system of governance applies.


Table 13: Outsourced activities and associated jurisdictions

Provider Description of Service Provided Jurisdiction

Group Intragroup outsourcing of IS and related activities

Ireland and Canada

External Quotations (new and top ups) and projections provider for our FDP, PIP and FTIP products through portal integrations for our quotations and new business teams

UK

External Outsourced customer service function, IT systems and infrastructure

UK

External We outsource some of our sales team. They supply account managers and a management structure that work hand in hand with our larger wealth sales team for pensions

UK

External Back office fund administration services for The Retirement Account and FIA fund rand of unit linked/insured funds

UK

External Medical underwriting decision engine UK

External Produces and issues P60s annually for customers

UK

External Records retention supplier UK

External Outsourced Bulk Annuities Services UK

External Policy Administration services for legacy Hong Kong policies

HK


The Company predominantly writes individual single premium and group insurance contracts, to meet the retirement, investment and protection needs of individuals and companies. This range of products exposes the Company to a number of different risks.

The Company owns a number of subsidiary companies, exposing it to additional risks, which are explained further in the Section C.2.4.

Risk Measurement –The Company has assessed its risk exposure by measuring its SCR using the PIM. A breakdown of the undiversified SCR by risk (%), as at 31 December 2020, is shown below:

As measured by the SCR, the Company’s risk profile is focused towards underwriting and market risks, with credit (counterparty default) and operational risks comprising smaller components. Overall, there has not been much change in the Company’s risk exposure between 2019 and 2020. Each of these risks is analysed in the sub-sections below.

The Company’s underwriting and market risk exposure arises mainly from the significant volumes of pension annuity business written over a number of years. Furthermore, market risk arises from ownership of the subsidiary company, ILG. Credit (reinsurance and derivative counterparty default risk) and operational risks are small in comparison to the other risk categories.

The Company is also exposed to liquidity risk. There is no explicit capital requirement for liquidity risk within the SCR, however the Company takes a proactive approach to managing this risk.

The Company measures and manages its risk exposure through the use of risk limits and risk indicators. Risk limits, which are important components of the Company’s ERM framework, exist for each individual risk category as well as for the total of all individual risks. To ensure continued effectiveness, risk exposures against limits and trends in risk indicators are monitored on a regular basis and reported to the BRC which is ultimately accountable for the governance and oversight of risk throughout the Company.

The suite of risk limits and the risk indicators are reviewed at least annually to ensure that they remain effective. The suite of risks limits is continually being developed and enhanced as the risk profile of the business evolves.

The Company also uses stress testing to measure its risk profile and to understand the sensitivity of the solvency ratio to a range of risk events. Stress tests are regularly carried out on the key risk exposures to help inform decision making and planning processes and to help to identify and quantify the risks to which the Company is exposed.

C Risk Profile

Figure 5: Split of SCR by risk profile shown as a percentageFor the above figure, the spread risk SCR is included within market risk.

Underwriting Risk

Counterparty Default Risk

Market Risk

Operational Risk

6460

33

372

1

1

2

Underwriting Risk

Counterparty Default Risk

Market Risk

Operational Risk

6460

33

372

1

1

2

Undiversified SCR

2020

2019


Results of stress testing in relation to key risk sensitivities are set out below. The table below illustrates the absolute change in the Company’s solvency coverage ratio that would result from the stresses shown. The impact of each stress on the value of the Company and its subsidiary companies is taken into account. All other assumptions remain unchanged for each stress.

Transitional relief on technical provisions is assumed to be recalculated in all sensitivities where the impact would be material. Sensitivities will change over time and will depend on market conditions.

The Company also assesses a range of scenarios as part of the annual ORSA process in order to understand the impact of adverse conditions on the Company’s solvency position and possible management actions that can be used to restore solvency.

Risk Preferences – Each of the sections below refers to the Company’s Board-approved Risk Strategy which assigns preferences to each risk. The meaning of each risk preference level is set out in the table below:

C Risk Profile

Table 15: Risk Preference Levels and Definitions

1. No Appetite The Company has no appetite for these risks but recognises that limited exposures may arise from time to time. The Company seeks to minimise losses arising from these risks.

Risk Preference Level Definition

2. Low Appetite The Company has a low appetite for these risks and carefully considers them in the pursuit of its business strategy and objectives. The Company takes extra measures to manage its exposure to these risks against defined limits or thresholds by seeking to minimise losses arising from these risks.

3. Willing to Accept The Company is willing to accept these risks in certain circumstances as these are consistent with its business model. The Company seeks to mitigate these risks where appropriate.

4. Readily Accepts The Company readily accepts exposure to these risks through new and existing business. These are core business risks and the exchange of these risks into value is a core business activity. These risks are well understood and well managed.

Stress Test Impact on SCR Coverage Ratio

2020 2019

0.5% increase in interest rates 6.3% 6.0%

0.5% fall in interest rates -4.2% -2.6%

0.5% increase in credit spreads* 0.6% -2.4%

10% fall in equity and property values -4.9% -4.5%

10% increase in maintenance expenses -2.1% -2.0%

10% increase in policy lapse rates -0.8% -0.8%

10% reduction in policy lapse rates -0.1% -0.3%

5% increase in mortality rates (assured lives) -1.0% -1.2%

5% deterioration in morbidity experience -2.1% -2.3%

5% decrease in annuitant mortality rates -8.4% -8.1%

Table 14: Results of Sensitivity Testing

* The Credit Stress is prior to any Volatility Adjustment offset. The change in the credit spread sensitivity from 2019 to 2020 is primarily driven by a change in the deferred tax position on the balance sheet.


Materiality of Risks – Materiality considerations are based on the amount of capital required for individual risks, the sensitivity of the balance sheet to these risks as well as the impact of other key considerations e.g. reputational consequences. The Company’s material risk exposures are to:

• longevity risk (Underwriting)

• catastrophe risk (Underwriting)

• fixed income investment/spread risk (Market)

• interest rate risk (Market)

• property risk (Market)

• equity risk (Market)

• currency risk (Market)

• counterparty default risk (Credit)

• liquidity risk

• operational risk

• conduct risk

• strategy, business planning and execution risk

• business environment risk

All other risks have been assessed as being less material and are not covered in any detail in this report.

Assets are invested in accordance with the Prudent Person Principle. This ensures the Company invests only in assets and financial instruments where the risks can be properly identified, measured, monitored and reported appropriately, taking into account the assessment of overall solvency needs and liquidity requirements.

The Company has established criteria relating to the investment of its assets. The Investment Operating Policy sets out the requirements that the Board and senior management consider appropriate in order to protect customers and shareholders. Investment principles, limits, processes and escalation protocols are defined to ensure that suitable assets are purchased, having regard to the liability profile and the required diversity of the asset portfolio. This ensures that the Company meets the requirements of the Prudent Person Principle.

Climate change risk is not separately allowed for in the assessment of capital but has the potential to drive a wide range of risks to CLL’s business. The impacts of climate change will emerge over a long time horizon and the impact will depend upon the speed, effectiveness and ‘orderliness’ of the global transition to a ‘low carbon’ economy. This is an emerging area of risk which has a strong and increasing focus by executive management and the Board.

The Company has dedicated expertise within the Investment Division, plus additional analysis and oversight from risk and actuarial teams to ensure that assets are invested appropriately. Oversight and governance is provided through appropriate review and challenge by senior management, in particular through the Investment Committees and the Asset and Liability Committee.

C Risk Profile


Longevity Risk

Catastrophe Risk

Morbity Risk

Expense Risk

Mortality Risk

Lapse Risk

56

23

11

6 2 2

55

23

12

6

2 2

C Risk Profile

Figure 6: Split of undiversified SCR by Underwriting Risks shown as a percentage

Underwriting Risk SCR

C.1 Underwriting RiskUnderwriting risk is the risk associated with the contractual promises and obligations made under insurance contracts. Exposure to this risk results from adverse events, or customer behaviour, occurring under specified perils and conditions covered by the terms of an insurance policy.

Adverse events can affect the ultimate amount of net cash flows (e.g. premiums, expenses and claims) and the timing of these cash flows. Customer behaviour (e.g. lapses) can also affect both the amount and timing of cash flows.

The underwriting risk profile (based on SCR), shows that the Company is exposed to various underwriting risks as shown below:

2020

2019


Definitions for each underwriting risk are provided below:

C Risk Profile

Risk Definition Risk Preference

Longevity Risk Longevity risk is the potential or volatility of earnings or capital arising from an adverse change in the value of assets (i.e. equity release mortgages) or insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where a decrease in the mortality rate leads to a decrease in the value of assets or an increase in the value of insurance liabilities.

4. Readily Accepts

Catastrophe Risk Two sources of catastrophe risk arise through mortality and morbidity risk:

• Mortality catastrophe risk is the potential loss or volatility of earnings or capital arising from an adverse change in the value of unsurance liabilities, resulting from the significant uncertainty of pricing and provisioning assumptions related to extreme or irregular mortality events.

• Morbidity catastrophe risk is the potential loss or volatility of earnings or capital arising from adverse change in the value of insurance liabilities, resulting from the significant uncertainty of pricing and provisioning assumptions related to extreme or irregular morbidity events.

3. Willing to Accept


Morbidity Risk Two sources of morbidity risk arise through group and individual business: Morbidity risk (Group Business) is the potential loss or volatility of earnings or capital arising from an adverse change in the value of insurance liabilities relating to Group Business, resulting from changes in the level, trend, or volatility of disability, health, dental, critical illness and other sickness rates, where an increase in the incidence rate or a decrease in the disability recovery rate leads to an increase in the value of Group Business insurance liabilities. Morbidity risk (Individual Business) is the potential loss or volatility of earnings or capital arising from an adverse change in the value of insurance liabilities relating to Individual Business, resulting from changes in the level, trend, or volatility of disability, health, dental, critical illness and other sickness rates, where an increase in the incidence rate or a decrease in the disability recovery rate leads to an increase in the value of Individual Business insurance liabilities. Morbidity risk also arises from equity release mortgages where an increase in morbidity results in borrowers going into long-term care and earlier redemption of loans leading to loss of interest payments and impacts on the Company’s matching position.

4. Readily Accepts


Expense Risk Expense risk is the potential loss or volatility of earnings or capital arising from variability of expenses incurred with fee for service business or in servicing and maintaining insurance, savings, or reinsurance contracts (e.g. the variability in expense liability cash flows due to the variation of the in force policies, excess claims, lapses and surrenders, asset management, new business decrease or other circumstances that could have an impact on unit expenses).


Table 16: Risk Preferences and Definitions Continued on Page 42


Definitions for each underwriting risk are provided below: Continued from Page 41

Given the significant volumes of annuity and group business written by the Company, longevity and catastrophe risk are considered the most material and will be discussed in further detail.

C Risk Profile


Mortality Risk Two sources of mortality risk arise through group and individual business:

Mortality risk (Group Business) is the potential loss or volatility of earnings or capital arising from an adverse change in the value of insurance liabilities relating to Group Business, resulting from changes in the level, trend, or volatility of mortality rates, where an increase in the mortality rate leads to an increase in the value of Group Business insurance liabilities.

Mortality risk (Individual Business) is the potential loss or volatility of earnings or capital arising from an adverse change in the value of assets (i.e. equity release mortgages) or insurance liabilities relating to Individual Business, resulting from changes in the level, trend, or volatility of mortality rates, where an increase in the mortality rate leads to a decrease in the value of assets or an increase in the value of Individual Business insurance liabilities.

4. Readily Accepts

4. Readily Accepts

Lapse Risk Lapse risk is the potential loss or volatility of earnings or capital arising from adverse change in the value of insurance liabilities and equity release mortgages, resulting from changes in the level or volatility of the rates of policy lapses, terminations, renewals and/or surrenders. For lapse supported products, a decrease in the lapse rate leads to an increase in the value of the insurance liabilities. For lapse sensitive products, an increase in the lapse rate leads to an increase in the value of the insurance liabilities.


Table 16: Risk Preferences and Definitions


C.1.1 Longevity RiskLongevity risk is the Company’s largest underwriting risk in terms of SCR and arises from its annuity business. The risk is that annuitants live longer than expected whereupon the Company will be required to make additional annuity payments.

The Company, is a provider of pension annuities in the UK and has built its portfolio through acquiring annuities from other insurance companies and also participates in bulk annuity market (selling insurance to trustees of Defined Benefit pension schemes).

Exposure to longevity risk was broadly stable over the year.

The Company implements a range of processes to manage longevity risk:

• Reinsurance – The Company actively participates in risk mitigation through longevity swaps, as well as through other reinsurance arrangements on existing annuity business which act to transfer out longevity risk. The Company regularly monitors and reports on the performance and effectiveness of existing reinsurance arrangements.

• Risk Monitoring and Reporting – A comprehensive range of management information is used to effectively monitor and control longevity risks associated with annuity business, including risk concentrations within new business.

• Longevity Research – The Company carries out research and analysis to monitor emerging trends in relation to longevity risk. Mortality reports, which include key management information as well as any emerging news relating to trends or events affecting longevity risk, are produced monthly.

• Experience Analysis – Best estimate assumptions for pricing and reserving reflect the Company’s experience and are determined using current and generally accepted actuarial and statistical techniques. The best estimate assumptions are reviewed at least annually.

• Policies and Standards – The Company has policies and standards that set out the underwriting practices to which the Company adheres. Controls are in place to ensure that underwriting processes and systems are operating as expected. Operational limits are used to determine whether to accept risk for individual policies or schemes and to manage concentration risk.

C.1.2 Catastrophe RiskAs a leading provider of UK group insurance business, the Company is exposed to catastrophe risk. The risk is that a catastrophic event, such as a pandemic or terrorist attack, leads to an increased incidence of death or illness of employees covered by group schemes, leading to larger benefit payments.

The Company is exposed to the risk of increased deaths (mortality catastrophe risk) and increased incidence of group health claims (morbidity catastrophe risk) arising from a catastrophic event.

Concentration of catastrophe risk is a by-product of writing group insurance products. Geographic concentration of risk through group schemes can lead to an increased exposure to catastrophic events, such as terrorism, where the lives affected are likely to be within a single location. The Company has a material concentration of group protection schemes written within central London.

C Risk Profile


The Company manages catastrophe risk exposure through:

• Reinsurance – The Company actively participates in risk mitigationthrough reinsurance arrangements on existing group business. TheCompany regularly monitors and reports on the performance and effectiveness of existing reinsurance arrangements.

• Risk Monitoring and Reporting – A comprehensive range of managementinformation is used to effectively monitor and control the risks associatedwith group business, in particular in relation to concentration risk. Single site limits are regularly monitored for underwriting purposes. Regular management information is developed and analysed by the group business team and shared with members of the executive team and risk function, supporting the risk management process.

• Event Limits – Catastrophic event limits are in place to restrict theamount that can be claimed as a result of a single catastrophic event.The Company regularly monitors and reports on these limits.

• Policies and Standards – The Company has policies and standardswhich set out the underwriting practices which the Company adheres to.Controls are in place to ensure that underwriting processes and systems are operating as expected. Operational and risk limits are used to determine whether to accept risk for individual policies or schemes and to manage concentration risk.

C.2 Market RiskMarket risk is the potential loss of earnings or capital arising from the changes in market rates or values. It refers to the risk of losses on the Company’s investment portfolio as a result of fluctuations in market rates orvalues of the underlying investments.

The market risk profile, shown in the figure below, shows that the Company is exposed to various market risks:

C Risk Profile

Figure 7: Split of undiversified SCR by Market Risks shown as a percentage

Market Risk SCR

11

1

15

5

17

51

Credit Spread Risk

Equity Risk

Property Risk

Currency Risk

Concentration Risk

Interest Rate Risk

9

13

548

15

1

2020

2019


Definitions for each market risk are provided below:

C Risk Profile


Fixed Income Investment Risk

There are three risks associated with fixed income investment:

Default risk is the potential loss of earnings or capital arising from a financial loss attributed to the default of that security in its financing obligations. Such securities included in this category cover both corporate and government debt, in either fixed income or floating note form, as well as commercial mortgages.

Downgrade risk is the potential loss of earnings or capital arising from a financial loss attributed to the downgrade of a security’s credit worthiness. Securities included in this category cover both corporate and government debt, in either fixed income or floating note form, as well as commercial mortgages.

Spread risk is the potential loss of earnings or capital arising from a financial loss attributed to a change in the yield premium required by the market in respect of credit risk on risky assets. Such securities included in this category cover both corporate and governement debt, in either fixed income or floating note form, as well as commerical mortgages. For Solvency II capital requirement purposes, the credit risk module also captures risks pertaining to equity release mortgages.

4. Readily Accepts

Interest Rate Risk Interest rate risk is the potential loss or volatility of earnings or capital arising from the effect of the volatility and uncertainty of future interest rates on asset cash flows relative to liability cash flows and on assets backing surplus. This also includes changes in the amount and timing of cash flows related to asset and liability optionality including interest rate guarantees and book value surrender benefits in the liabilities.


Property Risk Property risk is the potential loss or volatility of earnings or capital arising from the sensitivity of the values of assets, liabilities, financial instruments and fee revenue to changes in the level or the volatility of market prices of residential and commercial property. Assets include direct property, equity release mortgages and commercial real estate loans.


Equity Risk Equity risk is the potential loss or volatility of earnings or capital arising from the sensitivity of the values of assets, liabilities, financial instruments and fee revenue to changes in the level or the volatility of market prices of common shares. This includes investments in the surplus account or in the staff pension plan. The Irish Life participation exposes the Company to this risk.


Currency Risk Currency risk is the potential loss or volatility of earnings or capital arising from adverse changes in the value of assets, liabilities and financial instruments to changes in the level or in the volatility of currency exchange rates.


Market Concentration Risk

Market concentration risk is the potential loss or volatility of earnings or capital arising from additional risks stemming either from a lack of diversification in the asset portfolio (from a market risk perspective) or from a large exposure to default risk by a single issuer of securities or a group of related issuers.

2. Low Appetite

Table 17: Main Market Risk definitions and their associated preference Level


Given the significant volumes of annuity business written and the significant exposure to ILG business, fixed income investment risk, interest rate risk, property risk and equity and currency risks are considered the most material market risks and are discussed in further detail in the following sections.

Inflation risk is not explicitly covered by the SCR. However, it is considered explicitly in the expense risk calculation and implicitly in the calibration of the interest rate risk calculation. The Company’s exposure to inflation risk has increased due to bulk annuity schemes acquired in 2019 and 2020 and is expected to continue to increase as the Company grows its presence in the bulk annuity market. Inflation risk is currently mitigated through the appropriate matching of assets and liabilities and monitored through the use of quantitative indicators.

C.2.1 Fixed Income Investment RiskThe Company’s exposure to fixed income investment risk primarily arises from investment in assets that provide income that is expected to meet future annuity payments. A range of investments including corporate bonds, government bonds, commercial mortgages, equity release mortgages and finance leases are used to provide this income. Fixed income investment risk exposure also arises from the Company’s surplus assets, although these are generally invested in government bonds and money market instruments which are considered relatively low risk.

Fixed income investment risk is the largest contributor to the SCR. The spread SCR decreased over the year mainly driven by the new quota share arrangement that was implemented half way through the year and an expansion of the matching adjustment portfolio.

The Company currently uses the following risk management techniques for fixed income investment risk exposure:

• Credit Reviews – Investments are acquired where, after detailed analysis,the returns are considered to be favourable after taking account of the underlying risks. Credit ratings are determined by an internal credit review carried out by the Investment Division and, when available, compared with ratings provided by external credit rating agencies to avoid being more favourable. Credit ratings are subject to a formal governance process and are reviewed at least annually.

• Policies and Standards – Policies and standards set out the investmentpractices to which the Company adheres. Controls are in place to ensure that processes and systems are operating as expected. Operational limits are used to determine whether to accept risk for individual investments. Concentrations are managed through investment limits, which specify an acceptable range for each category allowing the Company to maintaina well-diversified portfolio. Concentrations are monitored on a regular basis and reported to the Board.

• Reinsurance – The Company currently reinsures a significant proportionof its annuity business. This has the effect of reducing the exposure to the risks associated with annuity business, including fixed income investmentrisk. The Company regularly monitors and reports on the performance and effectiveness of existing reinsurance arrangements.

• Use of Solvency II Long Term Guarantee measures – Solvency IILong Term Guarantee measures (Matching Adjustment and Volatility Adjustment) give insurers credit for holding certain long-term assets which match the cash flows of a designated portfolio of liabilities. These measures help to reduce the exposure to spread risk and reduce the volatility of the Solvency II balance sheet. To ensure the continued effectiveness of these measures, the management of the related assetsand liabilities are monitored on a regular basis.

• Governance and Oversight – The CLG Credit and Market risk function,which sits within the second line of defence, provides oversight and additional risk challenge and reporting on behalf of the Company. Credit risk is managed in accordance with the overall Company risk framework, with governance of credit risk maintained through a committee structure,in particular through the Investment Committee and the Asset and Liability Committee.

C Risk Profile


C.2.2 Interest Rate RiskThe Company’s exposure to interest rate risk arises largely from holding bonds, mortgages, finance leases and property to provide cash flows that are expected to meet annuity payments in the future. The Company is also exposed to interest rate risk on its surplus assets, although these are generally invested in relatively short duration assets with low sensitivity to changes in interest rates.

Interest rate risk is a small proportion of SCR as the Company holds a well-matched portfolio of assets providing income to meet expected annuity cash flows. The capital held for this risk has remained relatively stable over 2020. However, as a result of Solvency II capital requirements and risk margins, the Company’s solvency position is sensitive to movements in interest rates. Transitional relief on technical provisions acts to limit the sensitivity of the solvency position.

The Company manages interest rate risk exposure through:

• Asset Liability Matching – The primary management process forinterest rate risk (including any concentrations) is the asset and liability cash flow matching process that takes the expected cash flows on the assets backing the liabilities, including property lease cash flows, and matches them closely to the liability cash flows. To ensure the ongoing effectiveness of the asset liability management processes, the Company has an Asset and Liability Committee which regularly reviews the asset liability matching investigations and ensures that the Company continuesto be well matched.

• New Business Pricing – Annuity business is regularly re-priced to reflectcurrent yields on assets used to back liabilities for new business.

• Policies and Standards – Policies and standards set out the investmentpractices to which the Company adheres. Controls are in place to ensure that processes and systems are operating as expected. Operational limitsare used to determine whether to accept risk for individual investments and to manage concentration risk.

• Reinsurance – The Company currently reinsures a significant proportionof its annuity business. This has the effect of reducing the exposure to the risks associated with annuity business, including interest rate risk. The Company regularly monitors and reports on the performance and effectiveness of existing reinsurance arrangements.

C.2.3 Property RiskThe Company’s exposure to property risk arises primarily from the potential loss of rental income on its long lease property investments which are held to back annuity liabilities. Such loss can arise from rental voids caused either by tenant defaults or from tenant leases which have expired and not been renewed or replaced.

Property risk is material for the Company, despite the relatively low proportion of property investments used to back annuity liabilities. Exposure to property risk has remained fairly stable during 2020.

The Company manages property risk exposure through:

• Prudent Person Principle – The Company has the appropriate skills andexpertise within the organisation to fully identify, measure, manage, monitor, control and report on property risks. This includes the dedicatedfirst line expertise within the property management team, plus additional analysis from the Risk and Actuarial teams. Oversight and governance is provided through appropriate reporting, review and challenge by senior management.

• Investment Limits – Investment processes ensure the selection of assetsto maintain a diversification of the portfolio by sector and geography, subject to investment limits. To ensure that the portfolio continues to be well diversified, adherence to investment limits is monitored and reported to the Investment Committees on a regular basis.

C Risk Profile


• Risk Monitoring and Reporting – A comprehensive range of managementinformation is used to effectively monitor and control the risks associatedwith property investment. A report is produced regularly and shared with the Company’s Asset and Liability Committee. This includes analysis of currently vacant properties, and a schedule of properties with leases close to expiry.

• Governance Oversight – Property risk is overseen by the Credit andMarket Risk Team at CLG, who act on behalf of the Company to provide oversight, challenge and additional reporting on property risk exposures.

• Reinsurance – The Company currently reinsures a significant proportionof its annuity business. This has the effect of reducing the exposure to the risks associated with annuity business, including property risk. The Company regularly monitors and reports on the performance and effectiveness of existing reinsurance arrangements.

C.2.4 Equity RiskThe Company’s exposure to equity risk arises mainly through owning subsidiaries, principally the ILG. Any change to the value of these holdings will directly impact the value of the subsidiary to the Company.

The Company is also exposed to equity risk through unit-linked investment products although the investment risk is borne by the customer as policy benefits depend on the value of the underlying investment.

Equity risk is a material risk for the Company and exposure has remained fairly stable over 2020.

The Company manages equity risk exposure in relation to ILG through:

• Irish Life Group’s Risk Management – ILG has its own ERM framework,consistent with that of the Company, which comprises the processes thatare carried out to identify, manage, monitor and report on risks. ILG has its own Risk Function which provides oversight of the risks faced.

• Risk Monitoring and Reporting – ILG shares its risk reports, includingits ORSA, with the Company. This ensures that the Company is kept up to date and is well aware of risk events and exposures. Informationis incorporated into the Company’s CRO reports which are regularly presented to the Board.

• Governance and Oversight – Governance arrangements are in placeto ensure that the Company is aware of, and accepts, potential developments at ILG which could impact the Company.

C.2.5 Currency RiskCurrency risk exposure, similarly to equity risk, is concentrated and arises mainly from holding the ILG, a euro-denominated subsidiary. If the value of ILG reduces due to movements in exchange rates, this has an adverse impact on the Company.

The Company has some additional currency risk through other investments, however, such exposure is less material than the currency exposure from ILG.

Currency risk is a material risk for the Company and exposure has remained stable throughout 2020.

The Company manages the size of its exposure to currency risk using a currency swap. In early 2020, the Company rolled forward its currency hedging arrangements in order to maintain current levels of protection against currency exposure.

C.3 Credit RiskThe Company’s exposure to credit risk arises primarily through counterparty default risk, which is the potential loss of earnings or capital arising from theinability or unwillingness of a counterparty to meet its on-balance sheet and off-balance sheet contractual obligations.

The Company is exposed to a small amount of counterparty default risk, this itself is largely driven by reinsurance counterparties.

Fixed income Investment counterparty default risk is covered under Market Risk.

C Risk Profile


C Risk Profile


Reinsurance Counterparty Risk

Internal - The Company cedes insurance risk to reinsurance counterparties within the Great-West Lifeco Group in order to mitigate insurance risk. Internal Reinsurance Counterparty Risk represents the potential loss or volatility of earnings or capital arising from an internal reinsurance counterparty failing to maintain its contractual obligations in relation to the payments under the reinsurance contract.

External - The Company cedes insurance risk to reinsurance counterparties external to the Great-West Lifeco Group in order to mitigate insurance risk. External Reinsurance Counterparty Risk represents the potential loss or volatility of earnings or capital arising from an external reinsurance counterparty failing to maintain its contractual obligations in relation to payments under the reinsurance contract.


2. Low Appetite

Derivative Counterparty Risk

Derivative products are traded through exchanges or ‘Over the Counter’ with counterparties approved by the Board of Directors or the Investmetn Committees of the Boards. Derivative Counterparty Risk is the potential loss or volatility or earnings or capital arising from failure of the derivative counterparty to meet their financial obligations under the contract.

2. Low Appetite

Table 18: Credit Risk Definition and the Associated Preference Levels


Definitions for each of these are provided below:

C.3.1 Counterparty Default RiskThe Company exposure to counterparty default risk arises mainly from reinsurance arrangements with companies within the Great-West Lifeco. The Company uses reinsurance as a risk mitigation technique for underwriting, credit and market risks and such arrangements form a core part of the Company’s business strategy.

Counterparty default risk contributes a small amount to the SCR due to the high credit worthiness of the existing counterparties and the existence of collateral arrangements. Exposure has remained stable over 2020.

The Company uses the following risk management techniques for counterparty default risk exposure:

• Collateral and deposit-back arrangements – The Company uses collateral and deposit back arrangements to minimise counterparty default risk exposure. In the event of default by the counterparty, the Company would have recourse to the assets posted as collateral. Limits and restrictions are agreed with the counterparty on the assets used in collateral arrangements based on quality, type, liquidity and matching. With a deposit back arrangement, assets are in effect given back to the Company from the counterparty, reducing the risk of large losses arising from counterparty default.

• Policies and Standards – Policies and standards set out the reinsurance practices to which the Company adheres. These include verification that the reinsurer has an acceptable credit quality. Controls are in place to ensure that processes and systems are operating as expected. The Company has limits in place to manage exposure to risks from individual counterparties. Counterparty credit ratings are subject to regular monitoring to ensure that appropriate action is taken in response to any movements in the credit rating.

• Risk Monitoring and Reporting – A comprehensive range of management information is used to effectively monitor and control counterparty default risk. Reports countaining information on risk exposures is produced regularly and shared with the relevant governance committee.

C.4 Liquidity Risk Liquidity risk is the potential loss of earnings or capital arising from a company’s inability to generate the necessary funds to meet its obligations as they fall due. The Company has very little appetite for liquidity risk, reflected in a low risk preference (2 – Low Appetite) in the Risk Strategy.

The Company considers the main sources of liquidity risk to be:

• Collateral calls – The Company is party to various derivative and reinsurance arrangements where the Company may be required to post additional collateral e.g. as a result of market movements.

• Group insurance payments – The Company could have to pay a significant amount in benefits through group insurance products if there is a significant increase in death or critical illness claims, particularly following a catastrophic event such as a terrorist attack or pandemic.

• Matching Adjustments (MA) restrictions – Regulations around MA portfolios allow extraction of surplus under only strict conditions and require the portfolio to be topped up with assets following 1-in-200 stress events. There are currently sufficient MA eligible assets in the Company outside of the MA portfolio, which could be swapped in at short notice to meet this requirement.

There is no explicit capital requirement for liquidity risk within the SCR. However the Company actively manages and monitors its liquidity requirements on a regular basis. This includes regular assessments of liquidity requirements under normal and adverse conditions.

C Risk Profile


The Company holds significant amounts of liquid assets to meet liquidity calls as they fall due and remains within its liquidity risk appetite.

The profit expected from future premiums on existing insurance contracts at 31 December 2020 was £44m (£35m as at 31 December 2019).

The Company currently uses the following risk management techniques for liquidity risk exposure:

• Asset Liability Matching – Matching the timing between incoming cashflows from assets and outgoing cash flows due on liabilities is key to mitigating liquidity risk. To ensure the ongoing effectiveness of this process, the Company has an Asset and Liability Committee that aims toensure that all funds continue to be well matched.

• Investment Guidelines – The Company has guidelines in place tofacilitate cash management and ensure that adequate liquid assets are held in the various portfolios and that the liquid assets are of goodquality.

• Risk Monitoring and Reporting – A comprehensive range of managementinformation is used to effectively monitor and control liquidity risk, such as the production and sharing of the Liquidity Plan to the Asset and Liability Committee and the reporting of the Liquidity Ratio on a quarterlybasis to the ERMC and BRC through the CRO Report.

• Policies and Standards – The Company has a liquidity policy and aliquidity standard which sets out high-level processes for managing liquidity risk in the short and longer term. To ensure that the policy continues to remain effective, the Company’s liquidity position and other liquidity-focused management information, are monitored on a regular basis by the Investment Committees and the Asset and LiabilityCommittee.

C.5 Operational RiskOperational risk arises from potential failures or shortcomings of the Company’s processes and systems; such failures or shortcomings may be caused by both internal and external events. Exposure to operational risk results from either normal day-to-day operations or an unanticipated event and can have material financial and/or reputational consequences. Operational risk includes risk exposures arising from people, infrastructure, process, systems, legal/regulatory, fraud and outsourcing. Operational risk also contributes to conduct risk. The Company does not seek to take on operational risk as a strategic risk but recognises that it is exposed to it in theexecution of its business strategy.

The Company has a low appetite for most types of operational risk although in some cases, for instance fraud, it has no appetite.

C Risk Profile


The capital held against this risk is relatively small, however, this risk is material to the Company due to the potential financial and/or reputational consequences.

The Company maintains a comprehensive register of operational risks. The following are the most material and the management of these risks is a particular focus for senior management and the Board:• data security and disruption issues from cyber-attacks and/or threats; • failing to meet regulatory and legal requirements and/or implement

changes;• inability to deliver strategy if ineffective in responding to a changing

external environment; and• the possibility of resourcing and key person dependencies that may

impact our ability to deliver objectives.

The Company uses the following risk management techniques for operational risk exposure:

• Operational Risk Assessments – These are conducted within each business line and aim to identify all material operational risk scenarios that, if they were to crystallise, would lead to a reduction in the level of capital resources or adversely impact the operations or reputation of the Company. Action plans to address unacceptable levels of risk and/or the remediation of control weaknesses are put in place and managed through to resolution.

• Project Oversight – A pro-active process where the Risk Function engages the project teams and business units to understand the materiality of projects and initiatives in place and assess the level of oversight required.

• Operational Key Risk Indicators – The Company has identified a number of operational measures which are potential drivers of key operational risks. Monitoring these measures provides indicators of potential heightened risk exposures. These indicators are assessed and reported to the senior management team and BRC on a regular basis. The suite of risk indicators is also reviewed on a regular basis to ensure that it continues to remain effective for managing operational risks.

• Risk Event Analysis – The Company centrally records and reports details of all material risk events and associated remedial actions. Analysis is regularly undertaken to consider underlying trends. Furthermore, external event data is analysed to identify issues which may be pertinent to the Company, but has not yet materialised.

• Policies and Standards – Policies establish the roles and responsibilities with respect to management and oversight of operational risk. Key processes and supporting controls are identified in relation to requirements set out in the Company’s policies and standards, to ensure effective application of operational risk management. Business areas review and attest to respective Policies and Standards to confirm compliance and highlight areas requiring improvements along with corresponding actions.

Material information from these assessments is presented for review by senior management and the Board on a regular basis.

C.6 Other Material RisksThe Company is committed to dealing with customers honestly and fairly, and putting them at the heart of the business is core to its strategy.

C.6.1 Conduct RiskConduct risk is the risk of unfair outcomes for customers, from inadequate or failed processes or inappropriate behaviours, offerings or interactions by the Company, its employees or its Agents.

The Company has a low appetite for conduct risk exposures.

The Company is committed to dealing with customers honestly and fairly, and putting them at the heart of the business is core to its strategy.

C Risk Profile


The Company’s main sources of conduct risk are as follows:

• Product Design and Ongoing Governance - The risk that products are designed for inappropriate target markets, do not meet customer needs or consider customer vulnerability, use inappropriate distribution channels or include excessive fees and charges. Additionally this includes the risk of inadequate product management and ineffective ongoing review of product performance.

• Disclosure and Product Sales – This includes product manufacturer risks, such as unclear marketing or product literature and failure to provide product distributors with sufficient information on the benefits, features and target market of the product; and product distributor risks such as inappropriate sales or advice including negligent or malicious intent, failure to consider potential customer vulnerabilities, failure to clearly explain product features, risks and terms, fees, commission and charges, and failure to assess suitability of the product.

• Post Sales Service – The risk of failing to consider potential customer vulnerabilities, poor customer communications and interactions, inadequate complaint resolution and claims handling processes, and unreasonable barriers to customers seeking to switch products or end their relationship with the Company.

Conduct risks can also arise through other risks such as operational risk as well as strategic and business risk.

The Company does not seek to take on conduct risk but is inevitably exposed to it in the execution of its business strategy through normal business operations. It is difficult to mitigate fully against conduct risk. Instead the Company seeks to control the risk through close monitoring and, where necessary, interventions.

The Company uses the following risk management techniques for conduct exposure:

• Conduct Risk Framework – These are conducted within each business line and aim to identify all material conduct risk scenarios that, if they were to crystalise, would lead to a reduction in the level of capital resources or adversely impact the operations of the Company. Action plans to address unacceptable levels of risk and/or the remediation of control weaknesses are put in place and managed through to resolution.

• Conduct Risk Policies and Standards – Policies establish the roles and responsibilities with respect to management and oversight of conduct risk. Key processes and supporting controls are identified in relation to requirements set out in the Company’s policies and standards, to ensure effective application of conduct risk management. Business areas review and attest to respective policies and standards to confirm compliance and highlight areas requiring improvements along with corresponding actions.

• Conduct Risk Monitoring and Reporting – Conduct risks are subject to ongoing review and assessment supported by regular reporting of key risk indicators to assist with the identification and monitoring of potential conduct risks. The Company has identified a number of conduct measures which are potential drivers of key conduct risks. Monitoring these measures provides indicators of potential heightened risk exposures. These indicators are assessed and reported to the senior management team and Board Risk Committee on a regular basis. The suite of risk indicators is also reviewed on a regular basis to ensure that it continues to remain effective for managing conduct risks.

• Product Oversight and Governance - Product development and approval process are in place to ensure products and services are designed for clearly defined target markets that cater for the needs of our customers based on sound insight and research. Intermediaries are provided with clear and sufficient information that enables them to recommend the Company’s products to customers using suitable advice that reflects the customers’ needs. Additionally regular reviews are carried out to ensure products remain fit for purpose and continue to meet the needs of the target audience for whom they were originally designed.

C Risk Profile


• Underwriting/Pricing & Charges – Underwriting and pricing processesconsider the impacts on customers to ensure they are fair and that charges are justifiable and transparent.

• Customer and Product Related Literature – There is ongoing oversight,review and sign-off of customer and product related literature to ensure it is clear, fair and not misleading. This includes information provided tointermediaries.

• Compliance Monitoring Assessments – Ongoing compliance monitoringand risk based annual compliance assessments are carried out across business key processes to ensure that ensure that regulatory obligations are being met, conduct risk is being appropriately managed and poor customer outcomes are avoided.

• E-Learning – A conduct risk E-Learning module which aims to help staffunderstand what is meant by conduct risk, how to identify and manage conduct risk and explain the importance of delivering better customer outcomes.

C.6.2 Strategy, Business Planning and Execution Risk

Strategy, business planning and execution risk is the potential loss or volatility of earnings or capital, as well as poor treatment of customers and company reputation implications arising from failures of internal planning or strategic decision-making, leading to the Company being unable to meet its key strategic goals.

While the Company willingly accepts the risks associated with developing and following a successful business strategy, the Company aims to minimise the risks around setting and executing strategy with well-controlled processes.

The Company currently uses the following risk management techniques for Strategy, Business Planning & Execution risk exposure:

• Business Planning Process – The Company’s 5 year business plan isrevisited annually to ensure it remains appropriate and aligned with the Company’s business and risk strategy, considering the observations fromthe prior ORSA report.

• Initiative Risk Assessment – For material strategic iniatives an InitiativeRisk Assessment is deployed. This follows the initiative through to completion reporting key risks, issues and actions, with the risk functionengaged for opinions through the process.

• Risk Function Oversight – Targeted risk function oversight of keybusiness initiatives, including projects and material transactions. All material transactions/projects will be accompanied with a risk opinionwhen presented to the relevant Board committee for approval.

C.6.3 Business Environment Risk

Business Environment risk is the potential loss or volatility of earnings or capital, as well as poor treatment of customers and company reputation implications arising from changes to the external environment manifesting over the medium to long term leading to the Company being unable to meet its key strategic goals. Examples of such changes are major regulatory changes, legal changes, macroeconomic or country risk events.

Participation in the Company’s target markets exposes the Company to stability and change risks associated with such markets. The Company has a low appetite for business environment risks and acknowledges the limited mitigation options available. However, the Company seeks to control the risk through close monitoring and, where necessary, interventions. The Company uses the following risk management technique for business environment risk exposure:

• Emerging Risk Reporting Process - An annual workshop is held to reviewand assess the potential impacts of upcoming regulatory changes and business environment changes on the Company’s business strategy and risk profile. This is refreshed quarterly with any updates reported to the senior management team and BRC through scheduled Risk Reporting.

C Risk Profile


D.1 Assets

D.1.1 Solvency II Balance Sheet Asset ValuesThe asset value for each material class of asset on the Company’s Solvency II balance sheet as at 31 December 2020 is as follows:

D.1.2 Methods, Bases and Assumptions for Solvency II Balance Sheet ValuationUnder Solvency II, firms adopt a risk based approach to the valuation of all items reported on their Solvency II balance sheet. This generally means that assets are valued at an amount that would be paid under fair market conditions.

The Company generally holds investment assets to either produce income and/or for capital growth. Their economic value can be affected by the tax on any increase or decrease in their value during the period they are held by the Company. Amounts on account of such tax are accrued for either as current or deferred tax liabilities and settled with the UK tax authorities when due (see Section D.1.2.3 for comment on unit-linked and index-linked funds, including tax considerations).

D.1.2.1 Fixed Income SecuritiesFixed income securities include:

• government bonds;

• corporate bonds; and

• collateralised securities.

These investments are initially recognised by the Company on the date the trade is placed at the amount paid. Subsequently, they are held at their fair value. Fair value is determined by reference to quoted market bid prices primarily provided by a third party independent pricing source.

Where prices are not quoted in a normally active market, fair values are determined using valuation models. These valuation models discount the expected future cash flows using discount rates derived by comparing investment returns to movements in the market rates for comparable investments.

D Valuation for Solvency Purposes

Asset ClassDocument Reference

2020£m

Asset Value

2019£m

Asset Value

Fixed Income Securities D.1.2.1 17,947 16,320

Reinsurance Recoverable Asset D.1.2.2 6,784 3,787

Other Loans and Mortgages D.1.2.3 3,101 2,956

Assets held for Unit-linked and Index linked Funds

D.1.2.4 2,826 2,273

Participations D.1.2.5 2,062 1,900

Property D.1.2.6 1,488 1,586

Other Investments D.1.2.7 858 163

Collective Investment Undertakings D.1.2.8 282 140

Trade Receivables D.1.2.9 208 23

Insurance and Intermediaries Receivable D.1.2.10 97 78

Deposits other than Cash Equivalents D.1.2.11 86 186

Cash and Cash Equivalents D.1.2.12 48 81

Deferred Tax Asset D.1.2.13 24 -

Listed Equities D.1.2.14 19 22

Derivatives D.1.2.15 9 16

Reinsurance Receivables D.1.2.16 7 17

Other Assets D.1.2.17 134 91

Total assets 35,980 29,639

Table 19: Solvency II Asset Valuation


D.1.2.2 Reinsurance Recoverable AssetAmounts expected to be recovered from reinsurers are valued using valuation models. These valuation models calculate the present value of future policy payments using appropriate assumptions consistent with the relevant reinsurance treaty and calculation of technical provisions. A reduction to the value is applied to account for the possibility of each reinsurer defaulting under best estimate conditions based on their current credit rating. The increase in reinsurance recoverable over 2020 is due to additional reinsurance on a block of compulsory purchase annuities.

The reinsurance recoverable assets for each business line are:

As at 31 December 2020, the Company does not expect any recoveries from special purpose vehicles as the Company does not make use of special purpose vehicles, see Section D.2.5.

D.1.2.3 Other Loans and MortgagesLoans and mortgages includes commercial mortgages and equity release mortgages

Loans and mortgages are initially recognised by the Company on the date the loan is paid to the borrower. Subsequent fair values are calculated as the present value of expected future cash flows using an appropriate discount rate. Valuation inputs include market returns and risk adjusted spreads.

In cases where the Company does not expect to receive all contractual cash flows the mortgage is valued at its net recoverable amount i.e. the estimated selling price less the estimated selling expenses and deductions.

The Company has a series of interest bearing promissory notes totalling £117 million as at 31 December 2020 (£117 million 2019). The notes are with The Canada Life Assurance Company. D.1.2.4 Assets Held for Unit-linked and Index-linked FundsA unit-linked fund is an investment product that pools the premiums from many investors. Premiums are used to buy units in the fund. Fund managers invest premiums in a range of assets in line with the fund’s objectives and mandate.

Funds can be internal or external. Internal funds are managed by the Company. The customer selects which fund to invest their premiums in and then the Company’s fund managers invest those premiums. The Company also offers customers access to external funds. These funds operate in a similar manner to an internal fund but are managed by a chosen range of fund management companies. Premiums invested in external funds and their administration remains the responsibility of the Company.

The Company values assets in internal funds such as shares and bonds on a daily basis (except weekends or Bank Holidays) using current publicly quoted market prices. For external funds, the Company receives daily valuations provided by the external fund managers. Assets that do not have a day to day market price, such as commercial property, are valued at regular intervals by suitably qualified independent professionals.

The main components of a fund’s Net Asset Value calculation are:• fair value of the assets;

• dealing costs or trading fees associated with buying and selling assets;

• cash and cash equivalents;

• provisions for tax on investment income and capital gains on realised and unrealised gains; and

• ongoing fund charges.


Business Line

2020£m

Asset Value

2019£m

Asset Value

Annuities 6,667 3,670

Group Health 61 68

Group Life 64 53

Individual Life (8) (4)

Total 6,784 3,787

Table 20: Reinsurance recoverable assets for each business line


D.1.2.7 Other InvestmentsThe assets reported as other investments include finance leases and notesissued by a bare trust containing equity release mortgage assets.

Finance leases transfer, to the leaseholder, substantially all the risks and rewards related to ownership of the leased asset. The fair value of a finance lease is the present value of all of its future cash flows using an appropriate discount rate primarily based on market data.

Equity release mortgage assets were, in the main acquired as part of the MGMA business transfer. The majority of equity release mortgages are held in a bare trust, which has issued Senior (fixed) and Junior (residual) notes supported by the underlying asset cash flows.

Refer to Section D.4 for further details.

D.1.2.8 Collective Investment UndertakingsCollective investment undertakings invest capital raised from unit-holders (investors in the fund) in transferable or liquid securities so that any associated investment risk is spread amongst the unit holders. These undertakings include Open-Ended Investment Companies and investment trusts. The value of investment trusts are generally determined by the last price of the security on the exchange it is principally traded. Open-Ended Investment Companies are not traded on an active investment exchange andare valued at the most recent price published by the fund manager.

D.1.2.9 Trade ReceivablesTrade receivables represent payments past due from trade debtors as at the reporting date. These payments are valued at the future cash amountexpected to be received.


The unit-linked funds invest in a number of investment assets, including:

• Collective Investment Schemes such as a unit trust, investment trustor Open-Ended Investment Company;

• fixed income securities:

– government bonds;

– corporate bonds;

• commercial property; and

• listed equities.

Funds can also invest, where permitted by their investment mandate, in:

• derivatives;

• foreign currency;

• commercial mortgages; and

• exchange-traded funds.

The increase in 2020 is due to the addition of unit linked funds acquired under the MGMA business transfer.

D.1.2.5 ParticipationsParticipations are holdings of 20% or more of the voting rights or capital in other companies, whether invested directly or indirectly. Participations are valued as the percentage of the participation’s Net Asset Value on a SolvencyII basis. The Company’s largest participation is a 100% holding in ILG.

D.1.2.6 PropertyProperty assets are valued at fair value and are appraised quarterly by external surveyors. These valuations are undertaken in accordance with thevaluation standards set out by the Royal Institution of Chartered Surveyors.

The external valuers typically use a capitalisation method of valuation based upon comparable market transactions and applying suitable cap rates to the leasing structure (including any contracted rents) of the asset. Where appropriate the valuers will make re-letting assumptions and build in capital and operating expenditure.


D.1.2.10 Insurance and Intermediaries ReceivableInsurance and intermediaries receivables are policyholder payments pastdue at the reporting date. These payments are valued at the future cash amount expected to be received.

D.1.2.11 Deposits other than Cash EquivalentsDeposits other than cash equivalents comprise:

• short-term bonds, i.e. bonds that have an original term to maturity of lessthan 3 months from issue;

• money market funds (mutual funds which invest in bank deposits andshort term debt instruments); and

• other short-term investments held to meet short-term liquidityrequirements.

Fair value is determined with reference to quoted market prices. Third party organisations are the primary source of these prices.

D.1.2.12 Cash and Cash EquivalentsCash and cash equivalents are carried at face value.

D.1.2.13 Deferred Tax AssetDeferred tax is recognised when transactions or events have ocurred at the balance sheet date which will result in either more or less tax being receivable than is due on the current year’s tax return. A deferred tax asset can arise where Solvency II asset values and technical provisions show a lower surplus that has been reported in the tax base accounts or where thereare tax losses carried forward.

D.1.2.14 Listed EquitiesListed equities include:

• ordinary shares;

• preference shares; and

• exchange traded funds that are listed on a recognised investmentexchange.

Fair values are determined by the closing price from the exchange where the equity is principally traded.

D.1.2.15 DerivativesThe fair market value of derivative contracts are obtained from the respectivecounterparties and the prices are validated against an independent derivative pricing data specialists.

The following derivative contracts are in place:

• forward exchange rate agreement

• foreign currency swap contracts

To mitigate the credit risk of exposure to counterparties, all over-the-counter contracts are fully collateralised.

The Company only enters into derivative transactions for risk mitigation purposes.

D.1.2.16 Reinsurance ReceivablesReinsurance receivables represent payments past due from reinsurers as atthe reporting date. These payments are valued at the future cash amount expected to be received.

D.1.2.17 Other AssetsOther assets are valued at the future cash amount expected to be received.



D.1.3 Asset Valuations – Solvency II and UK GAAPSignificant differences in the asset values for material asset classes recorded on the Solvency II balance sheet and on the UK GAAP balance sheet as at 31 December 2020 are shown in the table below:

The table above highlights revaluation differences only. It excludes the effect of reclassification.

D.1.3.1 ParticipationsUnder Solvency II, the participation amount is determined as the subsidiaries’ Net Asset Value as calculated under Solvency II rules. Under UK GAAP, the equivalent value is the original purchase price less any subsequent impairment charges. Participations of more than 20% of issued share capital in investments that are not subsidiary company undertakings are valued at fair value under both bases.

D.1.3.2 Other Loans & MortgagesCommercial mortgages are valued using the effective interest method(amortised cost) for UK GAAP and fair value for Solvency II.

D.1.3.3 Finance LeasesFinance leases are valued using the effective interest method (amortised cost) for UK GAAP and fair value for Solvency II.

D.1.3.4 Deferred Acquisition CostsUnder UK GAAP, certain costs incurred as part of writing new policies are deferred to future periods. Under Solvency II these costs are expensed immediately.


31 December 2020 £m

Solvency II Asset Value

UK GAAP Asset Value

Difference

Asset class

Participations 1,920 1,453 467

Other loans & mortgages 3,008 2,614 394

Finance leases 204 165 39

Deferred acquisition costs - 34 (34)

Assets without significant valuation differences

30,848 30,824 24

Total Assets 35,980 35,090 890

Table 21: Significant Valuation Differences in Material Asset Classes


D.2 Technical ProvisionsTechnical provisions under Solvency II are generally calculated as the sumof a best estimate liability plus a risk margin, although for some lines of business the technical provisions are calculated as a whole.

Best estimate liabilities are calculated on a policy-by-policy basis using the values of future expected cash flows, allowing for premiums, claims, expenses, lapses and tax. Best estimate liabilities are calculated without allowing for reinsurance.

The risk margin is calculated based on the methodology and assumptions largely prescribed in the Solvency II rules. This methodology requires a calculation of the cost of continuing to hold solvency capital requirements over the remaining life of the policies. The SCR for calculating the risk margin is not the same as the SCR for the Company, as the risk margin basis assumes that certain risks can be hedged.

The following table shows the technical provisions by line of business as at 31 December 2020:

The main assumptions used in calculating the technical provisions are determined as follows:

• Interest rates for discounting the projected cash flows are determinedusing risk-free interest rates published by the Prudential Regulation Authority (PRA). In addition, the Company uses the volatility and matchingadjustments to the risk-free interest rates as set out in Sections D.2.3 and D.2.4 below.

• Inflation rates are based on implied Retail Price Index inflation ratesprovided by the Bank of England.

• Expenses consist of administration, claims management/handling,investment and overhead expenses. The Company performs regularanalysis in order to allocate between ongoing administration and investment expenses and expenses at the start of a policy.

• Life expectancy assumptions and other claim assumptions are reviewedannually against the Company’s latest experience and known industry trends.

• Lapse assumptions are set with reference to recent experience andexpected trends. Lapse assumptions vary by type of business and howlong the policy has been in force.

The Company also uses the Transitional Measure on Technical Provisions (TMTP) which is described in Section D.2.2.

D.2.1 Technical Provisions: Level of Uncertainty in ValuationUncertainty in the valuation of technical provisions arises principally because future experience will differ from the assumptions underlying the best estimate liabilities. The Company monitors how well actual experience compares to expected experience and adjusts the best estimate assumptions as appropriate.

Sensitivities of the Company’s solvency position to key assumptions are shown in Section C of this document.


31 December 2020 £mBusiness Line

Best Estimate Liability

Risk Margin

(unaudited)Technical Provision

Annuities 19,834 840 20,674

Unit-Linked 2,809 11 2,820

Group Health 861 81 942

Group Life 148 23 171

Individual Life (17) 6 (11)

Total 23,635 961 24,596

Table 22: Technical Provisions by Line of Business


D.2.2 Transitional Measure on Technical Provisions - unaudited The Company has received approval from the PRA to use the TMTP.

The following table shows the Company pro-forma Solvency II balance sheet with and without TMTP:

The TMTP is required to be run off over a maximum 16 year period. The Company runs the TMTP off annually on 1 January each year, in line with the Solvency II regulations. The PRA requires all UK firms to recalculate their TMTP at two-yearly intervals from the commencement of Solvency II or when there is a material change in the risk profile of the Company. As the previous recalculation point fell on 31 December 2019, the TMTP is next due to be recalculated as at 31 December 2021.

D.2.3 Volatility AdjustmentThe Company has received approval from the PRA to apply a Volatility Adjustment in respect of certain lines of business, primarily annuities in payment not included in the Matching Adjustment fund (see Section D.2.4), individual life business and group insurance business. The level of Volatility Adjustment is determined by the PRA.

The following table shows the Company pro-forma Solvency II balance sheet with and without Volatility Adjustment.

D.2.4 Matching AdjustmentThe Company has received approval from the PRA to apply a Matching Adjustment in respect of certain lines of business, primarily annuities in payment. This enables the Company to determine its technical provisions for this business using expected yields on the assets held to support the business, adjusted appropriately for risks, in place of the risk-free rate determined by the PRA rate. There are strict conditions which apply to both the assets and liabilities within any matching adjustment fund. These include demonstrating that the expected cash flows from the assets closely match the expected payments to policyholders. Assets included in the matching adjustment fund are mainly corporate bonds, government securities, commercial mortgages, finance leases and cash. Following the MGMA business transfer, there were two matching adjustments funds and PRA approval was received to combine these into one matching adjustment fund in 2020.


31 December 2020 £mPro-forma Balance Sheet As published

Without TMTP Difference

Technical Provisions 24,596 25,823 1,227

Basic own funds/ Eligible own funds to meet SCR*

4,036 3,043 (994)

SCR* 2,484 2,484 -

Eligible own funds to meet MCR

3,653 2,426 (1,227)

MCR 621 621 -

Table 23: Solvency II Balance Sheet without TMTP


Without Volatility

Adjustment Difference

Technical Provisions 24,596 24,723 127


4,036 3,989 (48)

SCR* 2,484 2,495 10


3,653 3,595 (58)

MCR 621 624 3

Table 24: Solvency II Balance Sheet Without Volatility Adjustment

* SCR unaudited

* SCR unaudited


D.3 Other Liabilities The Other Liabilities included in the Solvency II balance sheet are:

D.3.1 Deposits from ReinsurersThe Company has entered into a number of reinsurance contracts in which reinsurance companies have deposited assets, e.g. fixed interest securities, property and cash, with the Company. The assets are held as collateral against the amount due from the reinsurance companies for reinsurance recoverable.

The table below shows the Company pro-forma Solvency II balance sheet with and without Matching Adjustment.

D.2.5 Recoverables from Reinsurance and Special Purpose VehiclesRecoverables from reinsurance arrangements are set out in Sections D.1.2.2 and D.3.1. The Company does not make use of special purpose vehicles.

D.2.6 Simplifications in Calculating Technical ProvisionsThe Company does not use any significant simplifications in calculating technical provisions or risk margins.



Without Matching

Adjustment Difference

Technical Provisions 24,596 26,078 1,482


4,036 2,820 (1,217)

SCR* 2,484 3,630 1,146


3,653 2,208 (1,445)

MCR 621 908 286

Table 25: Solvency II Balance Sheet without Matching Adjustment

31 December 2020 £mLiability class

Document Reference

Solvency II Value

2020 2019

Deposits from reinsurers D.3.1 6,908 4,021

Deferred tax liabilities D.3.2 - 21

Derivatives D.3.3 65 72

Insurance & intermediaries payables D.3.4 108 81

Payables (trade, not insurance) D.3.5 62 98

Subordinated liabilities D.3.6 484 451

Reinsurance payables D.3.7 62 45

Provisions other than technical provisions D.3.8 13 22

Other liabilities D.3.9 129 86

Total Other Liabilities 7,831 4,897

Table 26: Solvency II Other Liabilities

* SCR unaudited


D.3.8 Provisions other than Technical ProvisionsA restructuing provision that is undiscounted and valued at the amount expected to be paid in the future.

D.3.9 Any Other Liabilities, not elsewhere shown Other material liabilities include tenant deposits and intercompany balances. Other liabilities are undiscounted and valued at the amount expected to be paid in the future. D.3.10 Liability Valuations – Solvency II and UK GAAPSignificant differences in the liability values recorded on the Solvency II balance sheet and the UK GAAP balance sheet as at 31 December 2020 are shown in the following table:

D.3.10.1 Technical ProvisionsThe technical provisions are valued using assumptions and methodologies consistent with Solvency II and UK GAAP.

D.3.10.2 Deposits from ReinsurersThe deposits from reinsurers amounts in Solvency II and UK GAAP reflect the different methodologies for the valuation of assets upon which these values are based as set out in Section D.1.3.2.

D.3.2 Deferred Tax LiabilitiesDeferred tax is recognised when transactions or events have occurred at the balance sheet date which will result in either more or less tax being payable than is due on the current year’s tax return. A deferred tax liability arises when the tax which is calculated on an asset value at balance sheet date does not have to be paid in the current tax period but may be payable sometime in the future, e.g. when the asset is sold.

D.3.3 DerivativesSee Section D.1.2.15 for recognition and valuation basis applied to derivative contracts.

D.3.4 Insurance & Intermediaries PayableInsurance and intermediaries payable includes claims past due to policyholders, premiums which have been received from policyholders in advance and outstanding commissions past due to intermediaries.

D.3.5 Payables (trade, not insurance)Trade payables are payments billed by suppliers for goods and services past due at the reporting date. These payments are valued at the future cash amount expected to be paid.

D.3.6 Subordinated LiabilitiesSubordinated liabilities represent borrowings from other Great-West Lifeco companies, and are detailed further in Section E.1.5. In the event of the Company going into liquidation, this debt would only be repaid after other creditors had been paid. Valuations are based on discounting expected future cash flows, i.e. the present value of any cash which will be paid in the future. The discount rate is based on observable market rates for comparable levels of credit risk.

D.3.7 Reinsurance PayableReinsurance payables represent payments past due to reinsurers as at the reporting date.

Such payments are valued at the future cash amount the Company expects to pay.


31 December 2020 £mLiability class

Solvency II Liability

Value

UK GAAP Liability

Value Difference

Technical provisions 24,596 24,460 136

Deposits from reinsurers 6,908 6,812 96

Subordinated liabilities 484 330 154

Deferred income reserve - 43 (43)

Value in force of acquired business - 57 (57)

All other liabilities 439 429 10

Total Liabilities 32,427 32,131 296

Table 27 : Solvency II to UK GAAP Valuation differences


D.3.10.3 Subordinated LiabilitiesSubordinated liabilities are valued using:• the effective interest method (amortised cost) for UK GAAP; and • fair value for Solvency II.

D.3.10.4 Deferred Income ReserveUnder UK GAAP, certain fees earned are deferred to future periods. Under Solvency II this income is recognised immediately.

D.3.10.5 Value in force of acquired businessUK GAAP recognises a difference between the fair value of the MGMA net assets at the date of transfer to the Company and the consideration paid which is amortised over the weighted average duration of the technical provisions.

D.4 Alternative Methods for Valuation

D.4.1 Equity Release Mortgage AssetsEquity release assets primarily acquired through the MGMA business transfer are held in a bare trust. The trust has issued a senior note held by the Matching Adjustment Portfolio and a junior note held outside of the Matching Adjustment Portfolio. Neither the notes issued by the trust nor the equity release mortgage assets are traded and so do not have an observable market value. As a result it is necessary to use alternative methods to derive the value for these assets.

The equity release mortgage assets have been valued by calculating a projection of the expected payments to be received on the loans and then discounting those future payments. These projected payments allow for theexpected future loan interest payments, loan repayments, expenses and the impacts of the NNEG feature. The NNEG feature means that the loan redemption proceeds will not be greater than the value (at the time of loanredemption) of the property, on which the loan is secured. Stochastic modelling is used to capture the expected cost of this feature, which will depend on the expected rate and volatility of future house price growth.

The discount rate used reflects the risk free interest rate term structure plus a spread above the risk free rate. The spread includes a market related element and a further element to include allowance for the high illiquidity arisingfrom a non-trading asset.

D.4.2 Senior Trust NoteThe senior note issued by the trust has a schedule of future fixed payments. An assessment of the ability of the trust to meet these payments when due has been made, which included stochastic modelling, and based on this assessment a credit rating has been assigned to the senior note. The senior note has been valued by discounting the schedule of future payments due.

The discount rate used reflects the then current risk free structure as well as the assessed credit rating and includes some allowance for the illiquidity arising from a non-traded asset.

D.4.3 Junior Trust NoteThe junior note has been valued as the residual value of the assets in the trust (after including allowance for the expected costs of operating the trust). As a result, the total value of the two notes held by the Company, issued by the trust, is equal to the value of the assets held in the trust (save for a reduction to allow for the costs of running the trust).

D.4.4 Valuation UncertaintyThe valuation of the equity release mortgage assets is derived using a number of assumptions regarding future experience. A robust assumption setting process is followed in order to ensure that uncertainty is well understood and experience relative to these assumptions is monitored regularly.

D.5 Any Other Information There is no further material information to report in relation to the valuation of assets and liabilities under Solvency II.



E.1 Own Funds The Company’s own funds are the excess of the value of the Company’s assets over the value of its liabilities.

The Company manages its own funds so that its solvency position stays within a target range which is specified in the Company’s Risk Appetite Framework, in accordance with its Capital Management Operating Policy. The range is determined to ensure sufficient coverage above the SCR to enable the Company to meet its financial liabilities.

The Company produces a capital plan annually which forecasts the Company’s solvency position for a five year period. The plan also includes any additional capital requirements or dividend payments expected to be made in the five year forecast.

E.1.1 Own FundsOwn funds are divided into two categories: basic own funds and ancillary own funds.

Basic own funds are assets held on the balance sheet. They are divided into three tiers based on their permanence and ability to absorb losses, with tier 1 being the highest quality.

Ancillary own funds are resources which can be called up by the Company under certain circumstances, e.g. letters of credit or guarantees, and such resources are subject to regulatory approval. The Company had no ancillary own funds as at 31 December 2020.

Under the regulations, some own fund items are restricted and are not permitted to cover all capital requirements. The Company had no restricted own funds at 31 December 2020.

As at 31 December 2020, the Company’s own funds consisted of:

The own funds have increased by £33m over the year from £4,003m to £4,036m. The main drivers of the increase in own funds are the expected surplus emerging (+£140m), the increase in reinsurance on a block of annuity business (+£300m) partially offset by dividend payments (-£170m) the impact of the fall in interest rates (-£200m) and the acquisition of MGMA (-£50m). At year end 2020 the Company had a deferred tax asset of £24m, classified as a Tier 3 capital item.

The Company’s reconciliation reserve accounts for approximately half of the total own funds. It equals the excess of assets over liabilities from the Solvency II Balance Sheet, reduced for the following; issued share capital, share premium account and initial own funds.

E.1.2 With-Profit FundsThe Company had no with-profit funds as at 31 December 2020.

E Capital Management

Description

2020£m

2019£m

Tier 1 - unrestricted

Issued share capital 342 342

Share premium account 812 812

Initial funds 397 397

Reconciliation reserve 1,977 2,001

Tier 2

Subordinated liabilities 484 451

Tier 3

Tier 3 assets 24 -

Total Own Funds 4,036 4,003

Table 28: Own funds


E.1.3 Own Funds to Meet Solvency Capital RequirementThe own funds eligible to meet the SCR at 31 December 2020 are:

E.1.4 Own Funds to Meet Minimum Capital RequirementThe own funds eligible to meet the MCR at 31 December 2020 are:


Description

2020£m

2019£m

Tier 1 - unrestricted 3,528 3,552

Tier 2 484 451

Tier 3 24 - Eligible Own Funds to meet SCR 4,036 4,003

Solvency Capital Requirement* 2,484 2,551

Solvency Capital Ratio 162% 157%

Description

2020£m

2019£m

Tier 1 - unrestricted 3,528 3,552

Tier 2 124 128

Eligible Own Funds to meet MCR 3,653 3,680

Minimum Capital Requirement 621 638

Minimum Capital Ratio 588% 577%

Table 29: Own funds and Solvency Capital Requirement *SCR unaudited

Table 30: Own funds and Minimum Capital Requirement


E.1.5 Subordinated LiabilitiesThe Company has six subordinated loans from other Great-West Life group companies. Four of the loans are admissible as own funds under Solvency II transitional regulations. The remaining two loans are admissible under Solvency II regulations, without reliance on transitional regulations.

The details of the six loans, all of which are classified as tier 2 own funds are:

None of the above subordinated liabilities has either future call dates or incentives to redeem.


Table 30: Subordinated loans

31 December 2020 Description

Nominal Amount £m

Coupon Rate Maturity Date Lender Fair Value£m

Admissible under transitional arrangements

Dated 2005 intra-group subordinated loan 65 LIBOR +1.05% Jun-35 CL Luxembourg Capital Management S.á.R.L

61

Dated 2005 intra-group subordinated loan 25 LIBOR +1.05% Jun-35 CL Luxembourg Capital Management S.á.R.L

23

Dated 2006 intra-group subordinated loan 50 5.90% May-36 CL Luxembourg Capital Management S.á.R.L

75

Undated 2006 intra-group subordinated loan 80 5.90% None Canada Life Finance (U.K.) Limited

189

Admissible under Solvency II regulations 0 0

Dated 2016 intra-group subordinated loan 70 LIBOR +4.2% Sep-32 CL Luxembourg Capital Management S.á.R.L

80

Undated 2016 intra-group subordinated loan 40 LIBOR +4.2% None Canada Life Finance (U.K.) Limited

56

Total 330 484

Table 31: Subordinated loans


E.2 Solvency Capital Requirement (unaudited) andMinimum Capital RequirementThe amounts of the Company’s SCR and MCR, together with the coverage of each by Own Funds items, are shown in Sections E.1.3 and E.1.4 above,and are:

The change in SCR over 2020 reflects the reduction in capital requirements as a result of risks ceded under the new quota share reinsruance arrangement partially offset by the additional capital for the policies transferred into the Company from MGMA.

The SCR breakdown by risk modules at 31 December 2020 is as follows:

The inputs to the MCR calculation are shown in the table below:

E.3 Use of the Duration-based Equity Risk Sub-module in theCalculation of the Solvency Capital Requirement (unaudited)The Company does not use the duration-based equity risk sub-module.

E4 Differences between the Standard Formula and Internal Model Used (unaudited)

E4.1 Purpose and ScopeThe Company calculates its SCR using a PIM which was approved by the PRA in December 2019. This covers the following material risk components:• Longevity risk• Credit risk• Catastrophe risk (life and health)

The Standard Formula is used to calculate the SCR for all other risk components.


Description2020

£m2019

£m



Risk2020

£m2019

£m

Credit Risk SCR 1,321 1,502

Longevity Risk SCR 851 788

Catastrophe Risk SCR 352 341

Sum of other (SF) SCRs 1,160 1,145

Total Undiversified SCR 3,686 3,776

Diversification (1,266) (1,237)

SCR after diversification 2,419 2,539

Operational Risk SCR 105 95

Loss absorbing capacity of Deferred Tax (40) (83)


MCR Inputs2020

£m2019

£m

Linear MCR 482 472

SCR 2,484 2,551

MCR cap 1,118 1,148

MCR floor 621 638

Combined MCR 621 638

Absolute floor of the MCR 3 3


Table 32: Capital Requirements

Table 33: SCR breakdown by risk modules

Table 34: MCR calculation inputs


Use of the PIM extends beyond the calculation of the SCR. It is integrated into the Company’s decision making processes and risk management framework.

This includes:• commercial and strategic decisions such as pricing of new business and

assessment of business investments;• business planning and the ORSA;• risk management including setting of the risk appetite and risk limits; and• solvency monitoring and capital management.

E4.2 MethodologyThe PIM defines capital requirements as the value at risk of the change in basic own funds over a 1 year time period with a 99.5% confidence.

Using historic data and expert judgement, statistical distributions are applied to the underlying risk drivers for each PIM risk component. These distributions are then used to calculate the change in basic own funds for each PIM risk component at the required percentiles. For the calculation of the SCR the individual capital requirement for each PIM risk component is set as the loss in basic own funds at the 99.5th percentile.

The individual capital requirements for the PIM risks are aggregated using correlation matrices, reflecting dependencies among risks under stressed conditions to determine the total PIM capital requirement which is then aggregated with the standard formula capital requirements to determine the SCR.

E4.3 Differences to Standard FormulaThe main differences in methodology and assumptions between the standard formula and PIM are:

Longevity: the standard formula applies a single mortality stress to base table mortality. The PIM longevity methodology is more granular stressing both the risk drivers for base table mortality and mortality improvements and applying different stresses to each of the lines of business.

Credit Risk: the standard formula applies a prescribed stress varying by duration, asset type and credit rating. The PIM methodology is more granular and calibrated for the Company’s credit exposure, with specific calibrations for asset types such as commercial mortgages and equity release mortgages, which are not explicitly considered under the standard formula. The PIM also makes allowance for gilt-swap spread risk which is not allowed for under the standard formula.

Catastrophe Risk (life and health): the standard formula life catastrophe stress is a fixed additional mortality stress. The standard formula health catastrophe stress is the combination of a morbidity stress arising from a pandemic or terrorism event, with the terrorism event only applied to the largest geographical exposure. The PIM methodology models both pandemic and terrorism risk for both life and health catastrophe, calibrated to the Company’s portfolio.

E4.4 Nature and Appropriateness of Internal Model DataA combination of internal (e.g. experience data) and external (e.g. market data) is used to calibrate the PIM. Where no data of suitable quality is available expert judgement has been applied.

All internal model data is assessed for completeness, accuracy and appropriateness in line with the Company’s Data Governance Standard.

A detailed assessment and justification of the data sources used in the PIM, including where appropriate a comparison to alternative data sources, has been documented and approved as part of the overall governance of the PIM methodology.



E.5 Non-compliance with the Minimum Capital Requirement and Non-compliance with the Solvency Capital Requirement (unaudited)The Company is required to disclose whether there have been any significant non-compliance with the SCR and any non-compliance with the MCR.

There have been no such occurrences.

E.6 Any Other Information (unaudited)There is no further material information to report in relation to capital management.



List of Undertakings

F Appendix

Name Country of incorporation

Principal activity

Holding and voting rights

Albany Life Assurance Company Limited United Kingdom Dormant 100%

Canada Life (U.K.) Limited United Kingdom Holding company 100%

Canada Life Fund Managers (U.K.) Limited United Kingdom Fund management 100%

Canada Life Group Services (U.K.) Limited United Kingdom Ancillary services 100%

Canada Life Holdings (U.K.) Limited United Kingdom Dormant 100%

Canada Life Ireland Holdings Limited Ireland Ancillary services 100%

Canada Life Irish Operations Limited United Kingdom Dormant 100%

Canada Life Management (U.K.) Limited United Kingdom Dormant 100%

Canada Life Services (U.K.) Limited United Kingdom Dormant 100%

City Life Limited Ireland Insurance Brokerage 75%

Cornmarket Group Financial Services Limited Ireland Insurance brokerage holding company

100%

Cornmarket Insurance Services Limited United Kingdom Insurance brokerage 100%

Cornmarket Retail Trading Limited Ireland Insurance brokerage 100%

GD (2,3 & 4) Basement Company Limited Ireland Property Management 100%

Glohealth Financial Services Limited Ireland Health Insurance agency Services 100%


List of Undertakings Continued

F Appendix


Principal activity Holding and voting rights

ILGAPT Limited Ireland Wealth Management Consulting Services

100%

ILGWM Limited Ireland Wealth Management Holding Company

100%

Ilona Financial Group Inc. USA Management Services 100%

Irish Life Associate Holdings Unlimited Company Ireland Investment holding company 100%

Irish Life Assurance Public Limited Company Ireland Life assurance 100%

Irish Life Financial Services Limited Ireland Insurance intermediary, investment business, mortgage intermediary, life assurance service provider

100%

Irish Life Group Limited Ireland Holding company 100%

Irish Life Group Services Limited Ireland Administrative service provider 100%

Irish Life Health Designated Activity Company Ireland Health Insurance 100%

Irish Life Irish Holdings Unlimited Company Ireland Holding company 100%

Irish Life Trustee Services Limited Ireland Management Services 100%

Stephen Court Limited Ireland Property Management 100%

Synergy Sunrise (Wellington Row) Limited United Kingdom Property Management 100%

Vestone Limited Ireland Insurance brokerage holding company

100%


List of Undertakings Continued

F Appendix


Principal activity Holding and voting rights

Acumen & Trust dac Ireland Wealth Management 75%

Acumen & Trust Pensions Trustees dac Ireland Wealth Management 75%

APT Wealth Management Limited Ireland Wealth Management 100%

APT Workplace Pension Limited Ireland Wealth Management 90%

APTFS Nominees Ireland Wealth Management 100%

BCRM Financial Holdings (Ireland) dac Ireland Wealth Management 75%

Canada Life Home Finance Trustee Limited United Kingdom Ancillary Services 100%

Clearview Investments & Pensions Limited Ireland Insurance Broker, Financial Planning Company 100%

Conexim Advisors Limited Ireland Wealth Management 53%

Choralli Limited Ireland Property Management 20%

City Gate Park Administration Company Limited Ireland Property Management 67%

Dakline Company Limited by Guarantee Ireland Property Management 50%

EIS Financial Services Limited United Kingdom Activities of insurance agents and brokers

100%

Hollins Clough Management Company Limited United Kingdom Property Management 50%

Radial Park Management Limited United Kingdom Dormant 76%

SJRQ Riverside IV Management Limited Ireland Property Management 51%

1939 ILIV Consulting Limited Ireland Holding company 75%

Invesco Limited Ireland Wealth Management and Pensions Consulting Services

75%

Invesco Trustees Designated Activity Company Ireland Pension Trustee for Revenue Approved Pension Schemes

75%

ILP Pension Trustees Designated Activity Company Ireland Corporate Trustee for Revenue Approved Pension Schemes

75%

Platform Capital Holdings Limited Ireland Wealth Management 53%


G Annex

General information

Undertaking name Canada Life Limited

Undertaking identification code JD3QAJDNG52JLJXV1L22

Type of code of undertaking LEIType of undertaking Life undertakingsCountry of authorisation GBLanguage of reporting enReporting reference date 31 December 2020Currency used for reporting GBPAccounting standards Local GAAPMethod of Calculation of the SCR Partial internal modelMatching adjustment Use of matching adjustmentVolatility adjustment Use of volatility adjustmentTransitional measure on the risk-free interest rate No use of transitional measure on the risk-free interest rateTransitional measure on technical provisions Use of transitional measure on technical provisions

List of reported templatesS.02.01.02 - Balance sheet

S.05.01.02 - Premiums, claims and expenses by line of business

S.05.02.01 - Premiums, claims and expenses by country

S.12.01.02 - Life and Health SLT Technical Provisions

S.22.01.21 - Impact of long term guarantees measures and transitionals

S.23.01.01 - Own Funds

S.25.02.21 - Solvency Capital Requirement - for undertakings using the standard formula and partial internal model

S.25.02.21 - Solvency Capital Requirement - for undertakings using the standard formula and partial internal model

S.28.01.01 - Minimum Capital Requirement - Only life or only non-life insurance or reinsurance activity


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shee

t

Solv

ency

II v

alue

Liab

iliti

esC0

010

R051

0Te

chni

cal p

rovi

sion

s -

non-

life

0

R052

0Te

chni

cal

prov

isio

ns -

non

-lif

e (e

xclu

ding

hea

lth)

R053

0TP

cal

cula

ted

as a

who

le

R054

0Be

st E

stim

ate

R055

0Ri

sk m

argi

n

R056

0Te

chni

cal

prov

isio

ns -

hea

lth

(sim

ilar

to

non-

life

)

R057

0TP

cal

cula

ted

as a

who

le

R058

0Be

st E

stim

ate

R059

0Ri

sk m

argi

n

R060

0Te

chni

cal p

rovi

sion

s -

life

(exc

ludi

ng in

dex-

linke

d an

d un

it-l

inke

d)21

,775

,747

R061

0Te

chni

cal

prov

isio

ns -

hea

lth

(sim

ilar

to

life

)94

1,85

2

R062

0TP

cal

cula

ted

as a

who

le

R063

0Be

st E

stim

ate

861,

076

R064

0Ri

sk m

argi

n80

,776

R065

0Te

chni

cal

prov

isio

ns -

lif

e (e

xclu

ding

hea

lth

and

inde

x-li

nked

and

uni

t-li

nked

)20

,833

,894

R066

0TP

cal

cula

ted

as a

who

le

R067

0Be

st E

stim

ate

19,9

65,1

38

R068

0Ri

sk m

argi

n86

8,75

6

R069

0Te

chni

cal p

rovi

sion

s -

inde

x-lin

ked

and

unit

-lin

ked

2,82

0,33

1

R070

0TP

cal

cula

ted

as a

who

le2,

825,

748

R071

0Be

st E

stim

ate

-16,

633

R072

0Ri

sk m

argi

n11

,216

R074

0Co

ntin

gent

liab

iliti

es

R075

0Pr

ovis

ions

oth

er t

han

tech

nica

l pro

visi

ons

12,9

92

R076

0Pe

nsio

n be

nefi

t ob

ligat

ions

R077

0De

posi

ts f

rom

rei

nsur

ers

6,90

8,05

6

R078

0De

ferr

ed t

ax li

abili

ties

R079

0De

riva

tive

s65

,306

R080

0De

bts

owed

to

cred

it in

stit

utio

ns

R081

0Fi

nanc

ial l

iabi

litie

s ot

her

than

deb

ts o

wed

to

cred

it in

stit

utio

ns1,

173

R082

0In

sura

nce

& in

term

edia

ries

pay

able

s10

8,44

4

R083

0Re

insu

ranc

e pa

yabl

es61

,569

R084

0Pa

yabl

es (

trad

e, n

ot in

sura

nce)

61,6

59

R085

0Su

bord

inat

ed li

abili

ties

483,

818

R086

0Su

bord

inat

ed l

iabi

liti

es n

ot i

n BO

F

R087

0Su

bord

inat

ed l

iabi

liti

es i

n BO

F48

3,81

8

R088

0An

y ot

her

liabi

litie

s, n

ot e

lsew

here

sho

wn

127,

782

R090

0To

tal l

iabi

litie

s32

,426

,877

R100

0Ex

cess

of

asse

ts o

ver

liabi

litie

s3,

552,

626


G Annex

S.05.01.02

Life

Health insurance

Insurance with profit

participation

Index-linked and unit-linked

insurance

Other life insurance

Annuities stemming from

non-life insurance contracts and

relating to health insurance obligations

Annuities stemming from

non-life insurance contracts and

relating to insurance

obligations other than health insurance obligations

Health reinsurance

Life reinsurance

C0210 C0220 C0230 C0240 C0250 C0260 C0270 C0280 C0300

Premiums written

R1410 Gross 180,261 0 135,487 1,362,943 0 1,678,690

R1420 Reinsurers' share 13,600 0 0 3,052,155 0 3,065,755

R1500 Net 166,661 0 135,487 -1,689,213 0 -1,387,065

Premiums earned

R1510 Gross 179,589 0 135,487 1,364,797 0 1,679,873

R1520 Reinsurers' share 14,037 0 0 3,053,500 0 3,067,538

R1600 Net 165,552 0 135,487 -1,688,704 0 -1,387,665

Claims incurred

R1610 Gross 141,636 0 200,042 1,687,532 33,906 2,063,115

R1620 Reinsurers' share 20,195 0 0 959,528 0 979,723

R1700 Net 121,441 0 200,042 728,004 33,906 1,083,393

Changes in other technical provisions

R1710 Gross 14,125 0 11,472 743,033 -41,794 726,838

R1720 Reinsurers' share -7,174 0 0 2,166,498 0 2,159,325

R1800 Net 21,299 0 11,472 -1,423,465 -41,794 -1,432,487

R1900 Expenses incurred 31,047 0 16,980 107,003 237 155,267

R2500 Other expenses 27,463

R2600 Total expenses 182,730

Premiums, claims and expenses by line of business

Line of Business for: life insurance obligations Life reinsurance obligations

Total


G Annex

S.05.02.01

Premiums, claims and expenses by country

Life

C0150 C0160 C0170 C0180 C0190 C0200 C0210

R1400

C0220 C0230 C0240 C0250 C0260 C0270 C0280

Premiums written

R1410 Gross 1,678,466 1,678,466

R1420 Reinsurers' share 3,065,755 3,065,755

R1500 Net -1,387,289 -1,387,289

Premiums earned

R1510 Gross 1,679,648 1,679,648


R1600 Net -1,387,889 -1,387,889

Claims incurred

R1610 Gross 2,055,768 2,055,768

R1620 Reinsurers' share 979,723 979,723

R1700 Net 1,076,046 1,076,046

Changes in other technical provisions

R1710 Gross 723,624 723,624


R1800 Net -1,435,701 -1,435,701

R1900 Expenses incurred 155,042 155,042

R2500 Other expenses 27,330

R2600 Total expenses 182,373

Home Country

Top 5 countries (by amount of gross premiums written) - life obligations

Top 5 countries (by amount of gross premiums written) - life obligations Total Top 5 and

home country


G Annex

S.12.01.02

Life and Health SLT Technical Provisions

Contracts without

options and guarantees

Contracts with options or guarantees

Contracts without


Contracts with options or guarantees

Contracts without


Contracts with options

or guarantees

C0020 C0030 C0040 C0050 C0060 C0070 C0080 C0090 C0100 C0150 C0160 C0170 C0180 C0190 C0200 C0210

R0010 Technical provisions calculated as a whole 2,228,244 597,504 2,825,748 0

R0020

Total Recoverables from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default associated to TP calculated as a whole 0 0 0

Technical provisions calculated as a sum of BE and RM

Best estimate

R0030 Gross Best Estimate 0 -10,945 21,116,431 0 21,105,485 931,087 931,087

R0080

Total Recoverables from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default 6,722,948 0 6,722,948 61,380 61,380

R0090Best estimate minus recoverables from reinsurance/SPV and Finite Re

0 0 -10,945 14,393,482 0 0 14,382,537 869,707 0 869,707

R0100 Risk margin 11,216 868,756 0 879,973 80,776 80,776

Amount of the transitional on Technical Provisions

R0110 Technical Provisions calculated as a whole 0 0

R0120 Best estimate -5,688 -1,151,293 -1,156,981 -70,011 -70,011

R0130 Risk margin 0 0

R0200 Technical provisions - total 0 2,222,827 20,833,894 597,504 23,654,225 941,852 941,852

Health insurance (direct business)Annuities

stemming from non-life

insurance contracts and

relating to health

insurance obligations

Health reinsurance (reinsurance

accepted)

Total (Health similar to life

insurance)

Insurance with profit

participation

Index-linked and unit-linked insurance Other life insurance Annuities stemming from

non-life insurance

contracts and relating to insurance

obligation other than health insurance obligations

Accepted reinsurance

Total (Life other than health insurance, including

Unit-Linked)


G Annex

S.22.01.21

Impact of long term guarantees measures and transitionals

Amount with Long Term Guarantee

measures and transitionals

Impact of transitional on

technical provisions

Impact of transitional on interest rate

Impact of volatility

adjustment set to zero

Impact of matching

adjustment set to zero

C0010 C0030 C0050 C0070 C0090

R0010 Technical provisions 24,596,078 1,226,992 0 127,359 1,482,280

R0020 Basic own funds 4,036,444 -993,863 0 -48,664 -1,216,546

R0050 Eligible own funds to meet Solvency Capital Requirement 4,036,444 -993,863 0 -48,664 -1,251,544

R0090 Solvency Capital Requirement 2,484,454 0 0 10,471 1,145,924

R0100 Eligible own funds to meet Minimum Capital Requirement 3,652,941 -1,226,992 0 -59,556 -1,444,612

R0110 Minimum Capital Requirement 621,114 0 0 2,618 286,481


G Annex

S.23.01.01

Own Funds

Basic own funds before deduction for participations in other financial sector as foreseen in article 68 of Delegated Regulation 2015/35 TotalTier 1

unrestrictedTier 1

restrictedTier 2 Tier 3

C0010 C0020 C0030 C0040 C0050

R0010 Ordinary share capital (gross of own shares) 342,150 342,150 0

R0030 Share premium account related to ordinary share capital 811,765 811,765 0

R0040 Initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings 397,392 397,392 0

R0050 Subordinated mutual member accounts 0 0 0 0

R0070 Surplus funds 0 0

R0090 Preference shares 0 0 0 0

R0110 Share premium account related to preference shares 0 0 0 0

R0130 Reconciliation reserve 1,977,411 1,977,411

R0140 Subordinated liabilities 483,818 0 483,818 0

R0160 An amount equal to the value of net deferred tax assets 23,908 23,908

R0180 Other own fund items approved by the supervisory authority as basic own funds not specified above 0 0 0 0 0

R0220 Own funds from the financial statements that should not be represented by the reconciliation reserve and do not meet the criteria to be classified as Solvency II own funds 0

R0230 Deductions for participations in financial and credit institutions 0 0 0 0

R0290 Total basic own funds after deductions 4,036,444 3,528,718 0 483,818 23,908

Ancillary own funds

R0300 Unpaid and uncalled ordinary share capital callable on demand 0

R0310 Unpaid and uncalled initial funds, members' contributions or the equivalent basic own fund item for mutual and mutual - type undertakings, callable on demand 0

R0320 Unpaid and uncalled preference shares callable on demand 0

R0330 A legally binding commitment to subscribe and pay for subordinated liabilities on demand 0

R0340 Letters of credit and guarantees under Article 96(2) of the Directive 2009/138/EC 0

R0350 Letters of credit and guarantees other than under Article 96(2) of the Directive 2009/138/EC 0

R0360 Supplementary members calls under first subparagraph of Article 96(3) of the Directive 2009/138/EC 0

R0370 Supplementary members calls - other than under first subparagraph of Article 96(3) of the Directive 2009/138/EC 0

R0390 Other ancillary own funds 0

R0400 Total ancillary own funds 0 0 0

Available and eligible own funds

R0500 Total available own funds to meet the SCR 4,036,444 3,528,718 0 483,818 23,908

R0510 Total available own funds to meet the MCR 4,012,536 3,528,718 0 483,818

R0540 Total eligible own funds to meet the SCR 4,036,444 3,528,718 0 483,818 23,908

R0550 Total eligible own funds to meet the MCR 3,652,941 3,528,718 0 124,223

R0580 SCR 2,484,454

R0600 MCR 621,114

R0620 Ratio of Eligible own funds to SCR 162.47%

R0640 Ratio of Eligible own funds to MCR 588.13%

Reconcilliation reserve C0060

R0700 Excess of assets over liabilities 3,552,626

R0710 Own shares (held directly and indirectly) 0

R0720 Foreseeable dividends, distributions and charges

R0730 Other basic own fund items 1,575,216

R0740 Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds 0

R0760 Reconciliation reserve 1,977,411

Expected profits

R0770 Expected profits included in future premiums (EPIFP) - Life business 44,251

R0780 Expected profits included in future premiums (EPIFP) - Non- life business

R0790 Total Expected profits included in future premiums (EPIFP) 44,251


G Annex

S.25.02.21

Unique number of component

Component descriptionCalculation of the Solvency Capital

RequirementAmount modelled USP Simplifications

Row C0010 C0020 C0030 C0070 C0090 C0120

1 10100I Interest rate risk interest rates down 16,985 0 9

2 10200I Interest rate risk Interest rates up 0 0 9

3 10400I Equity risk 448,693 0 9

4 10600I Property risk 127,515 0 9

5 1071AI Spread Risk: Default risk-free bond 258,903 258,903 9

6 1071BI Spread Risk: Corporate bond (incl. 1-yr transition and default risk allowance) 2,254,328 2,254,328 9

7 1075AI Spread Risk: CREL (incl. 1-yr transition and default risk allowance) 411,959 411,959 9

8 1075BI Spread risk: ERM Spread Risk 79,103 79,103 9

9 1076AI Spread Risk: ERM Liability Offset 6,609 6,609 9

10 1076BI Spread Risk: Non-ERM liability offset -1,270,194 -1,270,194 9

11 10799I Diversification within credit risk -419,372 -419,372 9

12 10800I Concentration risk 273,911 0 9

13 10900I Currency risk 401,613 0 9

14 19900I Diversification within market risk -450,841 0 9

15 20100I Type 1 counterparty risk 32,996 0 9

16 20200I Type 2 counterparty risk 17,177 0 9

17 29900I Diversification within counterparty risk -2,905 0 9

18 30100I Mortality risk 32,213 0 9

19 30210I Longevity risk: Longevity Base 274,084 274,084 9

20 30220I Longevity risk: Longevity Improvements 777,850 777,850 9

21 30299I Diversification with longevity risk -200,496 -200,496 9

22 30300I Disability-morbidity risk 0 0 9

23 30400I Mass lapse 17,412 0 9

24 30500I Other lapse risk 0 0 9

25 30600I Expense risk 93,638 0 9

26 30810I Life Pandemic Risk 115,194 115,194 9

27 30820I Life Terrorism Risk 143,670 143,670 9

USP Key

For life underwriting risk:1 - Increase in the amount of annuity benefits9 - None

USP Key

For health underwriting risk:1 - Increase in the amount of annuity benefits2 - Standard deviation for NSLT health premium risk3 - Standard deviation for NSLT health gross premium risk4 - Adjustment factor for non- proportional reinsurance5 - Standard deviation for NSLT health reserve risk9 - None

USP Key

For non-life underwriting risk:4 - Adjustment factor for non- proportional reinsurance6 - Standard deviation for non-life premium risk7 - Standard deviation for non-life gross premium risk8 - Standard deviation for non-life reserve risk9 - None

Solvency Capital Requirement - for undertakings using the standard formula and partial internal model


G Annex

S.25.02.21

Unique number of component

Component descriptionCalculation of the Solvency Capital

RequirementAmount modelled USP Simplifications

Row C0010 C0020 C0030 C0070 C0090 C0120

USP Key

For life underwriting risk:1 - Increase in the amount of annuity benefits9 - None

USP Key

For health underwriting risk:1 - Increase in the amount of annuity benefits2 - Standard deviation for NSLT health premium risk3 - Standard deviation for NSLT health gross premium risk4 - Adjustment factor for non- proportional reinsurance5 - Standard deviation for NSLT health reserve risk9 - None

USP Key

For non-life underwriting risk:4 - Adjustment factor for non- proportional reinsurance6 - Standard deviation for non-life premium risk7 - Standard deviation for non-life gross premium risk8 - Standard deviation for non-life reserve risk9 - None


28 30890I Life Catastrophe Adjustment 9,716 9,716 9

29 39920I Diversification within life underwriting risk -28,165 0 9

30 40100I Health mortality risk 0 0 9

31 40200I Health longevity risk 27,457 0 9

32 40300I Health disability-morbidity risk 174,356 0 9

33 40400I Health SLT mass lapse 13,130 0 9

34 40500I Health SLT other lapse risk 0 0 9

35 40600I Health expense risk 4,482 0 9

36 41610I Health Pandemic Risk 19,171 19,171 9

37 41620I Health Terrorism Risk 61,319 61,319 9

38 41690I Health Catastrophe Adjustment 3,371 3,371 9

39 49900I Diversification within health underwriting risk -39,346 0 9

40 70100I Operational risk 105,130 0 9

41 80140I Other risks 0 0 9

42 80200I Loss-absorbing capacity of technical provisions 0 0 9

43 80300I Loss-absorbing capacity of deferred tax -40,000 0 9

44 80400I Other adjustments 0 0 9


G Annex

S.25.02.21


Calculation of Solvency Capital Requirement C0100

R0110 Total undiversified components 3,750,666

R0060 Diversification -1,345,394

R0160 Capital requirement for business operated in accordance with Art. 4 of Directive 2003/41/EC

R0200 Solvency capital requirement excluding capital add-on 2,484,454

R0210 Capital add-ons already set

R0220 Solvency capital requirement 2,484,454

Other information on SCR

R0300 Amount/estimate of the overall loss-absorbing capacity of technical provisions

R0310 Amount/estimate of the overall loss-absorbing capacity ot deferred taxes -40,000

R0400 Capital requirement for duration-based equity risk sub-module

R0410 Total amount of Notional Solvency Capital Requirements for remaining part 1,712,367

R0420 Total amount of Notional Solvency Capital Requirement for ring fenced funds

R0430 Total amount of Notional Solvency Capital Requirement for matching adjustment portfolios 692,904

R0440 Diversification effects due to RFF nSCR aggregation for article 304

Approach to tax rate C0109

R0590 Approach based on average tax rate No

Calculation of loss absorbing capacity of deferred taxesLAC DT

C0130

R0640 Amount/estimate of LAC DT -40,000

R0650 Amount/estimate of LAC DT justified by reversion of deferred tax liabilities 0

R0660 Amount/estimate of LAC DT justified by reference to probable future taxable economic profit -40,000

R0670 Amount/estimate of AC DT justified by carry back, current year 0

R0680 Amount/estimate of LAC DT justified by carry back, future years 0

R0690 Amount/estimate of Maximum LAC DT -40,000


G Annex

S.28

.01.

01

Min

imum

Cap

ital

Req

uire

men

t -

Onl

y lif

e or

onl

y no

n-lif

e in

sura

nce

or r

eins

uran

ce a

ctiv

ity

Line

ar f

orm

ula

com

pone

nt f

or n

on-l

ife

insu

ranc

e an

d re

insu

ranc

e ob

ligat

ions

C001

0

R001

0M

CRN

L Re

sult

0

Net

(of

re

insu

ranc

e/SP

V) b

est

esti

mat

e an

d TP

ca

lcul

ated

as

a w

hole

Net

(of

rei

nsur

ance

) w

ritt

en p

rem

ium

s in

th

e la

st 1

2 m

onth

s

C002

0C0

030

R002

0M

edic

al e

xpen

se in

sura

nce

and

prop

orti

onal

rei

nsur

ance

R003

0In

com

e pr

otec

tion

insu

ranc

e an

d pr

opor

tion

al r

eins

uran

ce

R004

0W

orke

rs' c

ompe

nsat

ion

insu

ranc

e an

d pr

opor

tion

al r

eins

uran

ce

R005

0M

otor

veh

icle

liab

ility

insu

ranc

e an

d pr

opor

tion

al r

eins

uran

ce

R006

0O

ther

mot

or in

sura

nce

and

prop

orti

onal

rei

nsur

ance

R007

0M

arin

e, a

viat

ion

and

tran

spor

t in

sura

nce

and

prop

orti

onal

rei

nsur

ance

R008

0Fi

re a

nd o

ther

dam

age

to p

rope

rty

insu

ranc

e an

d pr

opor

tion

al r

eins

uran

ce

R009

0G

ener

al li

abili

ty in

sura

nce

and

prop

orti

onal

rei

nsur

ance

R010

0Cr

edit

and

sur

etys

hip

insu

ranc

e an

d pr

opor

tion

al r

eins

uran

ce

R011

0Le

gal e

xpen

ses

insu

ranc

e an

d pr

opor

tion

al r

eins

uran

ce

R012

0As

sist

ance

and

pro

port

iona

l rei

nsur

ance

R013

0M

isce

llane

ous

fina

ncia

l los

s in

sura

nce

and

prop

orti

onal

rei

nsur

ance

R014

0N

on-p

ropo

rtio

nal h

ealt

h re

insu

ranc

e

R015

0N

on-p

ropo

rtio

nal c

asua

lty

rein

sura

nce

R016

0N

on-p

ropo

rtio

nal m

arin

e, a

viat

ion

and

tran

spor

t re

insu

ranc

e

R017

0N

on-p

ropo

rtio

nal p

rope

rty

rein

sura

nce

Line

ar f

orm

ula

com

pone

nt f

or li

fe in

sura

nce

and

rein

sura

nce

oblig

atio

nsC0

040

R020

0M

CRL

Resu

lt48

1,95

3

Net

(of

re

insu

ranc

e/SP

V) b

est

esti

mat

e an

d TP

ca

lcul

ated

as

a w

hole

Net

(of

re

insu

ranc

e/SP

V) t

otal

ca

pita

l at

risk

C005

0C0

060

R021

0O

blig

atio

ns w

ith

prof

it p

arti

cipa

tion

- g

uara

ntee

d be

nefi

ts

R022

0O

blig

atio

ns w

ith

prof

it p

arti

cipa

tion

- f

utur

e di

scre

tion

ary

bene

fits

R023

0In

dex-

linke

d an

d un

it-l

inke

d in

sura

nce

oblig

atio

ns

2,81

3,56

9

R024

0O

ther

life

(re

)ins

uran

ce a

nd h

ealt

h (r

e)in

sura

nce

oblig

atio

ns14

,998

,180

R025

0To

tal c

apit

al a

t ri

sk f

or a

ll lif

e (r

e)in

sura

nce

oblig

atio

ns21

0,42

2,51

4

Ove

rall

MCR

cal

cula

tion

C007

0

R030

0Li

near

MCR

481,

953

R031

0SC

R2,

484,

454

R032

0M

CR c

ap1,

118,

004

R033

0M

CR f

loor

621,

114

R034

0Co

mbi

ned

MCR

621,

114

R035

0Ab

solu

te f

loor

of

the

MCR

3,33

8

R040

0M

inim

um C

apit

al R

equi

rem

ent

621,

114


H Glossary

Best Estimate Liability abbreviated to BEL

Actuaries use a number of different inputs and assumptions such as current and future premium income, administration costs, the cost of any guarantees and when and if the insured event is liable to happen, e.g. death will happen; illness may happen.

This will provide the actuaries with a best estimate of what the present value is of a payment at a future date.

Bid price This is the price at which an investment asset can be sold by an investor.

Bulk annuity A bulk annuity is an insurance policy that is purchased by pension scheme trustees to better secure members’ benefits by removing longevity, investment, interest rate and inflation risks associated with defined benefit pension schemes, either as an asset of the scheme (a buy-in) or by issuance of individual policies to the members (a buy-out).

Collateral arrangements An arrangement under which providers of collateral do one of the following:

(a) transfer full ownership of the collateral to the collateral taker for the purposes of securing or otherwise covering the performance of a relevant obligation;

(b) provide collateral by way of security in favour of, or to, a collateral taker, and the legal ownership of the collateral remains with the collateral provider or a custodian when the security right is established.

Diversification benefit If an insurer writes business across different geographical areas and age of policyholders and invests across different markets and asset classes its risks are less concentrated and more diversified. This reduces the risk of unexpected investment losses or pay-outs to policyholders. The insurer benefits from being allowed to hold less risk capital.

Equity Release Mortgages Equity release mortgages allow a homeowner to receive a lump sum in return for a mortgage secured on their house. Interest is rolled-up on the loan and the loan and accrued interest are repayable at redemption (upon death or moving into long-term care).

Financial Conduct Authorityabbreviated to FCA

The financial conduct regulator of financial services companies in the UK. It is also the prudential regulator for smaller firms. Its statutory duty is to retain confidence in markets, promote financial stability, protect consumers and reduce financial crime.

Hedging Hedging is a commonly used risk tool used in investment management. Its purpose is to offset a potential loss or gain by associating two or more investments. One example is interest rate hedging by matching interest bearing assets and liabilities. In its most simple form the asset is a deposit account paying, for example, Libor rate + 1% matched to a loan on which the interest rate payable, for example, is Libor + 4%. As long as both investments are linked to Libor, any movements in interest rates will be offset between the two investments.


H Glossary

Longevity swap This is a derivatives contract that transfers the risk of members of a pension scheme living longer than was expected from the insurer to a counterparty (an investment bank, another insurer).

Loss Absorbing Capacity of Deferred Tax Insurers must draw up a Solvency II balance sheet and also a hypothetical balance sheet which shows the impact of stress testing. The movement in the deferred tax balance between the two balance sheets is known as the Loss Absorbing Capacity of Deferred Tax. A description of deferred tax can be found in Section D.3.2.

Mark to model Used when there is no regular market price for an investment on an exchange, such as is the case for investments not listed on an exchange or investments that are traded only infrequently, in order to get a fair value price. Investment professionals will use an internal valuation model to calculate a fair value.

Minimum Capital Requirementabbreviated to MCR

MCR is a minimum level of capital below which the amount of financial resources (own funds) must not fall. If they do, the company may lose its license to trade.

Own Risk and Solvency Assessmentabbreviated to ORSA

The ORSA is central to the Solvency II Directive. It is a way in which insurance companies measure their own risk profile and calculate how much risk capital to hold to cover their risks.

Participation A participation means the ownership, directly or by way of control, of 20% or more of the voting rights or capital of another company.

Private placements Private placements are private long-term loans to companies. They are structured in the same way as corporate bonds and issued to institutional investors.

Promissory Note A financial debt instrument containing an unconditional promise to pay both principal amount and interest on demand or on an agreed date in accordance with the terms agreed.

Prudential Regulation Authorityabbreviated to PRA

The prudential regulator of large financial services companies, such as insurance companies, banks, building societies, credit unions and major investment firms, in the UK.

Quoted market price A price based on an active market where quoted prices are readily and regularly available because there are both willing sellers and buyers trading regularly.

Reconciliation reserve The value of the reconciliation reserve is the excess of assets over liabilities that are not associated with capital items in the financial statements, such as ordinary share capital, share premium and subordinated loans etc.

Reinsurance Where an insurance company pays a premium to buy insurance against loss for some of its insured risks from another company, the reinsurer. This will reduce the insurer’s risk and the insurance company is said to have ceded risk to the reinsurer.


H Glossary

Reversionary and overall capitalisation rates Property which is valued based on rental income is valued on two different bases, in both cases the rate is determined by dividing the rental income by the capital value of the property.

The overall capitalisation rate is determined when the rental income is in line with the current externally valued market rent.

The reversionary rate is determined when the rental income is below the current externally valued market rent.

Risk-free interest rate The theoretical rate of return that would be obtained on an investment that carries no risk.

Solvency Capital Requirementabbreviated to SCR

SCR is a prospective calculation equal to a level of eligible own funds that should be maintained on an on-going basis by an insurance company to absorb significant losses and which gives reasonable assurance to policy holders and beneficiaries that payments will be made as they fall due.

Solvency position An insurer’s solvency position is determined by evaluating its assets and liabilities to ensure that the insurer has enough income from investment assets to meet the pay-out obligations on its liabilities, i.e. it can pay claims as they fall due which may be a long time into the future.

Subordinated loans Subordinated loans are loans which will be repaid only after other specified debts e.g. policy holder and beneficiary liabilities have been repaid, when a company is liquidated.

Transitional Measure on Technical Provisionsabbreviated to TMTP

TMTP may be used by firms which have PRA approval to do so. The aim of the TMTP is to reduce market disruption potentially associated with the move from an existing to a new regulatory regime. It applies for 16 years, and is a deduction from the amount of Solvency II technical provisions. The deduction is calculated as the difference between current technical provisions and Solvency II technical provisions, and decreases linearly over the course of the 16-year transitional period.

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Canada Life Limited, registered in England no. 973271. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA.Telephone: 0345 6060708 Fax: 01707 646088 www.canadalife.co.uk Member of the Association of British Insurers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

solvency and financial condition report (sfcr) 2020

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