IRM principles on Risk Appetite and lessons from UBS

Pretty interesting finish to last week, with UBS getting spanked for a cool $2.3bn through the now-typical route of a back office know-it-all getting promoted to the trading desk and circumventing the plethora of internal controls designed to stop the very activity they and they alone know how to take to the n-th degree.

I thought of this when looking through the IRM's risk appetite and tolerance paper released at the end of last week (separate post to follow incidentally, only so many hours in the day!), specifically whether there was anything being promoted/supported by the institute which may have averted this rather grim result for the boys from Berne.

6 IRM principles to start with;

1. Risk appetite can be complex - don't try to dumb it down if it isn't justifiable
2. Risk appetite needs to be measurable
3. Risk appetite is not a single fixed concept
4. Risk appetite should be developed in the context of an organisation's risk management capability
5. Risk appetite must take into account views at strategic, tactical and operational level
6. Risk appetite must be integrated with the control culture of the company

Sadly for the profession, the risk governance set up at UBS is paper-perfect in this regard, so I dare say the CRO may feel obliged to hand in his cards. This despite the fact that, as with the Leeson and Kerviel cases beforehand, if you personally know the gaps (and the reward is great enough) the rogue trader is nigh on unstoppable by the second line of defence in these kinds of organisations. However, it looks more of a "should have done better" case for the second line, and should categorically be used as a counter argument to the dismissive tones of management when discussing risk limits and qualitative tolerances.

Some great quotes below from their website (highlights are for my benefit);

High Level – Risk Management and Internal Control

The [risk controls]framework is dynamic and continuously adapted as our businesses and the market environment evolve. It includes clearly defined processes to deal with new business initiatives as well as large and complex transactions.

Risk assessment and management oversight performed by the BOD considers evolving best practice and is intended to confirm to statutory requirements

 

Risk Appetite

Our risk appetite framework establishes risk appetite objectives in respect of earnings and capital levels that we seek to maintain, even after experiencing severe losses over a defined time horizon.

Our risk appetite is approved by the BoD. Risk appetite is based on our risk capacity, which is in turn based on our capital and forecasted earnings resources. Our overall risk appetite is set as an upper limit covering the aggregate risk exposure for each risk appetite objective, taking into account inherent limitations in the precision of risk exposure measures that focus on extreme market and economic events. Comparison of the firm's risk exposure with our risk capacity under prevailing operating conditions as well as prospective business plans serves as an input to the risk limit framework. This comparison is also a key tool to support management decisions on potential adjustments to the risk profile of our firm.

 

Operational Risk-specific

Management and risk committees are the governing bodies responsible for oversight and active discussion of risk management activities, including the question of whether or not the cost of mitigating actions is adequately balanced against the acceptable level of operational risk. Management, in all functions, is responsible for establishing an appropriate operational risk management environment, including the establishment and maintenance of robust internal controls and a strong risk culture.

 

Material operational risks and significant internal control deficiencies are identified and reported at least quarterly to stakeholders, including the BoD, GEB, divisional/regional/local management, Group Internal Audit, external auditors and regulators.

 

We have developed a model for the quantification of our operational risk, which meets the regulatory capital standard specified by the Basel II advanced measurement approach (AMA). Our model has two main components. The expected loss component is a statistical measure based on our own historical loss experiences (collected since 2002), and is used primarily to determine the expected loss portion of our capital requirement. The unexpected loss component is based on a set of generic scenarios representing categories of operational risks that are relevant to the firm. The scenarios are reviewed extensively on an annual basis by internal experts, using internal and external event information, information about the prevailing business environment and our own internal control environment. This component is used to determine the unexpected loss portion of our capital requirement.

 

Risk and Reward

Over the last two years, we took comprehensive steps to help ensure that our compensation plans and processes were re-designed and implemented in such a way to ensure appropriate risk-taking.

Active Risk - 'What makes a great Risk Manager' results...

I participated in a survey a little while back about "what makes a great risk manager" which involved looking at personality traits, and the guys at Active Risk posted the results today.

While I was hoping the results would look like my CV (!), there were some interesting findings from the 200-ish sample;

•  Categorises risk managers into Traditionalists (from the 'department who likes to say no'!), Drivers (who are pragmatic and impatient) and Evangelists (who have the CRO style, without necessarily the substance. The split of respondents was 60/10/30 respectively. The obvious thought for me was that this was the perfect ratio of the three skillsets to arrive at a quality Chief Risk Officer, and the conclusions touch on this throughout.
• Suggests traditionalists may be holding their companies back due to presentational shortcomings (probably fair), while Drivers should understand their impatience can come over as aggression and Evangelists should wind back on what I like to call 'risk rabbit' (where throwing terminology left and right leaves the consumer disinterested or confused.

Should certainly be of interest to my friends at Clarity Resourcing, as these kinds of considerations cross over most industries when fishing for risk talent - I hasten to add that I can't immediately recall what I was classed as!

Late post-script - found my personalised report, and I was down as a "reactive extrovert" - I'll settle for that!

AON Report on Regulatory, Accounting and Rating Agency critera changes

A decent piece from AON covering influences of Solvency II (amongst other similarly flavoured risk-based capital regulatory influences), IFRS, and ratings agency criteria for ERM on capital allocation strategies.

Some (surely sympathetically sampled) stats are included on how ratings strength will be more important than Solvency ratios - remains to be seen which measures are preferred for economic capital measurement for those who don't necessarily want or need to chase ratings agency favour.

Also includes country specific details on ORSA in the US, Risk based capital in Asia and Latin America, and references the AM Best supplemental rating questionnaire for ERM, which sounds like there might be some merits in reading

IRM Risk Appetite Guidance released

Closely associated with the last post, the IRM have pushed out the results of their consultation on Risk Appetite. I'll pick through this next week, so help yourselves via the link in the meantime

Society of Actuaries in Ireland - newsletter treats

As ever, the Society of Actuaries in Ireland produced a riveting read this month, with some hot topics covered very succinctly, and useful to multiple jurisdications for benchmarking.

Risk Appetite (specifically how best to communicate and document it) is particularly prominent with new obligations under the corporate governance code kicking in throughout this year, and the Society's ERM committee hauled in one of the CBIs top men to talk through options, with another couple of private sector big hitters. I spotted in particular;

• Risk Appetite Statement cannot be vague, and should include some financials
• Traffic Light system of monitoring was viewed favourably (amber being a warning sign to act)
• Breach alerts best in real time
• Solvency I and Solvency II measures matter - so don't rush for future state
• Very sketchy response on how to quantify "material" breaches of appetite, with no response documented from the regulator in this letter
• CBI want to know about "misses and near misses" - not quite sure about what the difference is frankly - are we now tiering 'misses' into categories? RAG's and traffic lights?
• No firm guidance on quantifying appetite for Op Risk
• Willingness (from the floor I imagine) for CBI to use standard definitions for risk appetite/tolerance/preference - amen to that brothers!
• Risk Appetite Statements should not be purely downside based

I must highlight the spectacular comment that "The risk appetite statement ensures decisions are made by the business rather than just by actuaries" - there's an eyeopener for all you insurance CEO's that thought you were the boss!

Some other very cute stuff included on Internal Model progress (a massive 45 models in the IMAP process - good luck staffing that!). On a serious note, one suggestion from the CBI was for 'independent validation' engagement documents to be submitted to the regulator to ensure they pass muster, which suggests there is a hot market for this type of service.

Two other parts of this jumped out. A sharp piece on diversification, where the CBI acknowledge that heavy use of expert judgement is anticipated, and point towards senior management understanding and ensuring the statistical quality standards can be met as aspects to consider.

The second linked piece was whether, as Insurance is a "mathematical business", that it is "not too much to expect" that the board and senior management to understand copulas and variance-covariance matrices.

You can tell that to the ex-politician NEDs first buddy...

Chief Risk Officer activity

LV+ got in on the CRO staffing activity in advance of Solvency II this week, pitching a finance-oriented executive into the role, with a remit of embedding an ERM Framework and managing Solvency II. In line with previous posts, I'm not sure who to score this one to (probably not the Risk team), but important to note the reporting line still going into the CEO.

On topic, but bank rather than insurer as the example, the Reputability Blog picked up on a slightly different organisational problem that I suspect will become more prevalent over the next couple of years - namely that with the maturity of the CRO role comes an ambition to be more than the CEO's "angel on the shoulder".

Larger financial services organisations may find their CROs develop something of a wanderlust if they don't expect a reasonable shot at the top job will be forthcoming (indeed an earlier blog post highlighted that a company Stateside is using the role as CEO training). I would have thought this is even more of a strategic issue for insurers, where existing CRO/de-facto CROs will be critical to Solvency II delivery plans, and will of course have extensive knowledge of their respective institutions' economic and regulatory capital weaknesses after 2+ years of project graft!

CEA releases - SIFIs and ComFrame

The CEA got busy this week with a double release, covering their feedback on the IAIS's ComFrame proposals for group supervision, and feedback on ongoing discussions on SIFIs.

As far as ComFrame goes, they express that they feel it is too prescriptive, and potentially onerous for some groups ahead of others. They do not agree with the introduction of "living wills" for insurance companies (in the same way that banks are being obliged to document 'orderly wind-down' strategy in the UK for example). They also highlight that it does not address minimum standards at national level, so could be viewed as an additional layer of compliance for groups.

The CEA go on to countersign a separate letter with a number of other insurance associations to highlight these viewpoints.

The response to the ongoing SIFI work of the Financial Stability Board reaffirms the position of the CEA (and indeed the Geneva Association who have been vociferous on the matter) that insurers, by nature of their long term and less portable liabilities, should not be subjected to the same categorisation and timeframes as the banking industry. Cognisance of the ladder of intervention afforded by Solvency II is also requested.

Financial Reporting Council - new guidance on company stewardship and public reporting

Just in case you UK insurers don't have enough to factor in to your next annual report and accounts (least of all commencing the alignment piece between SFCR/ORSA content and the risk/strategy/capital aspects of your existing reporting releases) , the Financial Reporting Council (FRC) have dropped a couple of grenades into to mix with this release on Effective Company Stewardship, and perhaps more significantly for our kind, the expanded commentary regarding Boards and Risk which was gleaned through a range of interviews.

The stewardship document obviously has some "comply or explain" regulatory relevance for UK readers, whereas the second is a phenomenally useful benchmarking tool to match up against your own board/executive/committee considerations of risk regardless of your jurisdiction.

The stewardship document then focuses more on reporting obligations, in particular Audit, and the associated consultation was triggered in Jan 2011. I was drawn to their findings on reporting "Strategy, Risk and Going Concern" which touch on communication of risk appetite, namely;

• "differing views as to whether it is either necessary or possible for a board to apply a single, aggregated definition of its appetite for risk as a whole"
• "when developing [the] strategy however, it is important for boards to agree their appetite or tolerance for individual key risks"
• "reporting on the company's risk appetite was felt to be difficult, even if it could be defined, as risk appetite is not constant but varies depending on market conditions

The FRC's proposals were therefore (on the basis that the legal obligation is to report on "principle risks and uncertainties);

• Focus reporting primarily on strategic risks (as opposed to those which occur without company action) and 
• Disclose such risks to business model and the strategy for implementing said model
• Not to "scatter" descriptions of the risks faced by the company throughout the document

All of this is a little plus ca change for insurers, who are already pretty good at these aspects!

The second document carried additional interest for me, bearing in mind it collates genuine opinion of the decision making bodies on their existing risk management obligations (and therefore could provide insight into future issues with Use Test evidence, ORSA processes and SFCR/RSR sign-offs). They reiterate that this is not guidance!

Obvious headline from this work is that the Turnbull Guidance will get a brush up in 2012, but I also picked out the following aspects;

• Risk Committee should not be obligatory for all industries
• Boards need to focus on risks that undermine strategy or long-term viability (i.e Reverse Stress Testing)
• The "velocity of risk" meant that reputational risk requires greater attention
• Essential that boards should focus on "gross" as well as "net" risk (inherent and residual in our lexicon)
• Challenge of determining whether a particular risk should be brought to the board's attention remains one of the greatest challenges
• Risk and Internal Audit should have clear reporting lines to board committees
• Investors are seeking "more meaningful reporting on risk", much like that prescribed earlier
• Risk categorisation terminology used is relatively crude (operational and strategic risks being the main distinction made)

I suspect most insurers would rest pretty easy if they benchmark their ERM frameworks against the contents of this paper.

Article - Journey's end for Solvency II

Well researched article in Financial Risks Today (including a name check for yours truly!) is worth a look - it covers quite a lot of ground and references a suite of research and comment, so you might find it useful as a one-stop shop.

Leadership, psychos and moon faces

On the corporate governance front, please be on the look out for any psychopaths or wide faced execs who may be the causes of your strategic undoing...

Solvency II and asset allocation - mixed messages

There seems to have been a suite of materials on Solvency II and predicted asset allocation impacts recently, from the great and good (Gideon on the Solvency II Wire has kept on top of these, and I took a look at the Oliver Wyman/IIF document last week - much of the materials pointed towards a drive towards short term EU government debt (capital-free, and no duration penalties) ahead of where an insurer may traditionally have invested for policyholder benefit, corporate (and specifically bank) debt.

There were some left-of-centre views that I spotted, one from a representative of Markit opining that, in the current climate, government debt was now being viewed as riskier than Western European corporate debt. Another covered the potential for Insurance Linked Securities demand to increase under Solvency II, thus necessitating more issuance to be EU-based (as opposed to traditional homes Bermuda or Cayman). The third came from Union Banque Privee, with research cited in the FT that, with appropriate asset selection (cheeky derivatives used as examples), asset arbitrage will allow insurers to obtain exposure and performance without necessarily holding onerous amounts of capital as prescribed under Solvency II.

The first then indicates that the weightings may need a genuine re-examination with the Eurozone debt issues as the backdrop, while the other two suggest there are investment options to counter the new requirements. Is the IIF research therefore much ado about nothing, or perhaps is the mighty banking lobby having one last "flex of the guns" before its emasculation over the next few years?

FTSE Insurers - last but not least...

Having tried on a number of occasions to complete the traipse through FTSE interims for Solvency II progress and mistakenly thought I was finished, Chesnara (a Resolution-style acquisition vehicle) dropped their results today - Reuters take on them is here, but I would highlight;

• On target for the current implementation date of 1 January 2013. "...the exact date is currently being reconsidered by the EU and may be deferred to 2014”
• [We] also believe that the current climate and the challenges of Solvency II will give rise to possible acquisition opportunities and [we] remain keen to progress these.
• Current planning indicates that [we] are well placed to meet the deadline and that there is not expected to be any increased capital requirements in the Group's UK businesses.

Irish Life and Permanent also got in on the act - I had spotted a few years ago (p21 of the document, p23/24 of the pdf) that they were massively ambitious to enjoy the capital savings expected under Solvency II (this was pre-crisis of course!) Their ambitions seem rather curtailed now, commenting only that "The group believes that the adoption of Solvency II will increase available capital resources." 

ERM benchmarking - Accenture - "High-performance insurer of the future"

A decent effort from the guys at Accenture on identifying and explaining the kinds of strategies which in their mind will separate the insurance men from the boys in future.

They have researched 70 companies (mix of single line, multi line and multinational companies) and come out with;

• A suite of KRIs to measure and benchmark corporate performance
• 5 Key attributes of "high performance" insurers; Customer-centric distribution, responsiveness to market, operational excellence, pursuit of cost reduction and focus on risk management
• 5 forces for change in the industry; growth shift to emerging markets, increases in technological development, escalation of risk and regulation, changes in consumer behaviour and changes in the competitive ladscape
• 6 distinct business models that should flourish

Very useful for benchmarking, KRI and ORSA purposes, particularly if you are working for a "multi" - the future growth aspects are likely to be hitting a strategic plan near you in the next couple of years...

Think piece from CII - rethinking risk management (Solvency II angle)

In the context of the FSA's perceived wish to have more mathematicians in charge of Insurance company risk functions, it is always nice to wrap one's self in the comfort blanket of some views from the soft side of the fence.

This paper from Dr. Ashby, taking a sample of 20 risk management professionals (no mention of their backgrounds, which would have been handy in the context), is a look back over the causes of the credit crisis and how to negate such causes in future. It points at the following;

• Consensus that inappropriate risk culture, poor risk communication and over-reliance on modelled risk assessment were significant contributing factors (both institutions and regulatory/ratings agencies highlighted). These are of course the kinds of aspects most difficult to attack without an appropriate remit and seniority (i.e CRO seat)
• Recommends more of a balance "between modelling and judgement", to counter the increased focus on "objective measurement over effective management" - guessing the quota of pure risk versus actuarial-style in the 20 person sample was weighted towards my kind!
• Fairly critical of risk functions for either alienating themselves from the business with a compliance-led approach, or for lacking the skills to communicate risk exposures
• None of the sample agreed that Solvency II would lead to improvements in risk management.
• Strangely highlights operational risk as an aspect of risk management "that does not lend [itself] to formal mathematical modelling" - couldn't agree less, and I'm not an actuary!

A worthy paper, good for benchmarking, and good for reassurance - well done to all involved.

Gender Diversity on Boards - the drive continues...

Lots on gender diversity this week, which I keep a watching brief on for obvious corporate governance purposes as well as impact on the post-Solvency II board, bearing in mind the Level 3 guidance on System of Governance in the area of "collective knowledge, competence and experience of the management body" (Guideline 12).

The Guardian highlighted progress towards Lord Davies recommendations (where the 6 month "ticker" has almost "tocked"), and flagged that there is some rather specious cramming of female non-execs since February to get the numbers up (only 1 executive appointment since Feb!). Interestingly, the responses sent to the FRC on adding a piece into the Corporate Governance Code on promoting diversity have been mostly in favour.

Looks like the 25% target could be a while away yet, and may be against the spirit of Lord Davies intent if completed by using the Non-Executive tactic.

The FT also flagged up a drive in Norway to extend the 40% female quota past listed entities and on to large unlisted companies (where it currently stands at 17% in the numbers quoted). The positive criteria cited made me chortle with my own inadequacy, namely that female board candidates;

• Are younger and better educated
• Are less risk prone (NB as a risk professional I have no idea what to think of this "trait")
• Are not as driven by high salaries and bonuses
• Generate deeper and broader discussion 

Evidence cited below this argues against, whilst highlighting that it is a fait accompli when considering the political persuasion of the current government.

Staying in Scandinavia, I checked out the recently revised corporate governance code in Denmark. Whilst they have a number of pieces on board "diversity", its benefits, and recommendations on regular reporting on diversity, they also slip in a clause (4.1.4) recommending the board discuss annually their activities to "ensure diversity at management levels, including equal opportunities for both sexes", as well as recommending that "measurable objectives" be set to this respect and publicly commented on.

Further comment gets to the heart of the recommendation by using the proportion of women at specific management levels as an example - they could just put the quota in and be done with it!

FT report on listed insurer's capital trends

Just in case anyone missed out on Monday, the FT provided a quality summary on perceived advance capital planning by UK and EU insurers ahead of Solvency II. I say quality despite the couched terminology (SCR referred to as the "softer capital requirement"!)

The suggested SCR coverage targets referenced are interesting (125-150% in the UK, and as much as 170% in continental Europe) – I have heard generalisations on target SCR surplus before (in the context of economic capital targets), but the guy from JP Morgan obviously thinks he’s onto something.

I had a quick look, and thought Generali may struggle on the European side (they had 168% as their Economic Solvency Coverage on p23), but everyone else was well covered.

The schematic also highlights the increase in surplus capital pre and post-credit crunch.

Implications of financial regulatory reform for the insurance industry - IIF and Oliver Wyman Paper

I managed to get a good look at the paper reported widely last week on how Basel III and Solvency II appear to have conflicting end-games, which could prove calamitous for banks should there not be at least some cognisance of each other's ambitions - thanks a bundle to the guys at Oliver Wyman for sending me a copy gratis (just fill in the form here to get your own, much trickier from the IIF website).

More important to note the additional lobbying angle and indeed the people behind it (Zurich's CRO and Swiss Re's CEO appear to be prominent in the IIF's insurance working group, with Allianz and Aviva also participating), rather than the minutae of the report (which is less than 30 pages regardless).

It of course points out the folly of EU government debt being "risk free" in the current environment, but also shows the differing capital requirements for corporate bonds in the NAIC, Basel III and Solvency II approaches, highlighting how relatively onerous long-term corporate debt will in terms of capital consumption, despite the fact that long-term bonds are ideal from an ALM perspective for many insurance products.

Bermuda, Solvency II and equivalence (and some US comment)

No doubt you would have seen the release of EIOPA's equivalence work to date on Japan, Switzerland and Bermuda. Summary articles here and here if you haven't.

I will take a more substantial look at Bermuda's report shortly (in the context of Ireland's captive preparations, it could be a welcome fillip to the country if there is an exodus). They were certainly singled out as the least-well prepared, being criticised on a number of legal requirements as well as wholesale gaps in governance requirements and, more worryingly, capital requirements which, in EIOPA's words, "in practice can be very low for insurers with a high risk profile".

Interestingly one of the USA's finest insurance commissioners weighed in on equivalence this week. I suspect it was not intended as a sleight to refer to the prevailing European regime as "admittedly outmoded", though he appears to be to be staunchly conservative in his stance, commenting "...any equivalence process must respect the different legal and regulatory systems that exist around the globe".

A request perhaps to "respect his authoritaah" a la Mr Cartman? Certainly a view not shared by the queue of other countries wishing to attain equivalence, and a repetition of the IFRS/US GAAP protracted convergence the most likely result.

Irish Corporate Governance Code for captives

The Central Bank of Ireland pushed out the Corporate Governance Code for Captives this week, which is to all intents and purposes a lightly abridged version of the main event.

My particular interest was their approach to governance and risk appetite, and there is no let-up from the obligations on insurance undertakings in this regard.

• Full qualitative and quantitative documented Risk Appetite required - argued against by some in the industry on the basis of "natuire, scale and complexity"
• Material deviation from Risk Appetite to be reported CBoI within 5 days - regardless of whether parent company or captive manager identifies it
• "Where appropriate", the board may consider a risk committee
• Internal Audit function required, but may use Group resource, or indeed outsource

Handy FAQ document accompanied its release - unlike in the consultation for the main code (in which almost every suggestion was ignored save for tiering supervision between 'big' and 'little'), they have actually made a few tweaks in response to the industry, which is very healthy. They have increased the transitional period by an extra 3 months, dropped the requirement for a deputy chairman, and permitted non-directors to aid in the development of captive strategy.

I am by no means an expert in the area, but they seem like proportional, tailored solutions to retaining a presence in this market, and the Central Bank ought to be applauded for the effort, even if judging by the number of "no's" in the consultation, the industry wanted more!

FTSE Insurers - last interim result (I think!) and Solvency II progress

Resolution/Friends Life, the darlings of the disclosure world, released their half year results today (there is a location check on the way through on this URL, but don't be put off, it's a Guernsey thing!). This of course compliments the other FTSE Insurers' releases which I have blogged on previously.

As ever, Resolution are very forthright on most aspects of their raison d'etre, including Solvency II preparations - they note the following;

• "The implementation of the EU Solvency II Directive continues to be a key focus of attention for the Group...Friends Life group is closely involved with the industry in lobbying on key areas where uncertainty remains"
• £24 million of cost booked in respect of Solvency II and finance system developments, complimented by "overall [Solvency II] implementation programme is on track against its plans and budget" 
• "the Group believes that [Solvency II] will have a favourable capital impact on the Friends Life group relative to current Pillar 1 solvency requirements"
• "Disappointingly, there is a lack of clarity on the final position with respect to Solvency II, and the implementation date looks likely to be delayed" - no commitment on date, unlike some of the others
• “participated in the EIOPA stress test exercise” and are “closely engaged in the development of the tax proposals including any changes arising as a result of Solvency II”.
• "The Group has been accepted into the FSA’s pre-application process"
• "Providers, in anticipation of the higher capital requirements under Solvency II, have been adjusting their pricing which is leading to increasing margins." reinforced later specifically on annuities
• Solvency II considerations down as a "key driver" in the context of the cash generation result - presumably in the context of how much they can pay away and how much must be retained, though I could be wrong
• German product range directly affected by "the impact of Solvency II [which] is expected to limit market participants' ability to provide traditional with-profits product offerings."

The comment that "The Group assesses strategic developments and opportunities on a Solvency II basis" was perhaps the most fascinating part - how you do this without clarity on the suite of transitional measures, Omnibus II elements etc is beyond me.

As a post script, Phoenix also posted interims, albeit a little later than the others - again, a lot of disclosure on Solvency II, quotes as below;

The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry forums. 

Both the European Council and the European Parliament have proposals to amend the timescales for the implementation of Solvency II and there appears to be growing political momentum towards delaying full implementation until 1 January 2014. At the present time however, there is no certainty that this will happen and the Group continues to plan for implementation on 1 January 2013.

The Group remains on track to deliver an approved partial Group internal model and has been accepted into the FSA internal model pre-application process following the submission of the pre-application process qualifying criteria template in 2010. In respect of the resources the FSA will devote to the pre-application process it has stated that it will concentrate on a small population of firms representing a significant market share and which it regards as having the highest potential impact on its objectives. The Group is included in this category and remains in continuous and constructive dialogue with the FSA.

The Group's actuarial IT systems transformation project will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment.

"We continue to target full Solvency II readiness by the end of 2012.Our Internal Model Self Assessment Template has been approved by the FSA and we are on track to meet the Internal Model Application Process date of 1 April 2012."

On 23 March 2011, HMRC issued a technical note on 'Solvency II and the Taxation of Insurance Companies' outlining changes to the taxation of UK insurance companies with effect from 2013. The Group has been actively involved in consulting with HMRC and HM Treasury on the detail of the new rules, with the aim of ensuring that the Group's policyholders and shareholders are as far as possible not adversely affected by the changes.

The consultation process is still on-going in relation to certain aspects of the new rules, and as a consequence of this and the complexity of the proposed changes it has not been possible to estimate their potential future impact on the deferred tax balances shown in these interim financial statements. Draft legislation is expected in the second half of the year and its estimated impact on the deferred tax balances will be considered and disclosed in the year end financial statements.