Proposed Scheme to Transfer Certain Immediate Annuity Policies
from Zurich Assurance Ltd (‘ZAL’) to Rothesay Life plc (‘RLP’)
Report of ZAL’s
Chief Actuary
on the Proposed Transfer of
Business Pursuant to Part VII of the Financial Services and Markets Act (2000) (“FSMA”).
Simon Johnson, FIA
Chief Actuary
18 January 2017
Chief Actuary’s Report – ZAL RLP Scheme
Contents
1
2
3
4
5
6
Introduction ................................................................................................................. 4
1.1
Background ........................................................................................................................................ 4
1.2
Disclosures ......................................................................................................................................... 4
1.3
Compliance with Actuarial Standards ............................................................................................. 4
1.4
Reliances ............................................................................................................................................ 5
1.5
Definitions and Abbreviations ......................................................................................................... 5
1.6
Structure of the Report .................................................................................................................... 5
Overview of ZAL .......................................................................................................... 6
2.1
Background ........................................................................................................................................ 6
2.2
Business ............................................................................................................................................. 6
2.3
Solvency Ratio of ZAL ....................................................................................................................... 7
2.4
Risk Profile of the ZAL Business ....................................................................................................... 7
2.5
Capital Management Policy ............................................................................................................. 7
2.6
Contingent Funding Agreement ...................................................................................................... 8
Summary of the Proposed Scheme ............................................................................ 9
3.1
Background ........................................................................................................................................ 9
3.2
Scheme Summary .............................................................................................................................. 9
Financial Position Before and After the Proposed Scheme .................................... 12
4.1
Introduction .....................................................................................................................................12
4.2
ZAL’s Solvency II Capital Position ..................................................................................................12
4.3
RLP’s Solvency II Capital Position...................................................................................................13
The Effect of the Scheme on the Remaining ZAL Policyholders ............................. 14
5.1
Security of Policyholder Benefits ...................................................................................................14
5.2
Benefit Expectations – With-Profits Policyholders .......................................................................14
5.3
Benefit expectations – Non-Profit Policyholders..........................................................................16
5.4
Service Standards ............................................................................................................................16
5.5
Taxation ...........................................................................................................................................16
5.6
Policyholder Communications........................................................................................................17
5.7
Report of the With-Profits Actuary ...............................................................................................17
The Effect of the Scheme on the Transferring Policyholders ................................. 18
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Chief Actuary’s Report – ZAL RLP Scheme
7
6.1
Security of Policyholder Benefits ...................................................................................................18
6.2
Benefit Expectations .......................................................................................................................19
6.3
Service Standards ............................................................................................................................19
6.4
Taxation ...........................................................................................................................................19
6.5
Policyholder Communications........................................................................................................20
Conclusion .................................................................................................................. 21
Appendix A: Terms and definitions ................................................................................ 22
Terms used in this Report ...........................................................................................................................22
Company Abbreviations Referred to in this Report ................................................................................22
3
Chief Actuary’s Report – ZAL RLP Scheme
1
Introduction
1.1
Background
1.1.1
The purpose of this report (this ‘Report’) is to describe the impact on the policyholders of Zurich
Assurance Ltd (‘ZAL’) of a Scheme under Part VII of the Financial Services and Markets Act 2000 (the
‘Scheme’), the objective of which is to transfer the majority of ZAL’s immediate annuity policies to
Rothesay Life plc (‘RLP’).
1.1.2
In particular, this Report states how the proposed Scheme would affect the security of the policyholder’s
benefits and their reasonable benefit expectations, and how, in my view, the Scheme is consistent with
the requirements of “pay due regards to the interests of the customers and treat them fairly”.
1.1.3
I am writing this Report in my capacity as the Chief Actuary of ZAL. This Report is addressed to the
Board of Directors of ZAL, but will also be provided to the ZAL With-Profits Actuary, the Independent
Expert, the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’) in order
to assist their assessments of the proposals. It should be read in conjunction with the Scheme, the
With-Profits Actuary’s Report on the Scheme, and the Independent Expert’s Report on the Scheme.
1.1.4
In this Report I have not restricted my assessment of the proposed Scheme to adverse effects.
1.1.5
I will provide a supplementary report nearer the date of the Court hearing in order to update my
conclusions to reflect any financial information or significant events after the date of the finalisation of
this Report.
1.2
Disclosures
1.2.1
I am a Fellow of the Institute and Faculty of Actuaries, having qualified in 2004, and hold a certificate
issued by the Institute and Faculty of Actuaries to act as Chief Actuary (Life). I joined Zurich in October
2013 and have been the Chief Actuary for ZAL since January 2016. I have over 15 years of experience
working in the UK life assurance industry.
1.2.2
I am an employee of Zurich Employment Services Ltd. Zurich Insurance Group Ltd (ZIG) is the ultimate
parent of both Zurich Employment Services Ltd and ZAL.
1.2.3
I do not hold any insurance policies with ZAL or other companies within the Zurich Group. I am a
member of the Zurich Financial Services UK Pension Scheme defined contribution pension arrangement.
I have a direct interest in shares of ZIG, and am entitled to participate in both the Zurich Group’s Long
Term and Short Term Incentive Plans.
1.2.4
I confirm that my financial and personal interests in ZIG have not influenced me in reaching any of the
conclusions detailed in this Report.
1.2.5
I do not hold any policies with RLP and have no direct interest in the shares of RLP or their investors.
1.3
1.3.1
Compliance with Actuarial Standards
The Financial Reporting Council has issued standards known as Technical Actuarial Standards (TAS). Five
standards applicable to this Report were in effect at the date of its preparation:
•
Technical Actuarial Standard R: Reporting Actuarial Information (TAS R) version 2, effective 1 April
2010
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Chief Actuary’s Report – ZAL RLP Scheme
•
Technical Actuarial Standard D: Data (TAS D) version 1, effective 1 July 2010
•
Technical Actuarial Standard M: Modelling (TAS M) version 1, effective 1 April 2011
•
The Insurance Technical Actuarial Standard (The Insurance TAS) version 1, effective 1 October 2011
•
The Transformations Technical Actuarial Standard (The Transformations TAS) version 1, effective 1
October 2011
This Report has been prepared in accordance with these standards.
1.3.2
In line with the above standards this Report is considered to be an aggregate report, but should be read
in conjunction with the Scheme, the With-Profits Actuary’s Report on the Scheme, and the Independent
Expert’s Report on the Scheme.
1.3.3
This Report has also been prepared in accordance with the Actuarial Professional Standard APS X2:
Review of Actuarial Work. The drafting of this Report included an internal review by another actuary in
the company, Matthew Brownlie FIA. The Scheme is subject to independent review by the Independent
Expert which provides a further review of the conclusions of this Report.
1.4
Reliances
1.4.1
In preparing this Report, I have had access to information on the financial position and practices of RLP.
This information has been provided by RLP. I have reviewed this information for consistency and
reasonableness using my knowledge of the UK life assurance industry, RLP’s published 2015 Annual
Reports and Accounts and Interim Solvency and Financial Condition Report for 31 December 2015, but
have not otherwise verified this information.
1.4.2
In coming to my conclusions, I have relied upon the accuracy of this information.
1.5
Definitions and Abbreviations
1.5.1
A list of the definitions and abbreviations that I have used in this document is included in Appendix A.
1.6
Structure of the Report
1.6.1
This Report is structured as follows:
•
Section 2 provides an overview of ZAL;
•
Section 3 outlines the proposed Scheme;
•
Section 4 considers the estimated financial position before and after the proposed Scheme;
•
Section 5 sets out the effect of the Scheme on the remaining ZAL policyholders;
•
Section 6 sets out the effect of the Scheme on the transferring ZAL policyholders;
•
Section 7 sets out my conclusions;
•
Appendix A lists the definitions and abbreviations used in this Report.
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Chief Actuary’s Report – ZAL RLP Scheme
2
Overview of ZAL
2.1
Background
2.1.1
ZAL is a UK registered, wholly-owned indirect subsidiary of Zurich Insurance Group Ltd, a company
incorporated in Switzerland, which is the ultimate holding company of the Zurich group of companies.
ZAL is regulated in the UK.
2.1.2
ZAL is authorised by the PRA and regulated by the FCA and the PRA.
2.1.3
The company was formed in 1990 as Eagle Star Life Assurance Company Limited (ESLAC). The UK longterm business of Eagle Star Insurance Company Limited was transferred into ESLAC in 1991. In 2004,
the name of ESLAC was changed to Zurich Assurance Ltd (i.e. ZAL). Immediately following that in 2005,
other long-term insurance business (that of Allied Dunbar Assurance plc being the largest of these) was
transferred into ZAL. ZAL has continued writing a wide range of new business since this time, some of
which has been marketed under the Sterling brand name.
2.1.4
ZAL manages its business as five separate funds including a Shareholder Fund. The other four funds are
the 90:10 With-Profits Fund, the 100:0 With-Profits Fund, the Defined Charge Participating Fund and
the Non-Profit Fund.
2.1.5
Shareholders are entitled to 100% of any surplus from the Non-Profit Fund. The policies in the Defined
Charge Participating Fund (DCP) do not participate in any profits of the company, but a percentage of
the surplus arising in the fund is required to be transferred to the 100:0 With-Profits Fund. The
operation of this transfer is described more fully in section 5.2.11. The shareholder is entitled to the
remaining surplus arising in the DCP Fund. The 90:10 With-Profits Fund and 100:0 With-Profits Fund
contain with-profits business. The surplus in these funds is required to be distributed between
policyholders and the shareholder in the ratios 90:10 and 100:0 as applicable for each fund.
2.1.6
Under Solvency II ZAL manages the 90:10 With-Profits Fund and the 100:0 With-Profits Fund as separate
ring-fenced funds, causing a small restriction on ZAL’s total Own Funds.
2.2
Business
2.2.1
Below is a summary of the in-force business of ZAL at 30 June:
Table 1: ZAL Solvency II Technical Provisions at 30 June 2016
Technical Provisions (£m)
Gross of Reinsurance
Net of
Reinsurance
Ceded Reinsurance
Line of Business
Health Insurance
Insurance With-Profits Participation
Index–linked and Unit–linked Insurance
Other Life Insurance
Total
6
193
(29)
165
1,810
0
1,810
41,596
(11,698)
29,898
2,933
(2,462)
472
46,533
(14,188)
32,344
Chief Actuary’s Report – ZAL RLP Scheme
2.2.2
ZAL writes a full range of life assurance business, but unit-linked business predominates.
2.3
Solvency Ratio of ZAL
2.3.1
ZAL’s Solvency II capital position at 1 January 2016 and 30 June 2016 was as follows:
Table 2: ZAL solvency position at 1 January 2016 and 30 June 2016
Total Assets
Total Liabilities
Excess of assets over liabilities
Adjustment for Restricted Own Funds Items in Respect of Ring Fenced Funds
01/01/16
30/06/16
£m
£m
47,232
49,261
(45,407)
(47,388)
1,825
1,873
(25)
(26)
Total Eligible Own Funds to Meet the Solvency Capital Requirement
1,800
1,847
Solvency Capital Requirement
1,191
1,235
Ratio of Eligible Own Funds to Solvency Capital Requirement
151%
150%
2.4
Risk Profile of the ZAL Business
2.4.1
The risk profile of ZAL is characterised by the fact it writes a broad range of life insurance business and is
exposed to the risks typical of long term insurance, including:
•
•
•
•
Market risk from the impact of market movements on the assets ZAL holds backing policyholder
liabilities;
Insurance risks, particularly in respect of mortality, longevity, lapses and expenses;
Operational risk, including in respect of strategic initiatives to develop ZAL’s business;
Credit risk, particularly in respect of holdings in investment grade corporate bonds and
counterparty risk, as a result of reassurance placed with other insurers.
2.4.2
Zurich operates a pension scheme for UK employees with both defined benefit and defined contribution
sections. The defined benefit sections of the scheme are closed to new entrants and, with effect from 1
January 2016, to future benefit accrual. All employees are now eligible to participate in the defined
contribution section. ZAL is not directly exposed to pension scheme risk as two management services
companies (Zurich Employment Services Limited for Life business staff and Zurich UK General Employee
Services Limited for General business staff) are the participating employers in the scheme and ZAL would
not normally be responsible for making any payments to reduce any deficit.
2.5
Capital Management Policy
2.5.1
In line with insurance companies across the European Union, ZAL moved to managing its capital on a
Solvency II basis from 1 January 2016. The Solvency Capital Requirement (SCR) that ZAL is required to
hold under Solvency II is a risk-based measure which allows for the nature of ZAL’s business. ZAL holds
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Chief Actuary’s Report – ZAL RLP Scheme
a capital buffer above its regulatory minimum to protect itself against short term volatility. ZAL’s capital
management policy sets out a target range for the capital buffer, such that ZAL’s SCR cover is
appropriately protected against movements in capital resources and capital requirements whilst avoiding
holding an excessive level of capital. If ZAL’s solvency should fall below the target range then actions
would be taken to restore this, such as by reducing the risks ZAL is taking, or by obtaining capital
funding from another Zurich Group company. If ZAL’s solvency should rise above the target range, then
ZAL would consider making shareholder distributions to reduce its solvency to the upper level of the
target range, subject to any other constraints.
2.5.2
Before making any distribution ZAL would also consider its Own Risk and Solvency Assessment,
although, currently the regulatory requirements are the more onerous.
2.6
Contingent Funding Agreement
2.6.1
ZAL has an agreement in place with ZIG which would provide up to £833m of contingent funding to
ZAL if certain events occur.
•
•
Up to £200m will be made available following a Regulatory Event.
Up to a further £633m will be made available following an Insolvency Event.
Where Regulatory Event means
a)
the eligible own funds of ZAL available to cover its SCR are less than the 99.6% confidence level
over a one year time frame; or
b) some other equivalent regulatory capital requirement of the relevant supervisory authority remains
unfulfilled.
and where Insolvency Event means
ZAL is within £50m of becoming insolvent for the purposes of Section 123 of the Insolvency Act 1986.
2.6.2
The amount of the funding available is reduced in certain circumstances, for example where additional
share capital is issued. The termination date of the funding agreement is 28 November 2043. To date
ZAL has not drawn down any capital under this agreement.
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Chief Actuary’s Report – ZAL RLP Scheme
3
Summary of the Proposed Scheme
3.1
Background
3.1.1
Following a review of its business, ZAL concluded that annuities are not a core part of its business. As a
result, ZAL stopped actively marketing annuity products in 2005. This strategy led to the sale of a large
part of ZAL’s annuity business at the time to Windsor Life (now ReAssure Limited), part of the Swiss Re
group, in 2007. The current Scheme is a continuation of the same overall strategy.
3.1.2
On 24 April 2015 ZAL entered into a reinsurance agreement with RLP to reinsure certain immediate
annuities with an effective date of 1 April 2015 (the ‘Reinsurance Agreement’). On 10 December 2015,
21 June 2016, and 1 December 2016 the agreement was extended to cover further tranches of
annuities with an effective date of, respectively 1 October 2015, 1 April 2016 and 1 October 2016.
3.1.3
RLP is a proprietary company authorised by the PRA and regulated by the FCA and the PRA.
3.1.4
Under the Reinsurance Agreement an agreed portfolio of assets was transferred from ZAL to RLP. The
assets are held in a separate collateral account which RLP manage subject to conditions set out in the
Reinsurance Agreement.
3.1.5
The immediate annuities reinsured consist entirely of non-profit conventional annuities in payment from
the DCP Fund. The vast majority of these are lifetime annuities where payments will continue until the
death of the annuitants. There are also a very small number of temporary annuities.
3.1.6
Most of the reinsured policies were written in the UK. There are a small number of overseas policies
written in Jersey, Guernsey and the Isle of Man.
3.1.7
The Reinsurance Agreement contemplated that ZAL and RLP would seek to transfer the reinsured
policies from ZAL to RLP under Part VII of the Financial Services and Markets Act (2000) in the UK and
similar legislation in Jersey, Guernsey and the Isle of Man. ZAL and RLP now wish to complete this
transfer.
3.2
Scheme Summary
3.2.1
On the proposed Scheme effective date the reinsured policies would be transferred from ZAL to RLP.
The transferred policies (‘Transferring Policies’) would become solely the responsibility of RLP and ZAL
would cease to be responsible for these policies.
3.2.2
Certain liabilities relating to the reinsured policies were excluded from the Reinsurance Agreement,
including liability arising from any regulatory investigation concerning conduct prior to the proposed
transfer and any taxation prior to the proposed transfer. Similarly the proposed Scheme would exclude
transfer of these liabilities.
3.2.3
Certain policies have also been identified where potential errors have arisen in deriving the value of
policyholder benefits. These relate primarily to policies with guaranteed minimum pension (GMP)
benefits. There are 93 policies affected. These policies have been reviewed by ZAL and their ongoing
annuity amounts have been corrected. In those cases where historic payments should have been higher,
those customers have been remediated.
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Chief Actuary’s Report – ZAL RLP Scheme
3.2.4
ZAL and RLP have agreed these affected policies will be included in the Transfer at the new corrected
benefit levels. The inclusion or exclusion of these policies from the Scheme would not change any of my
conclusions described in section 7.
3.2.5
The Reinsurance Agreement would terminate once all reinsured policies have been transferred. No cash
payments would be made between ZAL and RLP in relation to the transfer other than the reinsurance
premiums already paid from ZAL to RLP and the reinsurance claims received by ZAL from RLP.
3.2.6
The majority of ZAL’s policies would not be transferred by the proposed Scheme. ZAL would continue
to be responsible for these remaining policies and would continue to pay claims and service these
policies in the normal manner.
3.2.7
No changes would be made to the terms and conditions of any policies as a result of the Scheme, other
than that RLP would become responsible for meeting the contractual obligations in place of ZAL for the
Transferring Policies.
3.2.8
ZAL’s share of the legal and other costs incurred in preparing and implementing the Scheme will be met
by the Shareholder Fund of ZAL.
3.2.9
Below is a summary of the policies proposed to be transferred under the Scheme as at 30 June 2016 .
1
Table 3: Transferring Policies at 30 June 2016
UK
Overseas
Lifetime annuities
Temporary annuities
Lifetime annuities
Temporary annuities
Total
Number of Policies
Total Annual Annuity
Payments (£m)
28,302
59.8
483
0.7
1,200
2.6
1
0.0
29,986
63.1
3.2.10 Effective from 1 October 2016, a further tranche of reinsurance is agreed. The following policies are also
expected to transfer at the Effective Date.
Table 3a: Additional Transferring Policies from 4th tranche of the reinsurance effective from 1 Oct 2016
UK
Overseas
Number of Policies
Total Annual Annuity
Payments (£m)
878
2.4
Lifetime annuities
Temporary annuities
Lifetime annuities
Temporary annuities
Total
2
0.0
19
0.1
0
0.0
899
2.4
3.2.11 The technical provisions for the Transferring Policies amount to approximately £1.4bn.
1
There are a small number of policies classed as “overseas business”. These relate to policies written in Jersey, Guernsey and
Isle of Man.
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Chief Actuary’s Report – ZAL RLP Scheme
3.2.12 If the Scheme has not taken effect by 31 December 2018 (or if later, in the case of the Jersey Scheme,
the Guernsey Scheme and the Isle of Man Scheme, three months after the Effective Date), then the
Reinsurance Agreement will become permanent. However, ZAL and RLP may consider negotiating a
termination of the agreement, depending on each company’s view on the merits of termination
compared with permanent reinsurance.
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Chief Actuary’s Report – ZAL RLP Scheme
4
Financial Position Before and After the Proposed Scheme
4.1
Introduction
4.1.1
With effect from 1 January 2016, a new regulatory regime came into effect called Solvency II. This is a
new EU regulatory framework for insurers covering capital adequacy requirements, risk management
and disclosure.
4.1.2
Under Solvency II insurance liabilities are valued using best estimate assumptions plus a risk margin to
allow for uncertainty. In addition to the insurance liabilities, insurers must hold capital to protect against
adverse events. The capital insurers must hold under Solvency II is referred to as the Solvency Capital
Requirement (SCR).
4.1.3
Firms may choose to calculate the SCR using either the “standard formula”, as prescribed by the
European Insurance and Occupational Pensions Authority, or subject to PRA approval, an internal model.
Both ZAL and RLP have chosen to adopt the standard formula approach. Under the standard formula
the SCR is calculated by considering the impact of specified stresses, then combining the impact of
these stresses.
4.1.4
ZAL has assessed the appropriateness of using a standard formula approach as opposed to an internal
model. ZAL has concluded that the standard formula approach, alongside its Capital Management Policy
(section 2.5), is currently considered appropriate for ensuring ZAL maintains sufficient capital.
4.1.5
RLP has also assessed the appropriateness of using a standard formula approach as opposed to an
internal model. RLP has confirmed that the standard formula approach, alongside its Capital
Management Policy (section 6.1.4), is currently considered appropriate.
4.1.6
Both ZAL and RLP are required to hold capital resources at least equal to the SCR at all times. Should
the company’s capital resources fall below the SCR, ZAL/RLP must put in place an action plan to rectify
the position.
4.1.7
The SCR is intended to ensure the company can meet its liabilities in full, even in a severe adverse
scenario that might only be expected to occur once every 200 years. Both ZAL and RLP also choose to
hold a capital buffer on top of the SCR as outlined in section 2.5 and 6.1.4 respectively.
4.2
ZAL’s Solvency II Capital Position
4.2.1
The table below shows ZAL’s Solvency II capital position at 30 June 2016, together with a pro forma
impact of the proposed Scheme at 30 June 2016. This table excludes the impact of the fourth tranche
of annuities. The inclusion of the fourth tranche would not make any material difference and does not
change the level of SCR cover. The balance sheet impact of these policies will be included in the
supplementary report.
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Chief Actuary’s Report – ZAL RLP Scheme
Table 4: Pro Forma ZAL Solvency at 30 June 2016 Before and After the Proposed Scheme*
Actual
Total Assets
Total Liabilities
Excess of assets over liabilities
Adjustment for Restricted Own Funds Items in Respect of Ring Fenced Funds
Pro Forma
After the
Scheme
£m
£m
49,261
47,860
(47,388)
(45,978)
1,873
1,882
(26)
(26)
Total Eligible Own Funds to Meet the Solvency Capital Requirement
1,847
1,856
Solvency Capital Requirement
1,235
1,222
Ratio of Eligible Own Funds to Solvency Capital Requirement
150%
152%
4.2.2
There is an improvement in ZAL’s solvency following the proposed Scheme. This arises because
although the business is 100% reinsured, there are still some residual risks that ZAL is exposed to.
These include operational risk in relation to the administration of the annuity policies and reinsurance
contract, and counterparty risk in the event of a default by RLP.
4.2.3
Following the proposed Scheme the risk margin and SCR in respect of these residual risks would be
released leading to an improvement in ZAL’s solvency.
4.3
RLP’s Solvency II Capital Position
4.3.1
The report of the Chief Actuary of RLP states that, allowing for the Scheme, RLP’s solvency position at
30 June 2016 is unchanged from the position before the Scheme.
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Chief Actuary’s Report – ZAL RLP Scheme
5
The Effect of the Scheme on the Remaining ZAL Policyholders
5.1
Security of Policyholder Benefits
5.1.1
Section 4 showed that, following the Scheme, the solvency position of ZAL would be slightly improved
as ZAL would be no longer exposed to the residual risks from the transferred policies.
5.1.2
I note that ZAL’s solvency ratio, both before and after the Scheme, is above the upper boundary of its
capital management policy described in section 2.5. In line with its capital management policy, at some
point in the future, ZAL may consider paying a dividend to its shareholder. This could bring ZAL’s
solvency ratio down to the upper boundary. However, the same policy would be followed both before
and after the Scheme, and in the event of any dividend being paid ZAL’s capital resources would remain
above the regulatory SCR.
5.1.3
I note the Scheme will not materially change ZAL’s risk profile, and will not have a material impact on
the sensitivity of ZAL’s solvency ratio to market, demographic or other risks.
5.1.4
As a result of the Reinsurance Agreement, the security of the remaining policyholders’ benefits is no
longer exposed to the longevity and market risks of the annuity policies proposed to be transferred.
5.1.5
In the event of a deterioration in ZAL’s solvency, ZAL and the remaining policyholders could benefit from
the contingent funding agreement with ZIG described in section 2.6. This would not be affected by the
proposed Scheme.
5.1.6
In the unlikely event of ZAL being unable to pay policyholder benefits in full, eligible policyholders would
be entitled to claim compensation under the Financial Services Compensation Scheme. Any
compensation would be subject to the rules of the Financial Services Compensation Scheme at that
point in time. Eligibility for remaining policyholders to claim would not be affected by the proposed
Scheme.
5.1.7
I conclude, therefore, that there will be no material change in the security of the benefits of remaining
policyholders as a result of the proposed Scheme.
5.2
Benefit Expectations – With-Profits Policyholders
5.2.1
No changes will occur as a result of the Scheme to investment strategy, or the methodology for setting
bonuses, policy charges, or surrender values for existing policyholders within the ZAL with-profits funds.
5.2.2
In certain circumstances, ZAL would make financial support available for the 90:10 With-Profits Fund
and/or the 100:0 With-Profits Fund from the Defined Charge Participating Fund and the Non-Profit Fund
(or, if necessary, from the Shareholder Fund). The Scheme will not alter this arrangement.
5.2.3
90:10 Fund Expense Allocation – Group Pensions
ZAL will retain the overhead expenses currently allocated to the Transferring Policies. The Scheme will
reduce the total number of policies in ZAL and the overhead expenses previously allocated to the
Transferring Policies will, in the future, be allocated across a lower number of remaining policies.
Most 90:10 With-Profits policies will not be affected by this. On most policies the maintenance and
claim expenses charged to asset shares and allocated to the 90:10 With-Profits Fund are set by an
expense agreement, and will not change.
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Chief Actuary’s Report – ZAL RLP Scheme
The expenses allocated to 90:10 group pension policies expenses are based on an assessment of actual
costs. There is expected to be a small increase (approximately 7p per policy per month or 0.8% of their
current annual expense) in the overhead expenses allocated. In the absence of intervention, these
marginally higher expenses would be charged to the asset shares of this class. The guaranteed benefits
would not be affected by the change in asset share values.
5.2.4
The investment expenses charged to asset shares of 90:10 With-Profits policies are based on the actual
incurred expenses of the fund. These will not change as a result of the proposed Scheme.
5.2.5
Using the best estimate assumptions from the Q2 2016 valuation, I estimate that the present value of
the additional expenses is £125,000. I propose that ZAL should inject £125,000 into the 90:10 WithProfits Fund.
5.2.6
For each policy ZAL will calculate the present value of the increase in expenses as a result of the Scheme.
This present value of increased expenses will be added to the policy's asset share so as to remove the
expected impact on the asset share, and hence benefit values, of the expense increase.
5.2.7
90:10 Fund Expense Allocation – Future Vesting Annuities
Some 90:10 With-Profits pension policies have the option to convert to an annuity plan on guaranteed
rates. It is current practice for the 90:10 With-Profits Fund to purchase the required annuity from the
DCP Fund, with any guarantee cost charged to the estate of the 90:10 With-Profits Fund. The small
increase in the expenses (approximately 7p per policy per month) resulting from the re-allocation of
overheads may affect the cost of the annuity and, therefore, the cost to the 90:10 fund. The cost of
this annuity from the DCP Fund charged to the 90:10 With-Profits Fund is not guaranteed and is
dependent on actuarial assumptions at the time of purchase. Many factors, such as ZAL’s assumptions
of future mortality rates or management expense initiatives, can affect the cost of annuities in the
future.
5.2.8
I consider the impact of any variance in the cost of these guaranteed annuities to not be material and
within the scope of normal business activity. Any variance that does arise will not impact any
policyholder’s guaranteed benefits, but will be charged to the estate of the 90:10 With-Profits Fund.
5.2.9
After allowing for the injection in respect of group pensions, I do not believe that any changes in
expenses will result in any material effect on the benefits from 90:10 With-Profits policies.
5.2.10 100:0 Fund Expense Allocation
ZAL will retain the overhead expenses currently allocated to the Transferring Policies. The transfer will
reduce the total number of policies in ZAL and the overhead expenses previously allocated to the
Transferring Policies will, in the future, be allocated across a lower number of remaining policies.
The expenses charged to the 100:0 With-Profits Fund and its policies are defined in each policy’s terms
and conditions, rather than by an allocation of actual expenses. ZAL has the right to vary the charges
deducted subject to the policy terms and conditions. The degree of discretion is limited by the duty to
treat customers fairly which is unaffected by the Scheme. No changes will be made to the expenses
charged to 100:0 With-Profits policies as a consequence of the proposed Scheme.
5.2.11 100:0 Fund transfers from DCP Fund
Each year from 2005 to 2024, ZAL is required to transfer 1% of the surplus arising in the DCP Fund,
from the DCP Fund to the 100:0 With-Profits Fund. This transfer is subject to a limit of initially £1m,
increasing each year with UK Retail Prices Index inflation as published by the Office for National
Statistics. The transfer is defined on the Solvency I regulatory return basis.
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Chief Actuary’s Report – ZAL RLP Scheme
In 2015 a surplus arose in the DCP Fund. Approximately £0.18m was transferred to the 100:0 WithProfits Fund in respect of this surplus.
Due to new business strain from protection and pension business expected to be written in the DCP
Fund, a best estimate projection is that no surplus would arise in the DCP Fund for any year 2016 to
2024. This conclusion is unchanged by the Reinsurance Agreement, or the proposed Scheme.
I therefore believe that there will be no material change in the expected value of future transfers from
the DCP Fund to the 100:0 With-Profits Fund. The 100:0 With-Profits Fund and its policyholders have
seen a small benefit from a transfer of approximately £0.18m made in 2015, which would not have
arisen in the absence of the Reinsurance Agreement.
I therefore conclude that there will be no material changes to the benefit expectations of 100:0 WithProfits policyholders as a consequence of the Scheme. In fact 100:0 With-Profit policyholders will have
seen a small benefit from the transfer described above.
5.3
Benefit expectations – Non-Profit Policyholders
5.3.1
The benefits and charges on non-profit policies are defined by the terms and conditions of each policy.
On some policies ZAL has the right to vary the charges deducted. The degree of discretion is limited by
the duty to treat customers fairly which is unaffected by the Scheme.
5.3.2
The charges and premiums on some non-profit policies are subject to regular review processes. ZAL will
not be making any alterations to the processes and approach to reviewing any charges deducted from
existing non-profit policies as a consequence of the proposed Scheme.
5.3.3
The current processes for reviewing charges on existing policies do not reference the Transferring
Policies. For example, some expense deductions are subject to a regular review process which varies the
expense deductions in line with the movements in inflation indices. These reviews will be unaffected by
any change in ZAL’s actual expenses that may arise from policies being transferred under the proposed
Scheme.
5.3.4
I therefore conclude that there will be no material changes to the benefit expectations of the remaining
ZAL non-profit policyholders as a consequence of the proposed Scheme.
5.4
Service Standards
5.4.1
The service levels and outsourcing arrangements in respect of the remaining ZAL policies are unaffected
by the proposed transfer. The Transferring Policies are also only a small proportion of ZAL’s policies,
leaving a large number of remaining policies, so there is no reason to expect any deterioration in service
that might arise from diseconomies of scale.
5.4.2
I therefore conclude that there is no reason to expect any change in the standard of service provided to
remaining Zurich policyholders following the proposed Scheme.
5.5
Taxation
5.5.1
The Scheme will have minimal impact on ZAL’s tax position. Any taxation effects on ZAL of the
proposed Scheme are allowed for in the pro forma financial position shown in section 4.
5.5.2
The proposed Scheme is subject to a tax clearance from HMRC, so as to ensure that there are not any
unexpected tax effects from the Scheme.
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Chief Actuary’s Report – ZAL RLP Scheme
5.5.3
No changes will be made to the methodology for calculating deductions from ZAL’s unit-linked life
funds, or with-profits funds, in respect of policyholder tax, as a result of the proposed Scheme.
5.6
Policyholder Communications
5.6.1
A detailed communication plan has been produced, the implementation of which will ensure
policyholders are adequately informed of the nature and effect of the Scheme. The communications
package includes direct mailing, press adverts and web content.
5.6.2
An application is to be made to the Court for a waiver to omit direct mailing of the remaining ZAL
policyholders on the grounds that the Scheme will not materially impact them. Given that the technical
provisions for the Transferring Policies are approximately 3% of ZAL’s total technical provisions at 30
June 2016 and that I do not believe that there will be any material impact on the remaining
policyholders, I agree that the transaction is not of sufficient materiality to warrant informing the
remaining policyholders individually.
5.6.3
I am satisfied that the proposed communication plan is appropriate and consistent with the principles
pertaining to the fair treatment of policyholders.
5.7
Report of the With-Profits Actuary
5.7.1
In forming my opinion on the effect of the Scheme on existing with-profits policyholders, I have taken
into account, but not relied upon, the opinion of the WPA set out in a separate Report to the Board of
ZAL on the impact of the Scheme on the fair treatment of with-profits policyholders, the bonus
expectations of with-profits policyholders and the effectiveness of the communications strategy.
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Chief Actuary’s Report – ZAL RLP Scheme
6
The Effect of the Scheme on the Transferring Policyholders
6.1
Security of Policyholder Benefits
6.1.1
ZAL is regulated by the PRA and is required to maintain capital resources at least equal to the SCR. ZAL
has a capital management policy of maintaining a buffer over the SCR. At 30 June 2016 ZAL’s solvency
ratio, at 150%, was above the target level.
6.1.2
In the event of an adverse scenario the security of ZAL’s policyholders is also enhanced by the
Contingent Funding Agreement described in section 2.6.
6.1.3
RLP is also regulated by the PRA and is required to maintain capital resources at least equal to the SCR.
6.1.4
I have been informed that RLP aim to maintain a solvency ratio of between 130% and 150% of the
SCR. At 30 June 2016 RLP’s solvency ratio was above this level at 158% and would be unchanged by
the proposed Scheme.
6.1.5
ZAL and RLP are both regulated by the PRA and are required to maintain capital at least equal to the
Solvency II SCR. The level of the SCR is designed to protect the security of policyholder benefits in all
but the most extreme scenarios, which would only be expected to occur once every 200 years.
6.1.6
At 30 June 2016 RLP’s solvency ratio was slightly higher than ZAL’s, although there can be no guarantee
that this will continue to be the position in the future. For example either company could choose to pay
dividends in line with their capital management policies.
6.1.7
In April 2016, RLP entered into an agreement with Scottish Equitable Plc to reinsure a portfolio of
approximately £6bn of annuities. I have been informed that the parent company of RLP has provided
£430m of further equity capital as at 30 June 2016 funded from a combination of new equity and debt
at the parent company to ensure that RLP’s solvency ratio is not materially affected by this reinsurance
agreement. RLP has also confirmed their capital targets, risk appetite, and standard formula
appropriateness are not materially affected by this reinsurance agreement.
6.1.8
ZAL and RLP have quite different risk exposures. The key areas of risk within ZAL’s SCR are default risk,
lapse risk and expense risk. I have been informed that the key areas of risk within RLP’s SCR are spread
risk and longevity risk.
6.1.9
The risks each company are exposed to and the amount of diversification between these risks is
reflected in the amount of capital each company must hold under the Solvency II regime. The intention
of which is to ensure that each company can meet its policyholder liabilities with a high degree of
certainty.
6.1.10 The Transferring Policyholders would no longer benefit from ZAL’s contingent funding agreement, but
given the high level of security provided by the SCR, I do not believe this would result in a material
reduction in the security of benefits for the transferring policyholders. In an extreme scenario, there is
also no guarantee that ZIG would be in a position to provide this funding.
6.1.11 In the unlikely event of ZAL being unable to pay policyholder benefits in full, eligible policyholders would
be entitled to claim compensation under the Financial Services Compensation Scheme. Any
compensation would be subject to the rules of the Financial Services Compensation Scheme at that
point in time.
6.1.12 RLP is also a member of the Financial Services Compensation Scheme. In the event of RLP being unable
to pay policyholder benefits in full, eligible transferring policyholders would also be entitled to claim
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Chief Actuary’s Report – ZAL RLP Scheme
compensation under the Financial Services Compensation Scheme. Assuming no future changes, other
than the proposed Scheme, eligibility for compensation would be assessed against the same set of rules
as for ZAL policyholders.
6.1.13 I conclude, therefore, that there will be no material change in the security of the benefits of transferring
policyholders as a result of the proposed Scheme.
6.2
Benefit Expectations
6.2.1
The annual payments on the transferring annuities are contractually defined.
6.2.2
No changes will be made to the terms and conditions of any policies as a result of the Scheme, other
than that RLP would become responsible for meeting the contractual obligations in place of ZAL for the
Transferring Policies.
6.2.3
There are some limited circumstances in which ZAL has some discretion in making changes to policies:
•
•
•
On the divorce of a policyholder ZAL has some discretion on whether to require the benefits of
either party be transferred to another provider or to offer commutation to cash and in the
terms of that commutation.
On some policies, if on the death of a joint life policyholder the age of the surviving spouse is
different to the age that was disclosed or assumed at the inception of the policy, ZAL has
discretion to adjust the level of future benefit payments to the surviving spouse.
For certain small annuities the policyholder may commute the future annuity payments for a
cash sum. ZAL has some discretion in determining the basis of the commutation.
6.2.4
The Chief Actuary of RLP has confirmed that, concerning this discretion, RLP will apply future practices
having regard to the practices applied by ZAL prior to the transfer, alongside taking account of its
obligation to treat customers fairly and prevailing market conditions. In exercising this discretion, RLP
will be subject to the same conduct requirements as those that would apply to ZAL.
6.2.5
I conclude, therefore, that there will be no material change to the transferring policyholders’ benefit
expectations as a result of the proposed Scheme.
6.3
Service Standards
6.3.1
Currently the Transferring Policies are administered on behalf of ZAL by Capita Life and Pensions
Regulated Services Limited. I have been informed that following the proposed Scheme RLP will
outsource policy administration to Capita Employee Benefits Limited.
6.3.2
I have been informed that, as part of the Scheme, a handover process will be put in place whereby
policy data, documentation and correspondence will be passed over to RLP for the Transferring Policies.
6.3.3
RLP will be responsible for ensuring that its policy administration, customer service processes and service
levels comply with the terms and conditions of the Transferring Policies. Additionally ZAL and RLP will
review these processes against ZAL’s existing processes and service levels to ensure that there are no
significant adverse changes.
6.4
Taxation
6.4.1
Any personal tax liability of policyholders in respect of their annuity benefits would be unaffected by the
transfer.
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Chief Actuary’s Report – ZAL RLP Scheme
6.4.2
The review of service standards will include reviewing the consistency of processes for making PAYE
income tax deductions from the Transferring Policies.
6.5
Policyholder Communications
6.5.1
A detailed communication plan has been produced the implementation of which will ensure
policyholders are adequately informed of the nature and effect of the Scheme. The communications
package includes direct mailing, press adverts and web content.
6.5.2
ZAL will write to all the transferring policyholders, summarising the transfer process and their rights
under this process. A summary of the Independent Expert’s Report will also be included in the
communication pack.
6.5.3
I am satisfied that the proposed communication plan described above is appropriate and consistent with
the principles pertaining to the fair treatment of policyholders.
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Chief Actuary’s Report – ZAL RLP Scheme
Appendix A: Terms and definitions
Terms used in this Report
Chief Actuary
The actuary appointed from time to time to perform the duties set out in
the Actuaries Section of the PRA Rulebook and SUP 4.3.13 of the FCA
Handbook.
FCA
Financial Conduct Authority, the regulator of the financial services industry
in the UK responsible for conduct of financial services firms including the
fairness of financial services contracts.
FSMA
The Financial Services and Markets Act 2000 (as amended).
Independent
Expert
The individual appointed to report on the terms of an insurance business
transfer scheme and approved by the PRA and FCA pursuant to Section
109 of FSMA.
PRA
Prudential Regulation Authority, the regulator of the financial services
industry in the UK responsible for the safety and soundness of firms and
securing an appropriate degree of protection for policyholders.
Scheme
The insurance business transfer scheme that is the subject of this Report.
Solvency II
Revised capital adequacy regime for the European insurance industry
covering both capital requirements and risk management standards
applicable from the 1 January 2016.
Transferring
Policies
The policies currently reinsured from ZAL to RLP and due to be transferred
to RLP under this Scheme.
With-Profits
Actuary, or WPA
The actuary appointed to perform the With-Profits Actuary function and
the duties set out in the Actuaries Section of the PRA Rulebook and SUP
4.3.16A of the FCA Handbook.
Company Abbreviations Referred to in this Report
ESLAC
Eagle Star Life Assurance Company Limited
RLP
Rothesay Life plc
ZAL
Zurich Assurance Ltd
ZIG
Zurich Insurance Group Ltd
Zurich Group
Collectively the companies and subsidiaries of the ultimate holding
company ZIG
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