Managing risk at the UK’s largest Friendly Society

1. Managing risk at the UK’slargest Friendly Society Alistair Smith May 2006

2. Personal background • Head of Risk at Liverpool Victoria since November 2004 • Responsible for the risk management framework, FSA change and the MRLO • Previously managed the project to implement an enterprise risk framework at Lloyds TSB and was responsible for the ICOB and TCF programmes for retail banking

3. What is a friendly society? • A mutual association for insurance like purposes, and often, especially in the past, serving ceremonial and friendship purposes also. It is a benefit society composed of a body of people who join together for a common financial or social purpose.

4. Historical origins • 1793 first Friendly Society Act enacted by parliament, which declared it legal to form: “….societies of good fellowship, for security against the risk of sickness, age, infirmity and death of the breadwinner”. • Out of these societies sprang the “collecting societies”, which employed collectors to bring in subscriptions and bring in new members”.

5. Origins of Liverpool Victoria • Founded by business men in 1843 as the Liverpool Independent Legal Victoria Burial Society • Response to widespread unemployment and a 50% drop in wages for unskilled workers in Liverpool from 1835 - 1842, which meant that the poor could not bury their dead

6. Recent history • 1995 bought Frizzell Group • 1997 acquired Landmark Insurance • 2000 acquired Permanent Insurance • 2001 acquired Bishopscourt Financial Holdings • 2001 acquired Royal National Pension Fund for Nurses

7. Liverpool Victoria today • 1m members & 1.5m customers • Life business • GI business with 3/4 million motor & 1/2 million household policies • Bank • Asset management business with £8bn under investment • Affinity business

8. Links to our heritage • Remain committed to mutuality • 24/7 member support line • Member care and support fund • All members have an equal vote • National and regional member panels • Product discounts for members

9. Governance Policy and Risk Oversight, Support and Independent Assurance Strategy, Performance, Policy Setting and Risk Management LVFS Board Nominations and Remuneration committee Life Supervisory Board Subsidiary Boards Group Audit & Compliance Committee Group Chief Executive Group Directors Group Executive Committee Group Director Corporate Governance Head of Audit Group Capital Management Committee Group Risk Committee Development Review Committee

10. Our Control Principles • Senior managers acts as stewards of members’ assets. The stewardship role has 5 main principles: • Centralised model of Board & Executive control • Single point accountability • Accountability delegated to the senior manager closest to the activity • Risk management is an integral part of this • Framework of committees to oversee key risks

11. Apportionment of Responsibilities • Group Accountabilities Chart apportions responsibility amongst the Group Executive • Each member of the Group Executive has their own Accountabilities Chart to apportion responsibility for an activity to a senior manager • Individual accountabilities are detailed in Role Profiles

12. Culture • Aspire to be the most trusted financial services company in the UK • “Do the right thing” by customers • Be risk aware not risk averse • Be compliant with regulation and legislation

13. Why do we manage risk? • To identify events that may adversely affect the achievement of our strategy, so that we can take action to mitigate them • To ensure that the risks we are taking are appropriate in relation to the potential rewards • To ensure that if adverse events do occur we can respond quickly and limit damage • To limit the amount of capital we need to set aside to protect members against losses

14. Risk classification • Strategic risk - political, economic, social, technological, competitive • Market risk - equity values, interest rates, property • Insurance risk - rise in claims amount/frequency • Operational risk - people, processes, systems • Credit risk - default on bank lending, reinsurance • Liquidity risk - ability to meet payments on time • Group risk - risk from being part of a Group

15. Risk Appetite • Overall risk appetite has been agreed by the Board in terms of regulatory capital required to remain solvent at a 99.5% confidence level • Risk limits also set for individual mapped risks

16. Embedding Risk Aware Culture • Induction training • Management training • Internal communications • Performance management objectives • Incentives which reward compliant behaviour and penalise non-compliance • Treating Customers Fairly programme

17. Treating Customers Fairly • CEO sponsors the programme and I manage it • Asked senior managers from across the business to decide how customers should be treated to achieve our aspiration to be most trusted • Facilitated the process and fed it external thinking

18. Treating Customers Fairly • Business functions considered were: • product development • financial promotions • sales • after sales service • claims • complaint handling • management of with profits fund

19. Treating Customers Fairly • Undertook gap analysis between current practices and desired position • Developed action plans to close the gap • Report progress to Group Risk Committee monthly and FSA bi-monthly • Embedding in processes

20. The risk management process Identify (Risk Mapping) (MI, Risk committees, Audit) Monitor Assess (Impact & probability) (Policies, management action) Control Respond (Avoid, Reduce, Share, Accept)

21. Identifying risk • Risk mapping • Key risk indicators • Scenario planning • Stress testing • Use of IT systems • Loss event tracking

22. Assessing Risk • Risk is assessed in terms of impact and likelihood • Qualitative risk assessment is generally used for assessment of operational risk • Quantitative approaches are the norm for financial risks e.g. credit scoring for credit risk and stochastic and deterministic modelling for financial risks.

23. Responding to Risk • Avoidance • Reduction • Sharing • Acceptance

24. Controlling Risk • Policies and procedures • Management action • Physical controls • IT controls

25. Monitoring Risk • Risk Indicators • Management review • Oversight committees • Internal Audit • External auditors • Regulatory authorities

26. Risk oversight Committees • Risk Committees oversee management of market, insurance, liquidity, credit and operational risk, ensuring it is effective and in accordance with policy • Executive Committees oversee the management of strategic risk.

27. Regulation • Supervised by the FSA through its major retail groups division • Close and continuous relationship • Full Arrow visit every 24 months • Themed reviews in the interim

28. Questions?