Legal & General Group Plc L&G FY 2014 Results -9-
04 März 2015 - 8:01AM
UK Regulatory
The writing of long-term are, however, exposed to factors
insurance business requires such as dramatic advances
the setting of assumptions in medical science beyond
for long-term trends in factors those anticipated leading
such as mortality, lapse to unexpected changes in life
rates and persistency, valuation expectancy. In protection
interest rates, expenses business we remain inherently
and credit defaults. Actual exposed to rates of mortality
experience may result in diverging from assumptions
the need to recalibrate these and to loss from events that
assumptions reducing profitability. cause widespread mortality/morbidity
Forced changes in reserves or significant policy lapse
can also be required because rates. As illustrated by the
of regulatory or legislative implementation of the EU gender
intervention in the way that neutral pricing legislation,
products are priced, reducing there is also potential for
profitability and future legislative intervention in
earnings. the pricing of insurance products
irrespective of risk factors,
such as age or health.
Investment market performance
or conditions in the broader We undertake significant analysis
economy may adversely impact of longevity and mortality
our earnings and profitability. risks to ensure an appropriate
The performance and liquidity premium is charged for the
of investment markets, interest risks we take on and that
rate movements and inflation our reserves remain appropriate.
impact the value of investments We remain focused on developing
we hold in shareholders' a comprehensive understanding
funds and those to meet the of annuitant mortality and
obligations from insurance we continue to evolve and
business. Interest rate movement develop our underwriting capabilities.
and inflation can also change We seek to ensure that legislators
the value of our obligations. understand the benefits to
We use a range of techniques consumers of pricing insurance
to manage mismatches between products based on the risk
assets and liabilities. However, factors that each policy presents.
loss can still arise from
adverse markets. In addition,
significant falls in investment
values can reduce fee income
to our investment management
business, while broader economic
conditions can impact the
purchase and the retention
of retail financial services
products, impacting profitability.
In dealing with issuers of Whilst global investment markets
debt and other types of counterparty have returned to pre-financial
the Group is exposed to the crisis levels, in the current
risk of financial loss. environment there is limited
A systematic default event resilience in financial markets
within the corporate sector, for shocks; with potential
or a major sovereign debt for significant falls in asset
event, could result in dislocation values should markets reassess
of bond markets, significantly returns. Factors that may
widening credit spreads, result in shocks include a
and may result in default deterioration in geo-political
of even strongly rated issuers stability for example as a
of debt, exposing us to financial consequence of tensions in
loss. `We are also exposed Eastern Europe and the Middle
to banking, money market East; an abrupt change in
and reinsurance counterparties, the monetary policies of the
and settlement, custody and leading economies; or a further
other bespoke business services, crisis in the Euro zone. Financial
a failure of which could markets may also reappraise
expose us to both financial asset valuations as a result
loss and operational disruption of changes in the outlook
of our business processes. for the global economy including
for example, a projected period
of low or negative growth
amongst leading economies
or a period of prolonged deflation,
and in response to outcomes
from elections in the UK,
Europe and the US.
We model our business plans
across a broad range of economic
scenarios and take account
of alternative economic outlooks
within our overall business
strategy. As part of our business
plans we have sought to ensure
focus upon those market segments
that we expect to be resilient
in projected conditions.
Changes in regulation or
legislation may have a detrimental Recent years have seen a narrowing
effect on our strategy. Legislation of credit spreads reflecting
and government fiscal policy market confidence in the issuers
influence our product design, of investment grade bonds,
the period of retention of and at Legal & General we
products and our required have continued to experience
reserves for future liabilities. low levels of default on our
Regulation defines the overall corporate bond portfolio.
framework for the design, There remains, however, a
marketing and distribution range of factors that could
of our products; and the trigger defaults by the issuers
prudential capital that we of debt, leading to reduced
hold. Significant changes profitability or financial
in legislation or regulation loss. These include a Sovereign
may reduce our future revenues debt event or a banking crisis
and profitability or require developing, for example in
us to hold more capital. emerging markets. An economic
The prominence of the risk shock or significant change
increases where change is in the current economic outlook
implemented without prior may also increase potential
engagement with the sector. for a supplier of business
The nature of long term business services being unable to meet
can also result in some changes their obligations to us.
in regulation, and the re-interpretation
of regulation over time, We actively manage our exposure
having a retrospective effect to default risks, setting
on our in force books of counterparty selection criteria
business, impacting the value and exposure limits and hold
of embedded future profits. reserves against our assessment
of counterparty debt defaults.
We continue to diversify the
asset classes backing our
annuities business, to include
the use of property lending,
sale and leaseback and other
forms of direct investment.
The regulatory landscape continues
As a UK based Group, our to evolve. The Solvency II
earnings are influenced by capital regime is to be implemented
the performance and perception by the PRA on 1 January 2016;
of the UK financial services the FCA is continuing to develop
sector as a whole. its approach to consumer regulation;
The financial crisis, subsequent and we continue to see new
investment performance and regulation emerging from the
low interest rate environment, EU. More broadly, as illustrated
together with regulatory in the 2014 budget announcement,
actions in the sector, may the sectors in which we operate
impact consumer attitudes remain inherently exposed
to long-term savings and to sudden changes in legislation
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