Centrica : British Gas Insurance Limited SFCR 2018

SOLVENCY AND FINANCIAL

CONDITION REPORT

BRITISH GAS INSURANCE LIMITED

Year Ended 31 December 2018

British Gas Insurance Limited

Solvency and Financial Condition Report 2018

CONTENTS
SUMMARY .......................................................................................................................................................			2
DIRECTORS' REPORT ........................................................................................................................................			6
INDEPENDENT AUDITOR'S REPORT..................................................................................................................			7
A	BUSINESS AND PERFORMANCE ..............................................................................................................		11
	A.1	BUSINESS ..............................................................................................................................................................	11
	A.2	UNDERWRITING PERFORMANCE..........................................................................................................................	12
	A.3	INVESTMENT PERFORMANCE...............................................................................................................................	13
	A.4	PERFORMANCE OF OTHER ACTIVITIES .................................................................................................................	13
	A.5	ANY OTHER INFORMATION ..................................................................................................................................	13
B	SYSTEM OF GOVERNANCE......................................................................................................................		14
	B.1	GENERAL INFORMATION ON THE SYSTEM OF GOVERNANCE..............................................................................	14
	B.2	FIT AND PROPER REQUIREMENTS ........................................................................................................................	16
	B.3	RISK MANAGEMENT SYSTEM INCLUDING THE OWN RISK AND SOLVENCY ASSESSMENT ...................................	16
	B.4	INTERNAL CONTROL SYSTEM ...............................................................................................................................	18
	B.5	INTERNAL AUDIT FUNCTION.................................................................................................................................	19
	B.6	ACTUARIAL FUNCTION .........................................................................................................................................	19
	B.7	OUTSOURCING .....................................................................................................................................................	20
	B.8	ANY OTHER INFORMATION ..................................................................................................................................	20
C	RISK PROFILE..........................................................................................................................................		22
	C.1	UNDERWRITING RISK............................................................................................................................................	22
	C.2	MARKET RISK ........................................................................................................................................................	23
	C.3	CREDIT RISK ..........................................................................................................................................................	24
	C.4	LIQUIDITY RISK......................................................................................................................................................	24
	C.5	OPERATIONAL RISK...............................................................................................................................................	25
	C.6	OTHER MATERIAL RISKS .......................................................................................................................................	25
	C.7	ANY OTHER INFORMATION ..................................................................................................................................	25
D VALUATION FOR SOLVENCY PURPOSES..................................................................................................			27
	D.1	ASSETS ..................................................................................................................................................................	27
	D.2	TECHNICAL PROVISIONS.......................................................................................................................................	28
	D.3	OTHER LIABILITIES ................................................................................................................................................	29
	D.4	ALTERNATIVE METHODS FOR VALUATION...........................................................................................................	30
	D.5	ANY OTHER INFORMATION ..................................................................................................................................	30
E	CAPITAL MANAGEMENT.........................................................................................................................		31
	E.1	OWN FUNDS.........................................................................................................................................................	31
	E.2	SOLVENCY CAPITAL REQUIREMENT AND MINIMUM CAPITAL REQUIREMENT ....................................................	32
	E.3	USE OF THE DURATION-BASED EQUITY RISK SUB-MODULE IN THE CALCULATION OF THE SCR ..........................	36
	E.4	DIFFERENCES BETWEEN THE STANDARD FORMULA AND PARTIAL INTERNAL MODEL........................................	36
	E.5	NON-COMPLIANCE WITH THE MCR AND NON-COMPLIANCE WITH THE SCR ......................................................	37
	E.6	ANY OTHER INFORMATION ..................................................................................................................................	37
F	GLOSSARY ..............................................................................................................................................		38
G APPENDIX: PUBLIC QUANTITATIVE REPORTING TEMPLATES ..................................................................			39

BGIL SFCR 2018

Summary

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British Gas Insurance Limited

Solvency and Financial Condition Report 2018

SUMMARY

(Unaudited)

British Gas Insurance Limited underwrites general insurance risks in the UK, within the assistance1class of business. The HomeCare range covers the breakdown of domestic boilers and central heating systems, as well as options to cover plumbing & drains and home electrics. We also offer appliance cover.

We are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

All business is introduced to British Gas Insurance Limited by British Gas Services Limited, an insurance intermediary directly authorised and regulated by the Financial Conduct Authority and part of the Centrica Group.

BUSINESS AND PERFORMANCE

There has been a reduction in customer numbers over the year, reflecting a competitive marketplace. This reduction, along with periods of colder weather when there is increased demand on central heating systems and more boiler breakdowns, has contributed to lower underwriting profit in 2018.

Underwriting profit

2017		£79.7m

2018		£72.8m

Section A has more information on our business and performance.

SYSTEM OF GOVERNANCE

Governance is provided through the Board, its sub-committees and Executive committees.

We have a robust risk management system in place to identify, measure, monitor, manage and report on the risks to our business strategy and delivery of our objectives. We operate a 'three lines of defence' governance model to ensure appropriate segregation of risk ownership, oversight and assurance responsibilities.

•First line: business management is accountable for implementing and using the risk management framework.

•Second line: Risk and Compliance functions are accountable for providing an independent and forward- looking view of the risk profile to the Board, as well as providing the necessary oversight and challenge to the first line.

•Third line: Internal Audit is accountable for providing independent assurance on the adequacy and effectiveness of risk management and control.

Section B has more information on our system of governance.

1Customers can also arrange home insurance through British Gas but we do not underwrite it and so this report does not cover home insurance.

BGIL SFCR 2018

Summary

2

British Gas Insurance Limited

Solvency and Financial Condition Report 2018

RISK PROFILE

Our risk profile is very similar to last year. Underwriting risk and operational risk remain key risks. Cold weather risk is our biggest underwriting risk and how British Gas Services Limited deal with customers drives our operational risk.

Compared to many other insurers, our operational risks represent a bigger proportion of our total risk profile. This is a feature of our comparatively low underwriting risk due to the quick settlement of claims at a unit cost per claim.

2018	2017
Market risk, 3%	Market risk, 1%
Underwriting risk, 42%	Underwriting risk, 45%

Operational risk , 48% Counterparty default risk , 7%	Operational risk , 46%	Counterparty default risk , 7%

The risks associated with Brexit continue to be monitored. As a UK-only insurer, we are not affected by passporting arrangements, or exposed to currency risk, but we are exposed to general UK economic conditions. In addition, the ability of British Gas Services Limited to deliver services is potentially impacted, although contingency measures are in place.

VALUATION FOR SOLVENCY PURPOSES

Our own funds (excess of assets over liabilities) have decreased but that is mostly due to a decrease in assets as a result of higher dividends being paid in 2018.

Balance sheet

Assets, £204.5m

2017		Liabilities, £38.1m	Own funds, £166.4m

Assets, £171.6m

2018		Liabilities, £20.5m	Own funds, £151.1m

Assets		Liabilities

Further information on assets and liabilities is provided in section D.

BGIL SFCR 2018

Summary

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British Gas Insurance Limited

Solvency and Financial Condition Report 2018

CAPITAL MANAGEMENT

In 2018 the Prudential Regulation Authority approved the use of our own model to calculate operational risk and counterparty default risk, in addition to underwriting risk. Last year we calculated operational risk and counterparty default risk using a formulaic approach2but this did not adequately reflect our risk profile. Using our own model has decreased the amount of capital we are required to hold.

Our aim is to maintain sufficient capital to meet claims as they fall due, protect the interests of customers and meet operating needs and regulatory requirements. We hold enough funds to cover our capital requirement plus a margin. Our policy is to pay excess funds as a dividend (subject to ongoing business performance being within risk appetite, and any other relevant factors) so our capital coverage is similar to last year.

We pay dividends to our parent company, GB Gas Holdings. We paid a 2017 dividend of £56m in May 2018. We also paid a dividend of £20m in December 2018 and we expect to pay a further dividend for 2018 of £47m in May 2019, reducing our own funds to £104.1m which is £30.2m above our Solvency Capital Requirement (SCR).

Capital Coverage

£110.4m

2017							£79.6m
			Capital coverage= 139%, Solvency II surplus =£30.8m
								£104.1m
2018
						£73.9m
			Capital coverage = 141%, Solvency II surplus =£30.2m
			Eligible own funds		Solvency Capital Requirement

The minimum amount of capital that we must hold (our MCR) is £33.3m.

We have maintained sufficient own funds to meet both our SCR and our MCR throughout the reporting period.

Section E contains further information on capital management.

2Solvency II Standard Formula plus aPRA-approved capital add-on. Further detail is in section E.

BGIL SFCR 2018

Summary

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