Direct Line Insurance Group (DIISY) Risk Analysis

To manage credit risk, we set credit limits for each material counterparty and actively monitor credit exposures. In addition, we only purchase reinsurance from reinsurers with at least A- rating and, for liabilities with a relatively long period of time to settlement, this rating is at least A+. Finally, we also have well-defined criteria to determine which customers are offered and granted credit.

Strategic risk is influenced by internal and external developments such as the Covid-19 pandemic, the UK's new trading relationships and FCA’s Pricing Practice Review. In addition, the adoption of agile ways of working allows the business to more quickly identify and react to risks to the implementation of the Group’s strategic goals. To manage our risks, we have taken the following steps: – we agree, monitor and manage performance against the Boardapproved plan and targets; the Board leads an annual strategy and five-year planning process which considers our performance, competitor positioning and strategic opportunities; – as part of the timetable for the Strategic Plan, the Risk Function carries out a risk review of the Plan which is documented in the Group’s Own Risk and Solvency Assessment and presented to the Board; and – we identify and manage emerging risks using established governance processes and forums.

We maintain a constructive and open relationship with our regulators and have a strong culture of delivering on our commitments to our customers. Pricing practices within the general insurance market has remained a key area of focus for the FCA and for the Group. We have devoted a lot of attention and resource with the intention of enabling the Group to meet the FCA’s Pricing Practices Review requirements within the challenging deadlines prescribed by the FCA, and to be in a position to deliver the intended customer outcomes. Focus has also been given to the ability of the Group to trade effectively post the implementation of the FCA’s Pricing Practices Review requirements. For product lines which sit outside of the FCA’s pricing remedies, the Group continues to operate to a set of conduct pricing principles which enable the fair pricing of business across our book and the provision of fair outcomes for our customers. We have maintained regular and open dialogue with both the FCA and PRA on our responses to climate change and the Covid-19 pandemic. We have also engaged with HM Treasury and participated in the PRA’s Quantitative Impact Study on the UK review of the Solvency II framework. Finally, we have put in place a strong governance and accountability framework as part of the Senior Managers and Certification Regime, and carry out an annual declaration process to ensure the ongoing fitness and propriety of the Group’s Senior Managers and Certified Functions..

The insurance industry is gathering and processing greater volumes of data than ever before. The adoption of artificial intelligence and machine learning introduces the potential to create unfair outcomes if data is not processed responsibly. The use of technology to automate decisions could magnify the impact of problems caused by inaccurate or biased data. The Group has developed a Data Ethics Framework which introduces a set of principles to drive the ethical use of data and a new governance model to ensure appropriate visibility and escalation of ethical concerns. Furthermore, the Group has an established Data Ethics Steering Group which gathers internal and external views on data ethics, reviews business propositions on data use and helps to drive the embedding of the data ethics framework across the Group.

Operational risks can arise within all areas of the business and can become manifest as a result of inadequate or failed internal processes or systems, human error or because of external events. Our approach is to proactively manage our operational risks to mitigate potential customer harm, regulatory or legal censure, and financial or reputational impacts. The stable trend in operational risk is driven mainly by the progress demonstrated by the business in delivering key strategic technology improvements that strengthen resilience and have enabled the Group’s transition to a more flexible operating model, utilising both virtual and office-based working solutions. We have in place robust operational processes and systems, including prevention and detection measures, that seek to ensure the Group is well placed to absorb and/or adapt to internal or external events that have the potential to impact our customer operations and the wider business more generally. With large numbers of staff working mainly from home, significant progress has been made to improve the performance and ability of our IT systems, focusing on delivering system stability and optimising capability. Streamlining change implementation and ensuring we drive effective prioritisation in our investment decisions has remained a key area of management focus, to support the Group in achieving its strategic aims, whilst also actively strengthening its controls to further mitigate impacts from potential risk events. Finally, the Cyber threat landscape has continued to remain volatile globally, including the increase in ransomware attacks, and we have introduced new controls, strengthened existing ones, and enhanced our suite of automated monitoring and reporting, to enable us to respond to malicious and unintended threats from both internal and external entities.

Key drivers of the outlook for insurance risk across our strategic plan include reserve, underwriting, distribution, pricing and reinsurance risks. Issues relating to Covid-19, the Pricing Practices Review and claims inflation risk have been a key area of focus for the Group in 2021 and the main driver of the increasing trend in insurance risk. Claims trends have been significantly impacted by Covid-19, leading to uncertainty in claims reserving and pricing. In addition, in 2022 and beyond there is a risk of higher than expected claims inflation driven by customer behaviour, a rebound in global growth and supply chain disruption from the UK's new trading relationships. Uncertainty following the implementation of the FCA Pricing Practices Regulations will continue to have financial impacts on the market in 2022. We have used scenario testing to understand the potential financial impacts of these risks and continue to monitor these risks closely. Finally, climate change presents a risk of more frequent extreme events and key risk indicators are being continually enhanced to monitor related risks across Home and Motor.