Internal Control

The management of exposure to risk is fundamental to the Group’s operations which mainly involve the acceptance of investment and underwriting risks. The Group’s system of internal control, for which the Board has overall responsibility, is an essential and integral part of the risk management process and the main features are as follows:

Investment
The respective responsibilities of the Board and business unit management for investment strategy, compliance and performance are clearly defined. There are also detailed rules governing investment dealing and settlement, including the use of derivatives, incorporating details of procedures and authority levels.

Underwriting
The Group has controls over underwriting exposures covering both risks accepted and reinsured. Exposure limits are reviewed annually.

Financial Control Procedures
Detailed controls, applicable across the Group, are laid down in financial and actuarial procedures manuals.

Performance Planning and Monitoring
There is a comprehensive planning and performance monitoring system based on key performance indicators for each business area. The Group is currently introducing value-based management in its operations, starting with the UK businesses.

Financial Position
The Board receives regular reports from the group finance director on financial matters and receives annual reports from the group chief actuary on the financial condition of the Group’s principal long-term insurance businesses.

Compliance
The head of the group compliance function monitors adherence to regulatory requirements and reports directly to the Audit Committee on both UK and non-UK compliance matters.

Audit
The head of the group internal audit function has direct access to the chairman of the Audit Committee and any significant matters arising from internal audit work are reported to the Committee. The Audit Committee receives twice-yearly reports from the external auditors on internal financial control and reviews action taken in response to any weaknesses which are identified.

Effectiveness of Internal Financial Control
Following the concession granted by the London Stock Exchange on 10 December 1998 in relation to Code provision D.2.1 on Internal Controls, the Board has reviewed the effectiveness of the system of internal financial control in operation during the year through the monitoring processes set out above and pursuant to the guidance that was issued by the Rutteman Working Group in December 1994.

In addition, during the year each business area, including group head office, prepared an assessment of its risk exposures and internal financial control framework. This work was reviewed by the external auditors and a summary of the findings was considered by the Audit Committee. Such processes can provide only reasonable and not absolute assurance against material errors, misstatements or loss and, in that context, the review did not reveal any significant matters which, in the opinion of the Board, indicated that the system of internal financial control was inappropriate or unsatisfactory.