Tesco 2011 Annual Report Download - page 58

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54
—
TESCO PLC Annual Report and Financial Statements 2011
BUSINESS REVIEW
Principal risks and uncertainties
Principal risks Key controls and mitigating factors
TESCO BANK/FINANCIAL SERVICES RISKS CONTINUED
Insurance risk
The Bank is exposed to insurance risks directly through its historic
distribution agreement with Royal Bank of Scotland Insurance (RBSI)
and indirectly through its ownership of 49.9% of Tesco Underwriting
Limited (TU), an authorised insurance company
The key insurance risks within TU relate to underwriting risk and
specifically the potential for a major weather event to generate
significant Home insurance claims or, in relation to Motor insurance,
the cost of settling bodily injury claims
The legacy arrangement with RBSI is now in run-off and the primary
risk that the Bank remains exposed to is reserving risk – the risk that
reserves set aside by RBSI will be insufficient to cover the ultimate cost
of insurance claims arising. This is particularly relevant to Motor
insurance claims where the ultimate cost of large bodily injury claims is
uncertain and the time taken to settle such claims can vary significantly
depending on the severity of the injury
Since October 2010 Pet, Travel and Breakdown insurance have all been
distributed by the Bank on a ‘white label’ basis. The Bank does not carry
the insurance risks associated with these products
• Independent Tesco Bank Insurance Risk team, reporting directly to
Chief Risk Officer, that operates as the primary contact across all risk
disciplines for the insurance business
• Underwriting risks actively managed within TU with close monitoring
of performance metrics. Independent oversight conducted by
the Bank
• Performance against insurance risk appetite is monitored closely
at a senior level and reported to Tesco Bank’s Risk Management
Committee, Board Risk Committee and Board
• Reinsurance programme to limit the Bank’s exposure above
predetermined levels
• The impact of specific Motor and Home insurance events is considered
as part of the Bank’s stress-testing programme and ICAAP
Regulatory environment
Regulatory risk is the risk of failure to meet the Bank’s obligations under
the Financial Services and Markets Act (FSMA), the Consumer Credit Act
and the Data Protection Act and to meet the expectations of regulators.
The Bank is subject to significant regulatory oversight, including
supervision by the FSA which has substantial powers of intervention
There is currently a significant amount of regulatory change including
the continued evolution of capital and liquidity requirements. The
regulatory landscape is changing with current FSA responsibilities due
to migrate to the new Prudential Regulatory Authority and the Financial
Conduct Authority. Detailed proposals for the new regulatory authorities
are due to be published later this year
There remains continued regulatory focus in relation to ‘Conduct Risk’
or ‘Treating Customers Fairly’ (TCF). Specifically there has been
continued focus on complaints relating to the sale of Payment
Protection Insurance (PPI)
• Independent Regulatory Risk team, reporting directly to Chief Risk
Officer, providing oversight and support to the business to ensure
that regulatory risks are identified and managed appropriately
• The Bank has minimal appetite for regulatory risks and it maintains
a control framework, including a suite of risk policies, to comply with
regulatory requirements
• Regular reporting of regulatory risks to Tesco Bank’s Risk
Management Committee, Board Risk Committee and Board as well
as to the FSA
• Significant senior management time and focus allocated to
management of regulatory risks and the ongoing regulatory
relationship
• The Bank has established a ‘TCF Board’ which is responsible for
monitoring and challenging the customer-related aspects of the
Tesco Bank business and, where appropriate, recommending
further action
• PPI complaints handling brought in-house to improve the customer
experience and to ensure that the outcomes are aligned with the
policy introduced by the Bank
• The Bank has recognised a provision for potential customer redress,
including compensation that may be required in relation to PPI
complaints