SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March, 2021
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
1 Angel Court, London,
England, EC2R 7AG
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
Risk Factors
A number of risk factors may affect Prudential's business,
financial condition, results of operations and/or prospects and,
accordingly, the trading price of its shares. The risk factors
mentioned below should not be regarded as a complete and
comprehensive statement of all potential risks and uncertainties.
The information given is as of the date of this document, and any
forward-looking statements are made subject to the reservations
specified under 'Forward-looking statements'.
Prudential's approaches to managing risks are explained in the
section of this document headed 'Group Chief Risk and Compliance
Officer's report on the risks facing our business and how these are
managed'.
1. RISKS RELATING TO PRUDENTIAL'S FINANCIAL
SITUATION
1.1 The Covid-19 pandemic has had a significant impact on
financial market volatility and global economic activity, increased
operational disruption risks to the Group and has adversely
impacted Prudential's sales in affected markets and its financial
condition, results of operations and prospects. The full extent of
the longer-term impacts from the pandemic remains
uncertain
The Covid-19 pandemic has significantly increased
the volatility of equity markets, interest rates and credit
spreads, reduced market liquidity and reduced global economic
activity. The potential adverse impacts to the Group of these
effects are detailed in the Financial Market and Economic
Conditions risk factor
detailed below. However, the full extent of the impact of the
pandemic on financial markets and economic growth remains highly
uncertain and unpredictable and will be influenced by the actions
of governments, policymakers and the public. This includes the
duration and effectiveness of mitigating measures against the
current and future strains of the coronavirus, including a
continued reliance on restrictions of movement and the deployment
of vaccination programmes (which may occur over a prolonged period
of time), the effectiveness and timing of which remains uncertain
across markets. Where these impacts are prolonged, this may affect
the solvency position of Prudential's subsidiaries and prevent or
limit their ability to make remittances, adversely impacting the
financial condition and prospects of the Group.
The
immediate regulatory and supervisory responses to the Covid-19
pandemic have been broad and have included increased scrutiny of
the operational resilience, liquidity and capital strength
(including the impact of making dividend payments) of financial
services companies. Various governments have effected, or may
effect, the postponement of elections and other constitutional or
legislative processes in response to the pandemic, and this may
result in an increase in constitutional and political uncertainty
in the markets in which the Group operates. Governments are either
starting or planning the roll-out of Covid-19 vaccination
programmes, and accessibility to vaccine supplies has the potential
to contribute to an increase in geopolitical tensions. The longer
term political, regulatory and supervisory developments resulting
from the Covid-19 pandemic remain highly uncertain. These may
include changes to government fiscal policies, laws or regulations
aimed at increasing financial stability and/or measures on
businesses or specific industries to contribute to, lessen or
otherwise support, the financial cost to governments in addressing
the pandemic. This may include requirements on private insurance
companies and healthcare providers to cover the costs associated
with the treatment of Covid-19 beyond contractual or policy
terms.
The
Covid-19 pandemic, and measures to contain it, have slowed economic
and social activity in the Group's geographical markets. While
these conditions persist, the level of sales activity in affected
markets has been, and will continue to be, adversely impacted
through a reduction in travel and agency and bancassurance
activity, which may be prolonged in markets which continue to rely
on containment measures based on restrictions of movement rather
than vaccine deployment. The impact to economic activity and
employment levels may result in an elevated incidence of claims,
lapses, or surrenders of policies, and some policyholders may
choose to defer or stop paying insurance premiums or reduce
deposits into retirement plans. The pandemic may also
indirectly result in elevated claims and policy lapses or
surrenders, and with some delay in time before being felt by the
Group, due to factors such as policyholders deferring medical
treatment during the pandemic, or policyholders lapsing or
surrendering their policies on the expiry of grace periods for
premium payments provided by the Group's businesses. Extended
restrictions on movement in particular may adversely impact product
persistency in the Group's Asia business. While these impacts to
the Group have not been material to date, the full extent of the
impact of the Covid-19 pandemic is currently highly uncertain and
the Group's claims experience to date and its current insurance
assumptions cannot be taken as an indicator of future potential
experience from the Covid-19 pandemic which may deteriorate
significantly and have a material adverse effect on Prudential's
business, financial condition, results of operations and
prospects.
Disruption
to Prudential's operations may result where its employees, or those
of its service partners and counterparties, contract the
coronavirus or are affected by restrictions on movement; where
office closures and other measures impacting working practices are
effected, such as the imposition of remote working arrangements;
and where quarantine requirements and isolation measures under
local laws apply, and as a result of social distancing and/or other
psychosocial impacts. While such measures are in place, there may
be an increase in attempts to compromise IT systems through
phishing and social engineering tactics.
In
some markets Prudential has implemented changes to its sales and
distribution processes. These include virtual face-to-face sales of
its products and the online recruitment, training and, where
possible, licensing of agents. Such changes may increase or
introduce new operational and regulatory risks, in particular those
focused on customer outcomes and conduct. A failure to implement
appropriate governance and management of these new or incremental
risks may adversely impact Prudential's reputation and brand and
the results of its operations. In markets where the level of sales
under these new processes is material or where such processes
become permanent distribution channels, the commercial value of the
Group's existing sale and distribution arrangements, such as
bancassurance arrangements, may be adversely impacted.
1.2 Prudential's businesses are inherently subject to market
fluctuations and general economic conditions, each of which may
adversely affect the Group's business, financial condition, results
of operations and prospects
Uncertainty,
fluctuations or negative trends in international economic and
investment climates could have a material adverse effect on
Prudential's business and profitability. Prudential operates in a
macroeconomic and global financial market environment that presents
significant uncertainties and potential challenges. For example,
during 2020 interest rates in the United States ('US') and some
Asian countries in which Prudential operates have decreased to
historic lows driven by the responses of central banks to mitigate
the impact of the Covid-19 pandemic. The transition to a lower
carbon economy may also impact long-term asset
valuations.
Global
financial markets are subject to uncertainty and volatility created
by a variety of factors. These factors include slowdowns or
reversals in world economic growth (particularly where this is
abrupt, as has been the case with the impact of the Covid-19
pandemic), fluctuations in global energy prices, changes in
monetary policy in China, the US and other jurisdictions together
with their impact on the valuation of all asset classes and effect
on interest rates and inflation expectations, and concerns over
sovereign debt. Other factors include the increased level of
(geo)political risk and policy-related uncertainty (including the
broader market impacts resulting from the trade negotiations
between the US and China) and socio-political, climate-driven and
pandemic events. The extent of financial market and economic impact
of these factors may be highly uncertain and unpredictable and
influenced by the actions, including the duration and effectiveness
of mitigating measures of governments, policymakers and the
public.
The
adverse effects of such factors could be felt principally through
the following items:
-
Lower interest rates and reduced investment returns arising on the
Group's portfolios including impairment of debt securities and
loans, which could reduce Prudential's capital and impair its
ability to write significant volumes of new business, increase the
potential adverse impact of product guarantees included in
Jackson's variable annuities and non-unit-linked products with a
savings component in Asia, increase reinvestment risk for some of
the Group's investments from accelerated prepayments and increased
redemptions and/or have a negative impact on its assets under
management and profit.
-
A reduction in the financial strength and flexibility of corporate
entities which may result in a deterioration of the credit rating
profile and valuation of the Group's invested credit portfolio
(which may result in an increase in regulatory capital requirements
for the Group or its businesses), as well as higher credit defaults
and wider credit and liquidity spreads resulting in realised and
unrealised credit losses. Similarly, mortgages and mortgage-backed
securities in the Group's investment portfolio are subject to
default risk and may be adversely impacted by delays or failures of
borrowers to make payments of principal and interest when
due.
-
Failure of counterparties who have transactions with Prudential
(such as banks, reinsurers and counterparties to derivative
transactions) to meet commitments that could give rise to a
negative impact on Prudential's financial position and on the
accessibility or recoverability of amounts due or, for derivative
transactions, adequate collateral not being in place.
Concentrations of counterparty credit risk could exacerbate the
impact of these events where they materialise.
-
Estimates of the value of financial instruments becoming more
difficult because in certain illiquid or closed markets,
determining the value at which financial instruments can be
realised is highly subjective. Processes to ascertain such values
require substantial elements of judgement, assumptions and
estimates (which may change over time). Where the Group is required
to sell its investments within a defined timeframe, such market
conditions may result in the sale of these investments at below
expected or recorded prices.
-
The Group holds certain investments that may lack liquidity, such
as privately placed fixed maturity securities, mortgage loans,
complex structured securities and alternative investments. If these
investments were required to be liquidated on short notice, the
Group may experience difficulty in doing so and may be forced to
sell them at a lower price than it otherwise would have been able
to realise.
-
A reduction in revenue from the Group's products where fee income
is linked to account values or the market value of the funds under
management. In particular, equity price falls impact the amount of
revenue derived from fees from the unit-linked products in the
Group's Asia business and from annuity contracts at Jackson, where
fees are charged on account and asset values.
-
Increased illiquidity, which includes the risk that expected cash
inflows from investments and operations will not be adequate to
meet the Group's anticipated short-term and long-term policyholder
benefits and expense payment obligations. Increased illiquidity
also adds to uncertainty over the accessibility of financial
resources which in extreme conditions can impact the functioning of
markets and may reduce capital resources as valuations decline.
This could occur where external capital is unavailable at
sustainable cost, increased liquid assets are required to be held
as collateral under derivative transactions or redemption
restrictions are placed on Prudential's investments in illiquid
funds. In addition, significant redemption requests could also be
made on Prudential's issued funds and while this may not have a
direct impact on the Group's liquidity, it could result in
reputational damage to Prudential. The potential impact of
increased illiquidity is more uncertain than for other risks such
as interest rate or credit risk.
In
general, upheavals in the financial markets may affect general
levels of economic activity, employment and customer behaviour. As
a result, insurers may experience an elevated incidence of claims,
lapses, or surrenders of policies, and some policyholders may
choose to defer or stop paying insurance premiums or reduce
deposits into retirement plans. The demand for insurance products
may also be adversely affected. In addition, there may be a higher
incidence of counterparty failures. If sustained, this environment
is likely to have a negative impact on the insurance sector over
time and may consequently have a negative impact on Prudential's
business and its balance sheet and profitability. For example, this
could occur if the recoverable value of intangible assets for
bancassurance agreements and deferred acquisition costs are
reduced. New challenges related to market fluctuations and general
economic conditions may continue to emerge.
For
some non-unit-linked products with a savings component, in
particular those written in some of the Group's Asia operations, it
may not be possible to hold assets which will provide cash flows to
match those relating to policyholder liabilities. This is
particularly true in those countries where bond markets are less
developed and in certain markets where regulated premium and claim
values are set with reference to the interest rate environment
prevailing at the time of policy issue. This results in a mismatch
due to the duration and uncertainty of the liability cash flows and
the lack of sufficient assets of a suitable duration. While this
residual asset/liability mismatch risk can be managed, it cannot be
eliminated. Where interest rates in these markets remain lower than
those used to calculate premium and claim values over a sustained
period, this could have a material adverse effect on Prudential's
reported profit and the solvency of its business units. In
addition, part of the profit from the Group's Asia operations is
related to bonuses for policyholders declared on with-profits
products, which are impacted by the difference between actual
investment returns of the with-profits fund (which are broadly
based on historical and current rates of return on equity, real
estate and fixed income securities) and minimum guarantee rates
offered to policyholders. This profit could be lower in particular
in a sustained low interest rate environment.
Jackson
writes a significant amount of variable annuities that offer
capital or income protection guarantees. The value of these
guarantees is affected by market factors (such as interest rates,
equity values, bond spreads and realised volatility) and
policyholder behaviour. Changes in markets, or deviations in
policyholder behaviour experience from assumptions, may result in
the need to hold additional reserves for these products, which may
impact Jackson's liquidity, require it to raise additional capital
and/or adversely impact its net income. Jackson uses a derivative
hedging programme to reduce its exposure to market risks arising on
these guarantees. There may be circumstances where the derivatives
that Jackson enters into to hedge its market risks may not
sufficiently or effectively offset its exposures under the
guarantees, or where its exposures may be over-hedged. This
includes circumstances where:
-
The derivative markets for the instruments which most appropriately
reflect the equity funds in which policyholders have invested may
not be of sufficient size or liquidity to effectively hedge these
risks;
-
Operational errors occur in the execution of Jackson's hedging
strategy; or
-
Actual experience materially deviates from the assumptions used in
the models which inform Jackson's hedging strategy. These
assumptions include, amongst others, mortality, lapse, surrender
and withdrawal rates and amounts of withdrawals, election rates,
fund performance, equity market returns and volatility, interest
rate levels and correlation among various market
movements.
If
the results from Jackson's hedging programs do not correlate with
the economic effect of changes in benefit exposures to customers,
it could experience economic losses and increased volatility in its
earnings which could adversely impact the Group's business,
financial condition and results of operations. The cost of any
guarantees that remain unhedged will also affect Jackson's
results.
Periods
of significant and sustained downturns in securities markets,
increased equity volatility, reduced interest rates, or deviations
in expected policyholder behaviour could also increase the cost of
hedging beyond that anticipated in the pricing of the products
being hedged and could produce losses not addressed by the risk
management techniques employed.
In
addition, Jackson hedges the guarantees on its variable annuity
book on an economic basis (with consideration of the local
regulatory position) and, thus, accepts variability in its
accounting results in the short term in order to achieve the
appropriate result on these bases. In particular, for Prudential's
Group International Financial Reporting Standards ('IFRS')
reporting, the measurement of the Jackson variable annuity
guarantees is typically less sensitive to market movements than for
the corresponding hedging derivatives, which are held at market
value. However, depending on the level of hedging conducted
regarding a particular risk type, certain market movements can
drive volatility in the economic or local regulatory results that
may be less significant under IFRS reporting.
Also,
Jackson has a mix of spread-based and mortality business with
assets invested in fixed-income securities and its results are
therefore affected by fluctuations in prevailing interest rates. In
particular, stable value products written by Jackson expose
Prudential to the risk that changes in interest rates, which are
not fully reflected in the interest rates credited to customers,
will reduce spread. The spread is the difference between the rate
of return Jackson is able to earn on the assets backing the
policyholders' liabilities and the amounts that are credited to
policyholders in the form of benefit increases, subject to minimum
crediting rates. Declines in spread from these products or other
spread businesses that Jackson conducts, and increases in surrender
levels arising from interest rate rises, could have a material
impact on its businesses or results of operations.
Any
of the foregoing factors and events, individually or together,
could have a material adverse effect on Prudential's business,
financial condition, results of operations and
prospects.
1.3 As a holding company, Prudential is dependent upon its
subsidiaries to cover operating expenses and dividend
payments
The
Group's insurance and investment management operations are
generally conducted through direct and indirect subsidiaries, which
are subject to the risks discussed elsewhere in this 'Risk Factors'
section.
As
a holding company, Prudential's principal sources of funds are
remittances from subsidiaries, shareholder-backed funds, the
shareholder transfer from long-term funds and any amounts that may
be raised through the issuance of equity, debt and commercial
paper.
Certain
of Prudential's subsidiaries are subject to applicable insurance,
foreign exchange and tax laws, rules and regulations (including in
relation to distributable profits) that can limit their ability to
make remittances. In some circumstances, including where there are
changes to general market conditions, this could limit Prudential's
ability to pay dividends to shareholders or to make available funds
held in certain subsidiaries to cover operating expenses of other
members of the Group.
A material change in the financial condition of any of Prudential's
subsidiaries may have a material effect on its business, financial
condition, results of operations and prospects.
1.4 (Geo)political risks and uncertainty may adversely impact
economic conditions, increase market volatility, cause operational
disruption to the Group and impact its strategic plans, which could
have adverse effects on Prudential's business, financial condition,
results of operations and prospects
The Group is exposed to (geo)political risks and uncertainty in the
markets in which it operates. Recent shifts in the focus of some
national governments toward more protectionist or restrictive
economic and trade policies with specific markets, and
international trade disputes, could impact on the macroeconomic
outlook and the environment for global financial markets. This
could take effect, for example, through increased friction in
cross-border trade, such as implementation of trade tariffs or the
withdrawal from existing trading blocs or agreements and the
exercise of executive powers to restrict overseas trade, financial
transactions, capital movements and/or investment. The degree and
nature of regulatory changes and Prudential's competitive position
in some geographic markets may also be impacted, for example,
through measures favouring local enterprises, such as changes to
the maximum level of non-domestic ownership by foreign companies or
differing treatment under regulations and tax rules.
(Geo)political risks and political uncertainty may also adversely
impact the Group's operations and its operational resilience.
Increased (geo)political tensions may increase cross-border cyber
activity and therefore increase cyber security risks.
(Geo)political tensions may also lead to civil unrest and/or acts
of civil disobedience. This includes the unrest in Hong Kong, where
mass anti-government demonstrations have given rise to increased
disruption throughout the region. Such events could impact
operational resilience by disrupting Prudential's systems,
operations, new business sales and renewals, distribution channels
and services to customers, which may result in a reduction in
contributions from business units to the central cash balances and
profit of the Group, decreased profitability, financial loss,
adverse customer impacts and reputational damage and may impact
Prudential's business, financial condition, results of operations
and prospects.
Responses
by the US, UK and other governments to the enactment and
application of the national security law in Hong Kong and other
constitutional or legislative changes in the territory, which
continue to develop, may adversely impact Hong Kong's economy with
potential adverse sales, operational and product distribution
impacts to the Group due to the territory being a key market which
also hosts regional and head office functions. For internationally
active groups such as Prudential, operating across multiple
jurisdictions, government measures and responses may also add to
the complexity of legal and regulatory compliance and increase the
risk of conflicts between the requirements of one jurisdiction and
another. See risk factor 3.1 below.
1.5 Prudential is subject to the risk of potential sovereign
debt credit deterioration owing to the amounts of sovereign debt
obligations held in its investment portfolio
Investing
in sovereign debt creates exposure to the direct or indirect
consequences of political, social or economic changes (including
changes in governments, heads of state or monarchs) in the
countries in which the issuers of such debt are located and to the
creditworthiness of the sovereign. Investment in sovereign debt
obligations involves risks not present in debt obligations of
corporate issuers. In addition, the issuer of the debt or the
governmental authorities that control the repayment of the debt may
be unable or unwilling to repay principal or pay interest when due
in accordance with the terms of such debt, and Prudential may have
limited recourse to compel payment in the event of a default. A
sovereign debtor's willingness or ability to repay principal and to
pay interest in a timely manner may be affected by, among other
factors, its cash flow situation, its relations with its central
bank, the extent of its foreign currency reserves, the availability
of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole,
the sovereign debtor's policy toward local and international
lenders, and the political constraints to which the sovereign
debtor may be subject.
Moreover,
governments may use a variety of techniques, such as intervention
by their central banks or imposition of regulatory controls or
taxes, to devalue their currencies' exchange rates, or may adopt
monetary and other policies (including to manage their debt
burdens) that have a similar effect, all of which could adversely
impact the value of an investment in sovereign debt even in the
absence of a technical default. Periods of economic uncertainty may
affect the volatility of market prices of sovereign debt to a
greater extent than the volatility inherent in debt obligations of
other types of issuers.
In
addition, if a sovereign default or other such events described
above were to occur as has happened on occasion in the past, other
financial institutions may also suffer losses or experience
solvency or other concerns, which may result in Prudential facing
additional risks relating to investments in such financial
institutions that are held in the Group's investment portfolio.
There is also risk that public perceptions about the stability and
creditworthiness of financial institutions and the financial sector
generally might be adversely affected, as might counterparty
relationships between financial institutions.
If
a sovereign were to default on its obligations, or adopt policies
that devalued or otherwise altered the currencies in which its
obligations were denominated, this could have a material adverse
effect on Prudential's business, financial condition, results of
operations and prospects.
1.6 Downgrades in Prudential's financial strength and credit
ratings could significantly impact its competitive position and
damage its relationships with creditors or trading
counterparties
Prudential's
financial strength and credit ratings, which are used by the market
to measure its ability to meet policyholder obligations, are an
important factor affecting public confidence in Prudential's
products, and as a result its competitiveness. Downgrades in
Prudential's ratings as a result of, for example, decreased
profitability, increased costs, increased indebtedness or other
concerns could have an adverse effect on its ability to market
products, retain current policyholders, and the Group's ability to
compete for acquisition and strategic opportunities. Downgrades may
also impact the Group's financial flexibility, including its
ability to issue commercial paper at current levels and pricing.
The interest rates at which Prudential is able to borrow funds are
affected by its credit ratings, which are in place to measure the
Group's ability to meet its contractual obligations.
In
addition, changes in methodologies and criteria used by rating
agencies could result in downgrades that do not reflect changes in
the general economic conditions or Prudential's financial
condition.
Any
such downgrades could have a material adverse effect on
Prudential's business, financial condition, results of operations
and prospects. Prudential cannot predict what actions rating
agencies may take, or what actions Prudential may therefore take in
response to the actions of rating agencies, which could adversely
affect its business.
1.7 Prudential is subject to the risk of exchange rate
fluctuations owing to the geographical diversity of its
businesses
Due to the geographical diversity of Prudential's businesses,
Prudential is subject to the risk of exchange rate fluctuations.
Prudential's operations generally write policies and invest in
assets denominated in local currencies. Although this practice
limits the effect of exchange rate fluctuations on local operating
results, it can lead to fluctuations in Prudential's consolidated
financial statements upon the translation of results into the
Group's presentation currency. This exposure is not currently
separately managed. The Group presents its consolidated financial
statements in US dollars, which is the currency in which a large
proportion of the Group's earnings and assets and liabilities are
denominated or to which they are linked (such as the Hong Kong
dollar). There remain some entities within the Group the results of
which are not denominated in or linked to the US dollar and
transactions which are conducted in non-US dollar currencies.
Prudential is subject to the risk of exchange rate fluctuations
from the translation of the results of these entities and
transactions and the risks from the maintenance of the Hong Kong
dollar peg to the US dollar.
2. RISKS RELATING TO PRUDENTIAL'S BUSINESS
ACTIVITIES AND INDUSTRY
2.1 The proposed demerger of Jackson carries with it
execution risk and will require significant management
attention
The
proposed demerger of Jackson is subject to a number of factors and
dependencies, such as prevailing market and political conditions
and external approvals (including those from regulators and
shareholders). In addition, preparing for and implementing the
proposed demerger of Jackson is expected to require significant
time from management, and management time will continue to be
required in respect of any future sale of Prudential's remaining
stake in Jackson. Management's attention may be diverted from other
aspects of Prudential's business as a result.
Therefore,
there can be no certainty that the demerger of Jackson will be
implemented on the anticipated timetable, or that it will be
completed as proposed (or at all). Further, if the proposed
demerger of Jackson is completed, there can be no assurance that
either Prudential or Jackson will realise the anticipated benefits
of the transaction, or that the proposed demerger of Jackson and/or
the future sale of Prudential's remaining stake in Jackson will not
adversely affect the trading value or liquidity of the shares of
either or both of the two businesses.
If
the demerger of Jackson does complete, Prudential will continue to
hold shares in Jackson. The market price of Jackson shares
may be volatile and can go down as well as up. It is therefore
possible that the value of Prudential's shareholding may be lower
than anticipated, and the gross proceeds due to Prudential from any
future sale may be lower than Prudential might otherwise
achieve.
Failure
to complete the demerger of Jackson would result in the potential
benefits of the separation not being realised and may have an
adverse effect on the reputation of Prudential and on the external
perception of its ability to implement large-scale projects
successfully. This may be the case even where the failure to
implement the demerger of Jackson is due to factors outside the
control of Prudential. A failure to complete the demerger of
Jackson may also result in increased regulatory scrutiny on
Prudential, in particular where the reasons for the demerger of
Jackson not proceeding are internal to Prudential.
2.2 The implementation of large-scale transformation,
including complex strategic initiatives, gives rise to significant
design and execution risks, may affect Prudential's operational
capability and capacity, and may adversely impact the Group and the
delivery of its strategy if these initiatives fail to meet their
objectives
In
order to implement its business strategies for growth, improve
customer experiences, strengthen operational resilience, meet
regulatory and industry requirements and maintain market
competitiveness, Prudential undertakes Group restructuring,
large-scale transformation and acquisitions and disposals across
its business. Many of these change initiatives are complex,
interconnected and/or of large scale, including a current focus on
preparations for the proposed demerger of Jackson, advancing the
Group's digital capability, expanding strategic partnerships and
industry and regulatory-driven change. There may be a material
adverse effect to Prudential's business, customers, financial
condition, results of operations and prospects if these initiatives
incur unplanned costs, are subject to implementation delays, or
fail to fully meet their objectives. Additionally, there may be
adverse non-financial (including operational, regulatory, conduct
and reputational) implications for the Group. These initiatives
inherently give rise to design and execution risks, and may
increase existing business risks, such as placing additional strain
on the operational capacity, or weakening the control environment,
of the Group.
Implementing
further initiatives related to significant regulatory changes, such
as IFRS 17 and the transition to a legislative framework in Hong
Kong for the group-wide supervision of insurance groups, may
amplify these risks. Risks relating to these regulatory changes are
explained in the 'Legal and Regulatory Risk' risk factor
below.
The
speed of technological change in the business could outpace the
Group's ability to anticipate all the unintended consequences that
may arise from such change. Innovative technologies, such as
artificial intelligence, expose Prudential to potential information
security, operational, ethical and conduct risks which, if
improperly managed, could result in customer detriment and
reputational damage.
2.3 Prudential's businesses are conducted
in highly competitive environments with developing demographic
trends and continued profitability depends upon management's
ability to respond to these pressures and trends
The
markets for financial services in the US and Asia are highly
competitive, with several factors affecting Prudential's ability to
sell its products and continued profitability, including price and
yields offered, financial strength and ratings, range of product
lines and product quality, brand strength and name recognition,
investment management performance and fund management trends,
historical bonus levels, the ability to respond to developing
demographic trends, customer appetite for certain savings products
and technological advances. In some of its markets, Prudential
faces competitors that are larger, have greater financial resources
or a greater market share, offer a broader range of products or
have higher bonus rates. Further, heightened competition for
talented and skilled employees, agents and independent financial
advisers may limit Prudential's potential to grow its business as
quickly as planned. Technological advances, including the increased
capability for gathering large volumes of customer health data and
developments in capabilities and tools in analysing and
interpreting such data (such as artificial intelligence and machine
learning), may result in increased competition to the Group, both
from within and outside the insurance industry, and may increase
the competition risks resulting from a failure to be able to
attract sufficient numbers of skilled staff.
In
Asia, the Group's principal competitors include global life
insurers together with regional insurers and multinational asset
managers. In most Asia markets, there are also local companies that
have a material market presence.
Jackson's
competitors in the US include major stock and mutual insurance
companies, mutual fund organisations, banks and other financial
services companies.
Prudential
believes that competition will intensify across all regions in
response to consumer demand, digital and other technological
advances (including the emergence of new distribution channels),
the need for economies of scale and the consequential impact of
consolidation, regulatory actions and other factors. Prudential's
ability to generate an appropriate return depends significantly
upon its capacity to anticipate and respond appropriately to these
competitive pressures. This includes managing the potential adverse
impacts to the commercial value of the Group's existing sale and
distribution arrangements, such as bancassurance arrangements, in
markets where new distribution channels develop.
Failure
to do so may negatively impact Prudential's ability to attract and
retain customers and, importantly, may limit Prudential's ability
to take advantage of new business arising in the markets in which
it operates, which may have an adverse interest on the Group's
business, financial condition, results of operations and
prospects.
2.4 Adverse experience in the operational risks inherent in
Prudential's business, and those of its material outsourcing
partners, could disrupt its business functions and have a negative
impact on its business, financial condition, results of operations
and prospects
Operational
risks are present in all of Prudential's businesses, including the
risk of direct or indirect loss resulting from inadequate or failed
internal and external processes, systems or human error, fraud, the
effects of natural or man-made catastrophic events (such as natural
disasters, pandemics, cyber-attacks, acts of terrorism, civil
unrest and other catastrophes) or from other external events. These
risks may also adversely impact Prudential through its partners
which provide bancassurance and product distribution, outsourcing,
external technology, data hosting and other services.
Exposure
to such events could impact Prudential's operational resilience and
ability to perform necessary business functions by disrupting its
systems, operations, new business sales and renewals, distribution
channels and services to customers, or result in the loss of
confidential or proprietary data. Such events, as well as any
weaknesses in administration systems (such as those relating to
policyholder records) or actuarial reserving processes, may also
result in increased expenses, as well as legal and regulatory
sanctions, decreased profitability, financial loss, customer
conduct risk impacts and may damage Prudential's reputation and
relationship with its customers and business partners.
Prudential's
business is dependent on processing a large number of transactions
for numerous and diverse products. It also employs a large number
of complex and interconnected IT and finance systems and models,
and user developed applications in its processes to perform a range
of operational functions including the calculation of regulatory or
internal capital requirements, the valuation of assets and
liabilities, determining hedging requirements, and in acquiring new
business using artificial intelligence and digital applications.
Some of these tools form an integral part of the information and
decision-making framework of Prudential and the risk of adverse
consequences arising from erroneous or misinterpreted tools used in
core business activities, decision making and reporting exists.
Errors or limitations in these tools, or inappropriate usage, may
lead to regulatory breaches, inappropriate decision-making,
financial loss, or reputational damage. The long-term nature of
much of the Group's business also means that accurate records have
to be maintained securely for significant time periods. Further,
Prudential operates in an extensive and evolving legal and
regulatory environment (including in relation to tax) which adds to
the complexity of the governance and operation of its business
processes and controls.
The
performance of the Group's core business activities and the
uninterrupted availability of services to customers rely
significantly on, and require significant investment in, IT
infrastructure and security, system development, data governance
and management, compliance and other operational systems,
personnel, controls and processes. During times of significant
change, the resilience and operational effectiveness of these
systems and processes at Prudential and/or its third party
providers may be adversely impacted. In particular, Prudential and
its business partners are making increasing use of emerging
technological tools and digital services, or forming strategic
partnerships with third parties to provide these capabilities.
Automated distribution channels to customers increase the
criticality of providing uninterrupted services. A failure to
implement appropriate governance and management of the incremental
operational risks from emerging technologies may adversely impact
Prudential's reputation and brand, the results of its operations,
its ability to attract and retain customers and its ability to
deliver on its long-term strategy and therefore its competitiveness
and long-term financial success.
Although
Prudential's IT, compliance and other operational systems, models
and processes incorporate governance and controls designed to
manage and mitigate the operational and model risks associated with
its activities, there can be no assurance as to the resilience of
these systems and processes to disruption or that governance and
controls will always be effective. Due to human error, among other
reasons, operational and model risk incidents do occur from time to
time and no system or process can entirely prevent them, although
Prudential has not, to date, identified any such incidents that
have had a material impact. Prudential's legacy and other IT
systems, data and processes, as with operational systems and
processes generally, may also be susceptible to failure or
security/data breaches.
In
addition, Prudential relies on the performance and operations of a
number of bancassurance, outsourcing (including external technology
and data hosting) and service partners. These include back office
support functions, such as those relating to IT infrastructure,
development and support and customer facing operations and
services, such as product distribution and services (including
through digital channels) and investment operations. This creates
reliance upon the resilient operational performance of these
partners, and failure to adequately oversee the partner, or the
failure of a partner (or of its IT and operational systems and
processes) could result in significant disruption to business
operations and customers, may have reputational or conduct risk
implications and which could have a material adverse effect on its
business, financial condition, results of operations and
prospects.
2.5 Attempts to access or disrupt Prudential's IT systems,
and loss or misuse of personal data, could result in loss of trust
from Prudential's customers and employees, reputational damage and
have material adverse effects on the Group's business, financial
condition, results of operations and prospects
Prudential
and its business partners are increasingly exposed to the risk that
individuals (which includes connected persons such as employees,
contractors or representatives of Prudential or its third-party
service providers, and unconnected persons) or groups may
intentionally or unintentionally disrupt the availability,
confidentiality and integrity of its IT systems or compromise the
integrity and security of data (both corporate and customer), which
could result in disruption to key operations, make it difficult to
recover critical services or damage assets, any of which could
result in loss of trust from Prudential's customers and employees,
reputational damage and direct or indirect financial loss. The
cyber-security threat continues to evolve globally in
sophistication and potential significance. Prudential's increasing
profile in its current markets and those in which it is entering,
growing customer interest in interacting with their insurance
providers and asset managers through the internet and social media,
improved brand awareness and the 2016 designation of Prudential as
a G-SII could also increase the likelihood of Prudential being
considered a target by cyber criminals. Further, there have been
changes to the threat landscape in recent years and the risk from
untargeted but sophisticated and automated attacks has
increased.
There
is an increasing requirement and expectation on Prudential and its
business partners to not only hold customer, shareholder and
employee data securely, but also to ensure its ongoing accuracy and
that it is being used in a transparent, appropriate and ethical
way, including in decision-making where automated processes are
employed. A failure to do so may result in regulatory scrutiny and
sanctions and may adversely impact the reputation and brand of the
Group, its ability to attract and retain customers, its ability to
deliver on its long-term strategy and therefore the results of its
operations. New and currently unforeseeable regulatory issues may
also arise from the increased use of emerging
technology.
The
risk to the Group of not meeting these requirements and
expectations may be increased by the development and usage of
digital distribution and service channels, which can collect a
broader range of personal and health-related data from individuals
at increased scale, and the use of complex tools, machine learning
and artificial intelligence technologies to process, analyse and
interpret this data. Regulatory developments in data protection
worldwide (such as the implementation of EU General Data Protection
Regulation that came into force in 2018 and the California Consumer
Protection Act that came into force on 1 January 2020) may also
increase the financial and reputational implications for Prudential
following a significant breach of its (or its third-party
suppliers') IT systems or data. The international transfer of
data may, as a global organisation, increase regulatory risks for
the Group. Although Prudential has experienced or has been affected
by cyber and data breaches, to date, it has not identified a
failure or breach, or an incident of data misuse in relation to its
legacy and other IT systems and processes which has had a material
impact. However, Prudential has been, and likely will continue to
be, subject to potential damage from computer viruses, unauthorised
access and cyber-security attacks such as 'denial of service'
attacks (which, for example, can cause temporary disruption to
websites and IT networks), phishing and disruptive software
campaigns.
Prudential
is continually enhancing its IT environment to remain secure
against emerging threats, together with increasing its ability to
detect system compromise and recover should such an incident occur.
However, there can be no assurance that such events will not take
place which may have material adverse consequential effects on
Prudential's business, financial condition, results of operations
and prospects.
2.6 Prudential's digital health application, Pulse, has seen
increasing adoption in Asia and as the markets in which it
operates, its user base, features, partnerships and product
offerings develop, existing business risks to the Group may be
increased and new risks may be introduced
Prudential's
digital health application, Pulse, is subject to the risks
discussed within this 'Risk Factors' section. In particular, these
include risks related to legal and regulatory compliance and the
conduct of business; the execution of complex change initiatives;
information security, cyber and data privacy; the use of models
(including those using artificial intelligence) and personal data;
the resilience and integrity of IT infrastructure and operations;
and those related to the management of third parties. These
existing risks for the Group may be increased due to a number of
factors:
-
The number of current and planned markets in which the application
operates, each with their own laws and regulations, regulatory and
supervisory authorities, may increase regulatory compliance
risks.
-
The implementation of planned application features and offerings
may require the delivery of complex, inter-connected change
initiatives across current and planned markets. This may give rise
to design and execution risks, which could be amplified where these
change initiatives are delivered concurrently.
-
The increased volume, breadth and sensitivity of data on which the
business model of the application is dependent and to which the
Group has access, holds, analyses and processes through its models,
which increases data security, privacy and usage risks. The use of
complex models, including where they use artificial intelligence
for critical decision-making, in the application's features and
offerings may give rise to operational, conduct, litigation and
reputational risks where they do not function as
intended.
-
The application and its services relies on a number of third party
partners and providers, which may vary according to market. This
may increase operational disruption risks to the uninterrupted
provision of services to customers, regulatory compliance and
conduct risks, and the potential for reputational
risks.
New
product offerings may be developed and provided through the
application, some of which Prudential may have limited or no
experience in providing, which may introduce new regulatory,
operational, conduct and strategic risks for Group.
A
failure to implement appropriate governance and management of the
incremental and new risks detailed above may adversely impact
Prudential's reputation and brand, its ability to attract and
retain customers, its competitiveness and its ability to deliver on
its long-term strategy.
2.7 Prudential operates in certain markets with joint venture
partners, minority shareholders and other third parties, resulting
in certain risks that Prudential does not face with respect to its
wholly-owned subsidiaries
Prudential
operates, and in certain markets is required by local regulation to
operate, through joint ventures and other joint ownership or
third-party arrangements. For such Group operations the level of
control exercisable by the Group depends on the terms of the
contractual agreements, in particular, those terms providing for
the allocation of control among, and continued cooperation between,
the participants. In addition, the level of control exercisable by
the Group could be subject to changes in the maximum level of
non-domestic ownership imposed on foreign companies in certain
jurisdictions.
Prudential
may face financial, reputational and other exposure (including
regulatory censure) in the event that any of its partners fails or
is unable to meet its obligations under the arrangements,
encounters financial difficulty, or fails to comply with local or
international regulation and standards such as those pertaining to
the prevention of financial crime. In addition, a significant
proportion of the Group's product distribution is carried out
through arrangements with third parties not controlled by
Prudential such as bancassurance and agency arrangements in Asia
and broker-dealer networks in the US and is therefore dependent
upon continuation of these relationships. A temporary or permanent
disruption to these distribution arrangements, such as through
significant deterioration in the reputation, financial position or
other circumstances of the third party, material failure in
controls (such as those pertaining to the third-party system
failure or the prevention of financial crime) or failure to meet
any regulatory requirements could adversely affect Prudential's
reputation and its business, financial condition, results of
operations and prospects.
2.8 Adverse experience relative to the assumptions used in
pricing products and reporting business results could significantly
affect Prudential's business, financial condition, results of
operations and prospects
In
common with other life insurers, the profitability of the Group's
businesses depends on a mix of factors including mortality and
morbidity levels and trends, policy surrenders and take-up rates on
guarantee features of products, investment performance and
impairments, unit cost of administration and new business
acquisition expenses. The Group's businesses are subject to
inflation risk. In particular, the Group's medical insurance
businesses in Asia are also exposed to medical inflation
risk.
Prudential
needs to make assumptions about a number of factors in determining
the pricing of its products, for setting reserves, and for
reporting its capital levels and the results of its long-term
business operations.
Assumptions
about future expected levels of mortality are of relevance to the
Guaranteed Minimum Withdrawal Benefit ('GMWB') of Jackson's
variable annuity business.
A
further factor is the assumption that Prudential makes about future
expected levels of the rates of early termination of products by
its customers (known as persistency). This is relevant to a number
of lines of business in the Group, especially for Jackson's
portfolio of variable annuities and across product lines in Asian
markets. Prudential's persistency assumptions reflect a combination
of recent past experience for each relevant line of business and
expert judgement, especially where a lack of relevant and credible
experience data exists. Any expected change in future persistency
is also reflected in the assumption. If actual levels of future
persistency are significantly different than assumed, the Group's
results of operations could be adversely affected. Furthermore,
Jackson's variable annuity products are sensitive to other types of
policyholder behaviour, such as the take-up of its GMWB product
features.
In
addition, Prudential's business may be adversely affected by
epidemics, pandemics and other effects that give rise to a large
number of deaths or additional sickness claims, as well as
increases to the cost of medical claims. Pandemics, significant
influenza and other epidemics have occurred a number of times
historically but the likelihood, timing, or the severity of future
events cannot be predicted. The effectiveness of external parties,
including governmental and non-governmental organisations, in
combating the spread and severity of any epidemics could have a
material impact on the Group's claims experience. The risks to the
Group resulting from the Covid-19 pandemic are included in the
'Covid-19' risk factor detailed in above.
Prudential
uses reinsurance to selectively transfer mortality, morbidity and
other risks. This exposes the Group to the counterparty risk of a
reinsurer being unable to pay reinsurance claims or otherwise meet
their commitments; the risk that a reinsurer changes reinsurance
terms and conditions of coverage, or increases the price of
reinsurance which Prudential is unable to pass on to its customers;
and the risk of ambiguity in the reinsurance terms and conditions
leading to uncertainty whether an event is covered under a
reinsurance contract.
Any
of the foregoing, individually or together, could have a material
adverse effect on Prudential's business, financial condition,
results of operations and prospects.
2.9 Prudential is exposed to ongoing risks as a result of the
demerger of M&G plc (the 'M&G Demerger')
On
21 October 2019, Prudential completed the M&G Demerger and, in
connection with this, Prudential entered into a demerger agreement
with M&G plc. Among other provisions, the demerger agreement
contains a customary indemnity under which Prudential has agreed to
indemnify M&G plc against liabilities incurred by the M&G
plc group that relate to the business of the Group. Although it is
not anticipated that Prudential will be required to pay any
substantial amount pursuant to such indemnity obligations, if any
amount payable thereunder is substantial this could have a material
adverse effect on Prudential's business, financial condition,
results of operations and prospects.
3. LEGAL AND REGULATORY RISK
3.1 Prudential conducts its businesses subject to regulation
and associated regulatory risks, including a change to the basis in
the regulatory supervision of the Group, the effects of changes in
the laws, regulations, policies and interpretations and any
accounting standards in the markets in which it
operates
Changes
in government policy and legislation (including in relation to
tax), capital control measures on companies and individuals,
regulation or regulatory interpretation applying to companies in
the financial services and insurance industries in any of the
markets in which Prudential operates (including those related to
the conduct of business by Prudential or its third party
distributors), or decisions taken by regulators in connection with
their supervision of members of the Group, which in some
circumstances may be applied retrospectively, may adversely affect
Prudential. The impact from any regulatory changes may be material
to Prudential, for example changes may be required to its product
range, distribution channels, handling and usage of data,
competitiveness, profitability, capital requirements, risk
management approaches, corporate or governance structure and,
consequently, reported results and financing requirements. Also,
regulators in jurisdictions in which Prudential operates may impose
requirements affecting the allocation of capital and liquidity
between different business units in the Group, whether on a
geographic, legal entity, product line or other basis. Regulators
may also change solvency requirements, methodologies for
determining components of the regulatory or statutory balance sheet
including the reserves and the level of capital required to be held
by individual businesses (with implications to the Group capital
position), the regulation of selling practices, and could introduce
changes that impact products sold or that may be
sold. Furthermore, as a result of interventions by governments
in light of financial and global economic conditions, there may
continue to be changes in government regulation and supervision of
the financial services industry, including the possibility of
higher capital requirements, restrictions on certain types of
transactions and enhancement of supervisory powers.
In
the markets in which it operates, Prudential is subject to
regulatory requirements and obligations with respect to financial
crime including anti-money laundering and sanctions compliance,
which may either impose obligations on the Group to act in a
certain manner or restrict the way that it can act in respect of
specified individuals, organisations, businesses and/or
governments. A failure to do so may adversely impact the reputation
of Prudential and/or result in the imposition of legal or
regulatory sanctions for the Group. For internationally active
groups such as Prudential, operating across multiple jurisdictions
increases the complexity of legal and regulatory compliance.
Compliance with Prudential's legal or regulatory obligations in one
jurisdiction may conflict with the law or policy objectives of
another jurisdiction, or may be seen as supporting the law or
policy objectives of that jurisdiction over another, creating
additional legal, regulatory compliance and reputational risks for
the Group. These risks may be increased where uncertainty exists on
the scope of regulatory requirements and obligations, and where the
complexity of specific cases applicable to the Group is high.
Following the demerger of Jackson, these risks may become more
pronounced for the Group as markets with higher geopolitical risk
exposure will form a larger proportion of Prudential's
operations.
Further
information on specific areas of regulatory and supervisory
requirements and changes are included in the sub-sections
below.
(a)
Group-wide Supervision
With
effect from 21 October 2019, the group-wide supervisor of
Prudential plc changed to the Hong Kong Insurance Authority ('IA').
To align Hong Kong's regulatory regime with international standards
and practices, the Hong Kong IA has developed a new Group-wide
Supervision ('GWS') Framework for multinational insurance groups
under its supervision. The GWS Framework is based on a
principle-based and outcome-focused approach, and allows the Hong
Kong IA to exercise direct regulatory powers over the designated
holding companies of multinational insurance groups. On 24 July
2020 the Insurance (Amendment) (No. 2) Ordinance, being the
enabling primary legislation providing for the GWS Framework, was
enacted. This primary legislation is supported by subsidiary
legislation and guidance material from the Hong Kong IA. The
relevant subsidiary legislation, including the Insurance (Group
Capital) Rules, was tabled before the Legislative Council on 6
January 2021 and will come into operation on 29 March 2021. The GWS
Framework is expected to be effective for Prudential upon
designation by the Hong Kong IA in the second quarter of 2021,
subject to transitional arrangements. Prior to the GWS Framework
becoming effective for the Group, Prudential remains subject to the
Regulatory Letter signed with the Hong Kong IA. This letter
outlines the interim supervision arrangements from 21 October 2019
when the Hong Kong IA became the group-wide supervisor of the
Group.
Although
the GWS Framework is broadly consistent with the interim
supervision arrangements that currently apply to the Group under
the Regulatory Letter, until all elements of the GWS Framework are
finalised the Group cannot be certain of the nature and extent of
differences between the interim principles agreed with the Hong
Kong IA and the specific regulatory requirements of the GWS
Framework. The Group's existing processes and resources may also
need to change to comply with the final GWS Framework or any other
requirements of the Hong Kong IA. The need to adapt to any such
changes or to respond to any such requirements may lead to
increased costs or otherwise impact the business, financial
condition, results, profitability and/or prospects of the
Group.
With
the agreement of the Hong Kong IA, Prudential currently applies the
Local Capital Summation Method (the 'LCSM') to determine Group
regulatory capital requirements under the Regulatory Letter.
Prudential currently expects the GWS methodology to be largely
consistent with these interim supervisory requirements, with the
exception of the treatment of debt instruments outlined below which
will be subject to transitional arrangements under the GWS
Framework, however any differences in the final requirements
adopted under the GWS Framework may lead to changes to the way in
which capital requirements are calculated and to the eligibility of
the capital instruments issued by Prudential to satisfy such
capital requirements.
The
Hong Kong IA has agreed that the subordinated debt instruments
issued by Prudential at the date of the demerger of M&G plc can
be included as part of the Group's capital resources for the
purposes of satisfying the capital requirements imposed under the
interim LCSM principles agreed with the Hong Kong IA. Senior debt
instruments issued by Prudential are not included as part of the
Group capital resources under the LCSM. Under the GWS Framework,
Prudential's initial analysis indicates that all debt instruments
(senior and subordinated) issued by Prudential will meet the
transitional conditions set by the Hong Kong IA and will be
included as eligible Group capital resources, although this will be
subject to approval by the Hong Kong IA. If the Hong Kong IA does
not approve the subordinated debt instruments Prudential has in
issue as part of the Group's eligible capital resources for the
purposes of satisfying the capital requirements imposed under the
GWS Framework, Prudential may have less eligible capital resources
compared to under the LCSM and may need to raise additional debt
instruments, which may in turn lead to increased costs for the
Group.
(b)
Global regulatory requirements and systematic risk
regulation
Currently
there are also a number of other global regulatory developments
which could impact Prudential's businesses in the many
jurisdictions in which they operate. These include the Dodd-Frank
Wall Street Reform and Consumer Protection Act ('Dodd-Frank Act')
and its subsequent amendments in the US which provided for a
comprehensive overhaul of the financial services industry within
the US including reforms to financial services entities, products
and markets, the work of the Financial Stability Board (the 'FSB')
in the area of systemic risk including the reassessment of the
designation of Global Systemically Important Insurers ('G-SIIs'),
and the Insurance Capital Standard (the 'ICS') being developed by
the International Association of Insurance Supervisors (the
'IAIS'). In addition, regulators in a number of jurisdictions in
which the Group operates are further developing their local capital
regimes. Across Asia this includes China, Hong Kong, Singapore,
Thailand and India. There remains a high degree of uncertainty over
the potential impact of such changes on the Group.
In
November 2019 the IAIS adopted the Common Framework ('ComFrame')
which establishes supervisory standards and guidance focusing on
the effective group-wide supervision of Internationally Active
Insurance Groups ('IAIGs'). The ComFrame proposals, which include
the ICS, could result in enhanced capital and regulatory measures
for IAIGs. Prudential was included in the first register of IAIGs
released by the IAIS on 1 July 2020 and was designated an IAIG by
the Hong Kong IA following an assessment against the established
criteria in ComFrame.
In
November 2019 the FSB endorsed a new Holistic Framework ('HF'),
intended for the assessment and mitigation of systemic risk in the
insurance sector, for implementation by the IAIS in 2020 and has
suspended G-SII designations until completion of a review to be
undertaken in 2022. Many of the previous G-SII measures have
already been adopted into the Insurance Core Principles ('ICPs')
and ComFrame. As an IAIG, Prudential is expected to be subject to
these measures. The HF also includes a monitoring element for the
identification of a build-up of systemic risk and to enable
supervisors to take action where appropriate. As a result of the
Covid-19 pandemic, this monitoring requirement has been replaced
with a Covid-19-focused exercise for 2020, with annual monitoring
expected to recommence in 2021. In November 2020 the IAIS launched
a public consultation on phase 1 of a proposed liquidity metric to
be used as an ancillary indicator in the monitoring of the build-up
of systemic risk. This followed a more general consultation on
liquidity metrics earlier in 2020. Consultations on a phase 2
liquidity metric, as well as on macroeconomic elements of the HF,
are expected to follow. The FSB published its 2020 Resolution
Report in November 2020, highlighting intra-group connectedness and
funding in resolution as key areas of attention for its work on
resolution planning. Resolution will continue to be a near term
focus in the FSB's financial stability work and may inform
decisions around the reformed G-SII designation in
2022.
The
IAIS continues to develop the ICS as part of ComFrame. The
implementation of ICS will be conducted in two phases - a five-year
monitoring phase followed by an implementation phase.
(c)
IFRS 17
The
Group's accounts are prepared in accordance with current IFRS
applicable to the insurance industry. The International Accounting
Standards Board (the 'IASB') introduced a framework that it
described as Phase I which, under its standard IFRS 4, permitted
insurers to continue to use the statutory basis of accounting for
insurance assets and liabilities that existed in their
jurisdictions prior to January 2005. In May 2017, the IASB
published its replacement standard on insurance accounting (IFRS
17, 'Insurance Contracts'). Some targeted amendments to this
standard, including to the effective date, were issued in June
2020. IFRS 17, 'Insurance Contracts', as amended, will have the
effect of introducing fundamental changes to the statutory
reporting of insurance entities that prepare accounts according to
IFRS from 2023. The standard is subject to endorsement in the UK
via the UK Endorsement Board which is currently being established.
Prudential has a group-wide implementation programme underway to
implement this new standard. The effect of changes required to the
Group's accounting policies as a result of implementing the new
standard is currently uncertain particularly as amendments were
issued by the IASB in June 2020, but these changes can be expected
to, amongst other things, alter the timing of IFRS profit
recognition. The implementation of this standard will involve
significant enhancements to IT, actuarial and finance systems of
the Group.
Any
changes or modification of IFRS accounting policies may require a
change in the way in which future results will be determined and/or
a retrospective adjustment of reported results to ensure
consistency.
(d)
Inter-bank offered rate ('IBOR') reforms
In
July 2014, the FSB announced widespread reforms to address the
integrity and reliability of IBORs. The discontinuation of IBORs in
their current form and their replacement with alternative risk-free
reference rates such as the Sterling Overnight Index Average
benchmark ('SONIA') in the UK and the Secured Overnight Financing
Rate ('SOFR') in the US could, among other things, impact the Group
through an adverse effect on the value of Prudential's assets and
liabilities which are linked to or which reference IBORs, a
reduction in market liquidity during any period of transition and
increased legal and conduct risks to the Group arising from changes
required to documentation and its related obligations to its
stakeholders.
(e)
Investor contribution schemes
Various
jurisdictions in which Prudential operates have created investor
compensation schemes that require mandatory contributions from
market participants in some instances in the event of a failure of
a market participant. As a major participant in the majority of its
chosen markets, circumstances could arise in which Prudential,
along with other companies, may be required to make such
contributions.
3.2 The resolution of several issues affecting the financial
services industry could have a negative impact on Prudential's
business, financial condition, results of operations and prospects
or on its relations with current and potential
customers
Prudential
is, and in the future may continue to be, subject to legal and
regulatory actions in the ordinary course of its business on
matters relevant to the delivery of customer outcomes. Such actions
relate, and could in the future relate, to the application of
current regulations or the failure to implement new regulations
(including those relating to the conduct of business), regulatory
reviews of broader industry practices and products sold (including
in relation to lines of business already closed) in the past under
acceptable industry or market practices at the time and changes to
the tax regime affecting products. Regulators may also focus on the
approach that product providers use to select third-party
distributors and to monitor the appropriateness of sales made by
them. In some cases, product providers can be held responsible for
the deficiencies of third-party distributors.
In
the US, there has been significant attention on the different
regulatory standards applied to investment advice delivered to
retail customers by different sectors of the industry. As a result
of reports relating to perceptions of industry abuses, there have
been numerous regulatory inquiries and proposals for legislative
and regulatory reforms. This includes focus on the suitability of
sales of certain products, alternative investments and the widening
of the circumstances under which a person or entity providing
investment advice with respect to certain employee benefit and
pension plans would be considered a fiduciary subjecting the person
or entity to certain regulatory requirements. There is a risk that
new regulations introduced may have a material adverse effect on
the sales of the products by Prudential and increase Prudential's
exposure to legal risks.
Any
regulatory action arising out of the Group's position as a product
provider could have an adverse impact on the Group's business,
financial condition, results of operations and prospects, or
otherwise harm its reputation.
3.3 Litigation, disputes and regulatory investigations may
adversely affect Prudential's business, financial condition, cash
flows, results of operations and prospects
Prudential
is, and may in the future be, subject to legal actions, disputes
and regulatory investigations in various contexts, including in the
ordinary course of its insurance, investment management and other
business operations. These legal actions, disputes and
investigations may relate to aspects of Prudential's businesses and
operations that are specific to Prudential, or that are common to
companies that operate in Prudential's markets. Legal actions and
disputes may arise under contracts, regulations (including tax) or
from a course of conduct taken by Prudential, and may be class
actions. Although Prudential believes that it has adequately
provided in all material respects for the costs of litigation and
regulatory matters, no assurance can be provided that such
provisions are sufficient. Given the large or indeterminate amounts
of damages sometimes sought, other sanctions that might be imposed
and the inherent unpredictability of litigation and disputes, it is
possible that an adverse outcome could have an adverse effect on
Prudential's business, financial condition, cash flows, results of
operations and prospects.
3.4 Changes in tax legislation may result in adverse tax
consequences for the Group's business, financial condition, results
of operations and prospects
Tax
rules, including those relating to the insurance industry, and
their interpretation may change, possibly with retrospective
effect, in any of the jurisdictions in which Prudential operates.
Significant tax disputes with tax authorities, and any change in
the tax status of any member of the Group or in taxation
legislation or its scope or interpretation could affect
Prudential's business, financial condition, results of operations
and prospects.
4. ENVIRONMENTAL, SOCIAL AND GOVERNANCE
RISKS
4.1 The failure to understand and respond effectively to the
risks associated with environmental, social or governance ('ESG')
factors could adversely affect Prudential's achievement of its
long-term strategy
The
purpose of a business and the way in which it operates in achieving
its objectives, including in relation to ESG-related matters, are
an increasingly material consideration for key stakeholders in
achieving their own objectives and aims. ESG-related risks may
directly or indirectly impact Prudential's business and the
achievement of its strategy and consequently those of its key
stakeholders, which range from customers, institutional investors,
employees and suppliers, to policymakers, regulators, industry
organisations and local communities. A failure to transparently and
consistently implement the Group's ESG strategy, in its key markets
and across operational, underwriting and investment activities, may
adversely impact the financial condition and reputation of the
Group and may negatively impact the Group's stakeholders, who all
have expectations, concerns and aims related to ESG matters, which
may differ. In its investment activities, Prudential's stakeholders
increasingly place reliance on an approach to responsible
investment that demonstrates how ESG considerations are effectively
integrated into investment decisions and the performance of
fiduciary and stewardship duties, including voting and active
engagement decisions with respect to investee companies, as both an
asset owner and an asset manager.
A
failure to manage the material risks associated with key ESG themes
detailed below may adversely impact the reputation and brand of the
Group, its ability to attract and retain customers and staff, its
ability to deliver on its long-term strategy and therefore the
results of its operations and long-term financial
success.
(a)
Environmental risks
Environmental
concerns, notably those associated with climate change, pose
significant risks to Prudential and its customers. Prudential's
investment horizons are long term and it is therefore exposed to
the potential long-term impact of climate change risks, which
include the financial and non-financial impact of transition,
physical and litigation risks. A failure to understand, manage and
provide greater transparency of its exposure to these
climate-related risks may have increasing adverse implications for
Prudential and its stakeholders.
The global transition to a lower carbon economy
may have an adverse impact on investment valuations as the
financial assets of carbon-intensive companies re-price, and this
could result in some asset sectors facing significantly higher
costs and a reduction in demand for their products and services.
The speed of this transition, and the extent to which it is orderly
and managed, will be influenced by factors such as public policy,
technology and changes in market or investor sentiment. This
climate-related transition risk may adversely impact the valuation
of investments held by the Group, and the potential broader
economic impact may adversely affect customer demand for the
Group's products. Prudential's stakeholders increasingly expect
and/or rely on the Group to support an orderly transition based on
an understanding of relevant country and company-level transition
plans and which takes into consideration the impact on the
economies, businesses and customers in the markets in which it
operates and invests. The Group's ability to sufficiently
understand and appropriately react to transition risk may be
limited by insufficient or unreliable data on carbon exposure and
transition plans for the assets in which it
invests. The direct physical impacts of climate change,
driven by both specific short-term climate-related events such as
natural disasters and longer-term changes to climate and the
natural environment, will increasingly influence the longevity,
mortality and morbidity risk assessments for the Group's life
insurance product underwriting and offerings and their associated
claims profiles. Climate-driven events in countries in which
Prudential or its key third parties operate could impact the
Group's operational resilience and its
customers.
(b)
Social risks
Social
risks that could impact Prudential may arise from a failure to
consider the rights, diversity, well-being, and interests of people
and communities in which the Group or its third parties operate.
These risks are increased as Prudential operates in multiple
jurisdictions with distinct local cultures and considerations. As
an employer, the Group is also exposed to the risk of being unable
to attract, retain and develop highly-skilled staff, which may
increase if Prudential does not have in place responsible working
practices or fails to recognise the benefits of diversity or
promote a culture of inclusion. The potential for reputational risk
extends to the Group's supply chains, which may be exposed to
factors such as poor labour standards and abuses of human rights by
third parties. Emerging population risks associated with public
health trends (such as an increase in obesity) and demographic
changes (such as population urbanisation and ageing) may affect
customer lifestyles and therefore may impact claims against the
Group's insurance product offerings. As a provider of insurance and
investment services, the Group is increasingly focused on digital
innovation, technologies and distribution methods for a broadening
range of products and services. As a result, Prudential has access
to extensive amounts of customer personal data, including data
related to personal health, and an increasing ability to analyse
and interpret this data through the use of complex tools, machine
learning and artificial intelligence technologies. The Group is
therefore exposed to the regulatory, ethical and reputational risks
associated with customer data misuse or security breaches. These
risks are explained above. The increasing digitalisation of
products, services and processes may also result in new and
unforeseen regulatory requirements and stakeholder expectations,
including those related to how the Group supports its customers
through this transformation.
(c)
Governance risks
A
failure to maintain high standards of corporate governance may
adversely impact the Group and its customers, staff and employees,
through poor decision-making and a lack of oversight of its key
risks. Poor governance may arise where key governance committees
have insufficient independence, a lack of diversity, skills or
experience in their members, or unclear (or insufficient) oversight
responsibilities and mandates. Inadequate oversight over
remuneration increases the risk of poor senior management
behaviours. Prudential operates across multiple jurisdictions and
has a group and subsidiary governance structure which may add
further complexity to these considerations. Participation in joint
ventures or partnerships where Prudential does not have direct
overall control and the use of third party suppliers increase the
potential for reputational risks arising from poor
governance.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: 03 March 2021
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By: /s/ Mark FitzPatrick
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Mark
FitzPatrick
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Group
Chief Financial Officer and Chief Operating Officer
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