3 Management of risk continued This modeling takes into account UK regional events coverage and non
3.3 Capital risk management continued transactional costs and tax, in addition US household business, together with
to the necessary capital ratios. It proves the income and expenses arising from
of capital levels and its debt to overall the capital efficiency of Lloyd’s, despite the Group’s retail agency activities
equity ratios in line with others in the non-life a tax disadvantage against offshore entities, in the UK and in continental Europe.
insurance industry. and the cost advantage of processing In addition, it includes the European
smaller premium business outside of Lloyd’s. errors and omissions business from
Capital modeling and regulation Syndicate 3624. It excludes the results
The capital requirements of an insurance In addition to the ICA modeling process, of the larger retail TMT business written
group are determined by its exposure to risk the EU Insurance Group’s Directive of by Hiscox Insurance Company Limited.
and the solvency criteria established by 1998, as amended by the Financial Group’s It also includes an element of kidnap
management and statutory regulations. Directive (FGD), compels insurance and ransom and terrorism written in
companies that are members of a group Syndicate 33.
The Group’s capital requirements are to consider the solvency margin of their International comprises the results
managed both centrally and at a regulated ultimate parent company. This consideration of Hiscox Insurance Company
entity level. The assessed capital must refer to the surplus assets of the (Guernsey) Limited, Hiscox Insurance
requirement for the business placed through ultimate parent’s related insurers, reinsurers, Company (Bermuda) Limited, Hiscox
Hiscox Insurance Company Limited, Hiscox intermediate holding companies and other Inc., Hiscox Insurance Company
Insurance Company (Bermuda) Limited, regulated entities. Inc. and Syndicate 3624 excluding
Hiscox Insurance Company (Guernsey) the European errors and omissions,
Limited and Hiscox Insurance Company The FGD has been applied in the UK through fire and aviation business.
Inc. is driven by the level of resources the Integrated Prudential Sourcebook for Corporate Centre comprises the
necessary to maintain both regulatory Insurers (INSPRU) and General Prudential investment return, finance costs
requirements and the capital necessary Sourcebook (GENPRU). In accordance and administrative costs associated
to maintain financial strength of an A rating. with these provisions, the parent company’s with Group management activities.
solvency margin consideration became Corporate Centre also includes the
The Group’s regulatory capital is supervised a minimum capital requirement for the majority of foreign currency items
by the Bermuda Monetary Authority Group from 31 December 2006 onwards. on economic hedges and intragroup
(BMA). For the last two years, the BMA The Group complied with the requirement borrowings. These relate to certain
has conducted impact assessments of the for the current and prior year. foreign currency items on economic
regulatory capital requirements for groups, hedges and intragroup borrowings,
in preparation for the requirements to In the Group’s other geographical further details of which are given
become enforceable from the beginning territories, including the US, its subsidiaries at note 13. Corporate Centre forms
of 2013. The Group had sufficient capital underwriting insurance business are a reportable segment due to its
to meet the regulatory capital requirements required to operate within broadly similar investment activities which earn
during both of the impact assessments. risk-based externally imposed capital significant external coupon revenues.
requirements when accepting business.
In 2005, the UK Financial Services Authority All amounts reported on the following
(FSA) and Lloyd’s introduced a new capital 4 Operating segments page represent transactions with external
regime that requires insurance companies The Group’s operating segments consist parties only. In the normal course of trade,
to calculate their own capital requirements of four segments which recognise the the Group’s entities enter into various
through Individual Capital Assessments differences between products and services, reinsurance arrangements with one another.
(ICA). Hiscox Insurance Company Limited customer groupings and geographical The related results of these transactions
and Hiscox’s Lloyd’s operations maintain areas. Financial information is used in this are eliminated on consolidation and are not
ICA models in accordance with this regime. format by the chief operating decision maker included within the results of the segments.
The models are concentrated specifically in deciding how to allocate resources and This is consistent with the information
on the particular product lines, market in assessing performance. The format is used by the chief operating decision maker
conditions and risk appetite of each entity. representative of the management structure when evaluating the results of the Group.
The Group used its own integrated modeling of the segments. Performance is measured based on each
expertise to produce the ICA calculations. reportable segment’s profit before tax.
The results mirrored those driving the The Group’s four operating segments are:
existing internal capital setting process. London Market comprises the results
of Syndicate 33, excluding the results
For Syndicate 33 and Syndicate 3624, of the fine art, UK regional events
the ICA process produces a result that coverage and non US household
is uplifted by Lloyd’s to identify the capital business which is included within
required to hold the A rating. The strong the results of UK and Europe. It also
control and risk management environment, includes the fire and aviation
together with the sophistication of the businesses from Syndicate 3624,
modeling, have produced a capital ratio and the larger TMT business written
below that suggested under the previous by Hiscox Insurance Company Limited.
risk-based capital regime. Another key area In addition, it excludes an element
of capital modeling for Hiscox is to identify of kidnap and ransom and terrorism
which insurance vehicle produces the best included in UK and Europe.
return on capital employed for the Group, UK and Europe comprises the results
given certain restraints from licences, of Hiscox Insurance Company Limited,
reinsurance and the regulatory environment. the results of Syndicate 33’s fine art,
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012 75