a1127e
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, 2022
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 the financial condition, results
of operations and/or prospects of Prudential and its wholly and
jointly owned businesses, as a whole, and, accordingly, the trading
price of Prudential’s 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 factors specified under
‘Forward-looking statements’.
Prudential’s
approaches to managing risks are explained in the ‘Risk
review’ section of this document.
1.
RISKS
RELATING TO PRUDENTIAL’S FINANCIAL SITUATION
1.1
The
Covid-19 pandemic has significantly impacted financial market
volatility and global economic activity, increased operational
disruption risks for businesses 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 added significant uncertainty to the
stability and outlook of equity markets, interest rates and credit
spreads, and has affected market liquidity and reduced global
economic activity. The potential adverse impacts to the Group of
these effects are detailed in risk factor 1.2 below. However, while
global growth has broadly recovered, the full extent of the
long-term 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. These actions, and their effectiveness, vary between
markets, and may drive an uneven economic recovery, and include the
extent and timing of continued measures to restrict movement and
the effectiveness of vaccination programme deployment and uptake in
response to current, emerging and future variants of the
coronavirus. Where actions and impacts are prolonged, they may
affect the solvency position of the Group’s subsidiaries and
prevent or limit their ability to make remittances, adversely
impacting the financial condition and prospects of the
Group.
The
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. As some
countries begin to adopt strategies to manage Covid-19 as an
endemic disease, variations in the speed of economic recovery
between markets, and the subsequent impact on their respective
interest rates, inflation expectations and the relative strength of
their currencies (and the associated impact on their foreign
currency debt obligations, which may disproportionately impact
emerging economies) may have broader long-term adverse economic and
financial consequences for the markets in which the Group operates
and the full extent of this currently remains uncertain. 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 some the markets in
which the Group operates. Many governments are implementing
Covid-19 vaccination and booster programmes, and variable
accessibility to supplies of vaccines that are effective against
current, emerging and future variants of the coronavirus has the
potential to contribute to an increase in geopolitical and
political 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 and 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 extend to
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. In particular, sales in the Group’s Hong Kong
business continue to be adversely impacted by the border
restrictions in place with Mainland China. In FY 2020, during which
the border closure occurred in Q1, the APE sales of the
Group’s Hong Kong business reduced by $1,258 million (or 62
per cent) compared to 2019. In FY 2021, during which the border
remained closed for the entire year, the APE sales of the Hong Kong
business reduced by $208 million (or 27 per cent) compared to 2020.
These impacts to the APE sales of the Group’s Hong Kong
business were largely as a result of the border closure. Recovery
in sales levels will be dependent on the timing and extent of the
easing of these restrictions, with the emergence of the Covid-19
Omicron variant further increasing uncertainty to the return of
Mainland China customers as well as the resumption of their demand
for the Group’s products in Hong Kong. These impacts may be
prolonged in markets which continue to rely on containment measures
based on restrictions of movement. The impact on 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, 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. The Group’s assessment to date is
that elevated mortality claims in some markets can be attributed to
Covid-19. The full extent of the impact of the Covid-19 pandemic is
currently uncertain and the Group’s claims and persistency
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. The potential
longer-term impacts of the pandemic may include latent morbidity
impacts from the deferral of medical treatment by policyholders. It
may be a factor in increasing morbidity claims and there may be
implications from other factors such as long-term post-Covid-19
symptoms (although there is currently no consensus on the longer
term impact on morbidity).
Disruption
to Prudential’s operations may result where its employees, or
those of its service partners and counterparties, contract Covid-19
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
also be an increase in attempts to compromise the resilience of IT
systems through phishing, social engineering tactics and
ransomware. Such measures, and the cycles of their relaxation and
re-imposition, may also adversely impact the physical and mental
health of the Group’s staff, increasing the risk of
operational disruption resulting from performance impairment, an
increase in absenteeism, or increased levels of staff turnover,
which may affect operational capacity with the potential to be
exacerbated by challenges in recruitment. The operations of
Prudential’s service partners (which subject the Group to the
risks detailed in risk factor 3.7, resulting in certain risks that
Prudential does not face with respect to its wholly-owned
subsidiaries) may be disrupted in different ways and to a more
severe extent than the Group’s operations and may impact
service delivery to the Group.
In
response to pandemic-related restrictions, Prudential implemented
changes to its sales and distribution processes in specific
markets. 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 global and national
macro-economic conditions 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, following a
prolonged period of relatively low interest rates in countries
relevant to Prudential, the reopening and recovery of some
economies during 2021 has resulted in inflationary pressures, which
if sustained or increased may drive interest rates higher,
impacting the valuation of fixed income assets. Uncertainties also
include the impact of factors such as the actions of central banks
and governments to mitigate the impact of the Covid-19 pandemic and
in response to inflationary pressures. The transition to a lower
carbon economy, the timing and speed of which is uncertain, may
also result in greater uncertainty, fluctuations or negative trends
in asset valuations, particularly for carbon intensive sectors, and
will have a bearing on inflation levels.
Global
financial markets are subject to uncertainty and volatility created
by a variety of factors. These factors include actual or expected
slowdowns or reversals in world economic growth (particularly where
this is abrupt, as has been the case with the early impact of the
Covid-19 pandemic), sector specific slowdowns or deteriorations
which have the potential to have contagion impacts (such as the
negative developments in the China property sector), 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 geopolitical and political
risk and policy-related uncertainty (including those resulting from
the Russia-Ukraine conflict and the potential impact on business
sentiment and the broader market resulting from regulatory
tightening across sectors in China) and socio-political,
climate-driven and pandemic events. The extent of the 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 non-unit-linked
products with a savings component, 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, as
recently experienced by a number of issuers within the China
property sector, which may deteriorate the credit rating profile
and valuation of the Group’s invested credit portfolio (and
which may result in an increase in regulatory capital requirements
for the Group or its businesses), increased credit defaults and
debt restructurings and wider credit and liquidity spreads
resulting in realised and unrealised credit losses. Regulations
imposing or increasing restrictions on the amount of company debt
financing, such as those placing limits on debt or liability
ratios, may also reduce the financial flexibility of corporate
entities. Similarly, securitised assets 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. Where a widespread deterioration in the
financial strength of corporate entities occurs, any assumptions on
the ability and willingness of governments to provide financial
support may need to be revised.
–
Failure of
counterparties who have transactions with Prudential (such as
banks, reinsurers and counterparties to cash management and risk
transfer or hedging 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 the adequacy of collateral. Geographic or sector 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, by their nature, lack liquidity or
have the potential to lose liquidity rapidly, such as investment
funds (including money market funds), 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, decreases in equity prices impact the
amount of revenue derived from fees from the unit-linked products.
Sustained inflationary pressures which may drive higher interest
rates may also impact the valuation of fixed income investments and
reduce fee income.
–
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 example, inflationary pressures driving higher interest
rates may lead to increased lapses for some guaranteed savings
products where higher levels of guarantees are offered by products
of the Group’s competitors, reflecting consumer demand for
returns at the level of, or exceeding, inflation. Increased
inflation may also adversely impact the ability of consumers to
purchase insurance products, particularly in lower income customer
segments.
For
some non-unit-linked products with a savings component 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 or
where the duration of policyholder liabilities is longer than the
duration of bonds issued and available in the market, 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. If interest rates in these markets are 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 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.
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
Geopolitical
and 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 geopolitical and political risks and
uncertainty in the markets in which it operates. Such risks may
include:
–
The application of
government regulations, executive powers, protectionist or
restrictive economic and trade policies or measures adopted by
businesses or industries which increase trade barriers or restrict
trade, sales, financial transactions, or the transfer of capital,
investment, data or other intellectual property, with respect to
specific territories, markets, companies or
individuals;
–
An increase in the
volume and pace of domestic regulatory changes, including those
applying to specific sectors;
–
The increased
adoption or implementation of laws and regulations which may
purport to have extra-territorial application;
–
International trade
disputes such as the implementation of trade tariffs;
–
Withdrawals or
expulsions from existing trading blocs or agreements or financial
transaction systems, including those which facilitate cross-border
payments;
–
The domestic
application of measures restricting national airspace with respect
to aircraft of specific territories, markets, companies or
individuals;
–
Measures favouring
local enterprises, such as changes to the maximum level of
non-domestic ownership by foreign companies or differing treatment
of foreign-owned businesses under regulations and tax rules;
and
–
Measures which
require businesses of overseas companies to operate through locally
incorporated entities or with requirements on minimum local
representation on executive or management committees.
The
above measures may have an adverse impact on Prudential through
their effects on the macroeconomic outlook and the environment for
global financial markets. They may also increase regulatory
compliance and reputational risks, or adversely impact Prudential
where they apply to, and impact, the economic, business and legal
and regulatory environment in specific markets or territories in
which the Group, its joint venture or jointly owned businesses,
sales and distribution networks, or third party service providers
have operations. For internationally active groups such as
Prudential, operating across multiple jurisdictions, such measures
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 4.1 below.
Geopolitical
and political risks and uncertainty may also adversely impact the
Group’s operations and its operational resilience. Increased
geopolitical tensions may increase domestic and cross-border cyber
intrusion activity and therefore increase cyber security risks.
Geopolitical and political tensions may also lead to conflict,
civil unrest and/or acts of civil disobedience. 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.
Legislative
or regulatory changes which adversely impact Hong Kong’s
economy or its international trading and economic relationships,
may also result in adverse sales, operational and product
distribution impacts to the Group due to the territory being a key
market which also hosts Group head office functions.
1.4
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 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.
1.5
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 and 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.
In
addition, 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.
Any
such downgrade of the Group could have an adverse effect on
Prudential’s financial flexibility, requirements to post
collateral under or in connection with transactions to which they
are a party and ability to manage market risk exposures. In
addition, the interest rates or other costs that the Group incurs
in respect of its financing activities may increase as a result. A
credit rating downgrade may also affect public confidence in the
Group’s products and may adversely impact on its ability to
market products, retain current policyholders or attract new
policyholders.
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. The results of some entities
within the Group are not denominated in or linked to the US dollar
and some enter into 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
HK dollar peg to the US dollar.
2.
RISKS
RELATING TO SUSTAINABILITY AND ENVIRONMENTAL, SOCIAL AND GOVERNANCE
(‘ESG’) MATTERS
2.1
The
failure to understand and respond effectively to the risks
associated with ESG factors could adversely affect
Prudential’s achievement of its long‑term
strategy.
A
failure to manage the material risks associated with key ESG themes
detailed below may undermine the sustainability of Prudential by
adversely impacting the Group’s reputation and brand, ability
to attract and retain customers and employees, and therefore the
results of its operations and delivery of its strategy and
long-term financial success.
Environmental
concerns, notably those associated with climate change and their
social and economic impacts, present long-term risks to the
sustainability of Prudential and may impact its customers and other
shareholders.
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 to a
lower carbon economy and physical and litigation risks. 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. The potential impact of these factors on the
valuation of investments may also have a broader economic impact
that may adversely affect customers and their demand for the
Group’s products. The transition to a lower carbon economy
has the potential to disproportionately impact the Asia and Africa
markets in which Prudential operates and invests, and the
Group’s stakeholders increasingly expect and/or rely on the
Group to support an orderly, inclusive and sustainable transition
based on an understanding of relevant country and company-level
transition plans taking into consideration the impact on the
economies, businesses, communities and customers in these
markets.
The
pace and volume of new climate-related regulation emerging across
the markets in which the Group operates, the need to deliver on
existing and new voluntary exclusions on investments in certain
sectors, engagement and reporting commitments and the demand for
externally assured reporting may give rise to compliance,
operational and disclosure risks which may be increased by the
multi-jurisdictional coordination required in adopting a consistent
risk management approach.
The
Group’s ability to sufficiently understand and appropriately
react to transition risk and its ability to deliver on its external
carbon reduction commitments 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, are likely to become increasingly
significant factors in the mortality and morbidity risk assessments
for the Group’s 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 adversely impact the Group’s operational resilience and
its customers, which may potentially occur through migration or
displacement both within and across borders.
A
failure to understand, manage and provide greater transparency of
its exposure to these climate-related risks may have increasingly
adverse implications for Prudential and its
stakeholders.
Social
risks that could impact Prudential may arise from a failure to
consider the rights, diversity, well-being, needs, and interests of
its customers and employees and the communities in which the Group
or its third parties operate. Perceived inequalities and income
disparities, intensified by the pandemic, have the potential to
further erode social cohesion across the Group’s markets
which may increase operational and disruption risks for Prudential.
These risks are increased as Prudential operates in multiple
jurisdictions with distinct local cultures and
considerations.
Evolving
social norms and emerging population risks associated with public
health trends (such as an increase in obesity and mental health
deterioration) and demographic changes (such as population
urbanisation and ageing) may affect customer lifestyles and
therefore may impact the level of claims under the Group’s
insurance product offerings. As a provider of insurance and
investment services, the Group is increasingly focused on making
its products more accessible through 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 in risk factor 3.5. The increasing
digitalisation of products, services and processes may also result
in new and unforeseen regulatory requirements and stakeholder
expectations, including those relating to how the Group supports
its customers through this transformation.
As an
employer, the Group is also exposed to the risk of being unable to
attract, retain and develop a diverse group of highly-skilled
employees to meet the changing need of a transformative
organisation. This may increase if Prudential does not implement
responsible working practices or fails to recognise the benefits of
diversity, ensure psychological safety for employees, or promote a
culture of inclusion and sense of belonging. The potential for
reputational risk extends to the Group’s supply chains and
its investee companies, which may be exposed to factors such as
poor labour standards and abuses of human rights by third
parties.
A
failure to maintain high standards of corporate governance may
adversely impact the Group and its customers and employees and
increase the risk of poor decision-making and a lack of oversight
and management 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 also 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 service providers increase the potential
for reputational risks arising from poor governance.
Sustainability
and ESG-related risks may directly or indirectly impact
Prudential’s business and the achievement of its strategic
focus on providing greater and more inclusive access to good health
and financial security, responsible stewardship in managing the
human impact of climate change and building human and social
capital with its broad range of 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 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 and sustainability matters, which may differ,
both within and across the markets in which the Group operates. In
its investment activities, Prudential’s stakeholders
increasingly have expectations of, and place reliance on, an
approach to responsible investment that demonstrates how ESG and
sustainability considerations are effectively integrated into
investment decisions and responsible supply chain management and
the performance of fiduciary and stewardship duties. These duties
include effective implementation of exclusions, voting and active
engagement decisions with respect to investee companies, as both an
asset owner and an asset manager, in line with internally defined
procedures and external commitments.
3.
RISKS
RELATING TO PRUDENTIAL’S BUSINESS ACTIVITIES AND
INDUSTRY
3.1
The
implementation of large-scale transformation, including complex
strategic initiatives, gives rise to significant design and
execution risks and may affect Prudential’s operational
capability and capacity. Any failure of these initiatives to meet
their objectives may adversely impact the Group and the delivery of
its strategy.
Where
required in order to implement its business strategies for growth,
meet customer needs, improve customer experiences, strengthen
operational resilience, meet regulatory and industry requirements
and maintain market competitiveness, Prudential from time to time
undertakes Group restructuring, transformation programmes and
acquisitions and disposals across its business. Many of these
change initiatives are complex, interconnected and/or of large
scale, and include improvement of business efficiencies through
operating model changes, advancing the Group’s digital
capability, expanding strategic partnerships and industry and
regulatory-driven change. There may be a material adverse effect on
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. Large scale restructuring of
Prudential, such as the recent Jackson Demerger and changes to the
Group’s management and operational model, have increased
uncertainty for the Group’s employees, which may affect
operational capacity and the ability of the Group to deliver its
strategy.
Additionally,
there may be adverse non-financial (including operational,
regulatory, conduct and reputational) implications for the Group in
undertaking such initiatives, which 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, may amplify these risks. Risks relating to these
regulatory changes are explained in risk factor 4.1
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 additional
regulatory, information security, operational, ethical and conduct
risks which, if inadequately managed, could result in customer
detriment and reputational damage.
3.2
Prudential
is exposed to ongoing risks as a result of the Jackson Demerger,
which, if they materialise, could adversely affect
Prudential’s business.
(a)
The Group continues
to hold shares in Jackson but no longer has any
control
On 13
September 2021, Prudential completed the Jackson Demerger (the
‘Demerger’). As at 31 December 2021, the Group retains
an 18.4 per cent. economic interest (and an 18.5 per cent. voting
interest) in the total common stock of Jackson. The Group intends
to reduce this investment to less than 10 per cent. within 12
months of the completion of the Jackson Demerger. As a result of
the Demerger, Prudential no longer has the ability to control
Jackson’s strategic, financial and operational decisions.
Jackson may fail to develop its business, meet the expectations of
investors, may be subject to adverse publicity and increased legal
or regulatory scrutiny, or its reported financial position may be
adversely impacted by errors or limitations in its modelling and
other assumptions related to its business, including the
calculation of regulatory or internal capital requirements, the
valuation of assets and liabilities, and determining hedging
requirements. These factors may have an adverse impact on the
market price of Jackson shares, which 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.
(b)
Indemnities have
been given under a Demerger Agreement by Prudential in favour of
the Jackson Group
At the
time of the Demerger, Prudential and Jackson entered into the
Demerger Agreement. This governs the post-Jackson Demerger
obligations of the Group and the Jackson Group and contains, among
other provisions, indemnities under which Prudential indemnifies
the Jackson Group against liabilities that may arise in connection
with the business carried on by the Group (other than
Jackson’s business) prior to the Jackson Demerger. Prudential
has the right to defend any such claim.
Although
it is not anticipated that Prudential will be required to pay any
substantial amount pursuant to such indemnity obligations, if any
amounts payable under the indemnities are substantial, this could
have a material adverse effect on the financial condition and/or
results of Prudential.
(c)
Prudential may
incur liabilities in connection with the Jackson
Demerger
In
addition, in connection with the Jackson Demerger, Prudential may
be subject to claims by Jackson’s shareholders and other
third parties for any material misstatements or omissions of
material facts contained within Jackson’s Form 10
registration document, or for any fraudulent, intentional or
reckless misleading disclosure in connection with the Jackson
Shares under the US Securities and Exchange Act of 1934. If those
claims are not successfully defended, Prudential may have to pay
compensation, and where this is substantial may adversely affect
Prudential’s business, financial condition, cash flows,
results of operations and prospects.
3.3
Prudential’s
businesses are conducted in highly competitive environments with
developing demographic trends. The profitability of the
Group’s businesses depend on management’s ability to
respond to these pressures and trends.
The
markets for financial services are highly competitive, with a
number of factors affecting Prudential’s ability to sell its
products and 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 those enabling 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.
The
Group’s principal competitors include global life insurers
together with regional insurers and multinational asset managers.
In most markets, there are also local companies that have a
material market presence.
Prudential
believes that competition will intensify across all regions in
response to consumer demand, digital and other technological
advances (including the emergence and maturing 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 adversely 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 impact on the
Group’s business, financial condition, results of operations
and prospects.
3.4
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 other
external events. These risks may also adversely impact Prudential
through its partners. Prudential relies on the performance and
operations of a number of bancassurance, product distribution,
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 exposes Prudential to
the risk that the operations and services provided by these
partners are disrupted or fail. Further, Prudential operates in
extensive and evolving legal and regulatory environments (including
in relation to tax) which adds to the complexity of the governance
and operation of its business processes and controls.
Exposure
to such risks 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 risks,
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 and
customer conduct risk impacts, and may damage Prudential’s
reputation and relationship with its customers and business
partners. A failure to adequately oversee service partners (or
their IT and operational systems and processes) could result in
significant service degradation or disruption to Prudential’s
business operations and customers, which may have reputational or
conduct risk implications and could have a material adverse effect
on the Group’s business, financial condition, results of
operations and prospects.
Prudential’s
business requires the processing of a large number of transactions
for a diverse range of products. It also employs complex and
interconnected IT and finance systems, models, and user developed
applications in its processes to perform a range of operational
functions. These functions include the calculation of regulatory or
internal capital requirements, the valuation of assets and
liabilities and the acquisition of new business using artificial
intelligence and digital applications. Many of these tools form an
integral part of the information and decision-making frameworks
used by 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 their inappropriate usage, may lead
to regulatory breaches, inappropriate decision-making, financial
loss, customer detriment, inaccurate external reporting 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.
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, resilient
IT applications, infrastructure and security architectural design,
data governance and management and other operational systems,
personnel, controls and processes. During large-scale disruptive
events or times of significant change, the resilience and
operational effectiveness of these systems and processes at
Prudential and/or its third party service 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 complete 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. 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.
3.5
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 and reputational damage,
which could 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),
including disruption from ransomware, malicious software designed
to restrict Prudential’s access to data until the payment of
a sum of money. Where these risks materialise, this could result in
disruption to key operations, make it difficult to recover critical
data or 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.
Cyber-security threats continue 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, increasing adoption of the
Group’s Pulse platform and the 2020 designation of Prudential
as an Internationally Active Insurance Group (‘IAIG’)
could also increase the likelihood of Prudential being considered a
target by cyber criminals. Ransomware campaigns have increased in
frequency and represent an increasing threat to the financial
services sector, with recent highly publicised attacks on financial
services companies. The risk from untargeted but sophisticated and
automated attacks remains present.
There
is an increasing requirement and expectation on Prudential and its
business partners not only to hold the data of customers,
shareholders and employees 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 detriment to customers and third party
partners, and may adversely impact the reputation and brand of the
Group, its ability to attract and retain customers and deliver on
its long-term strategy and therefore the results of its
operations.
The
risk to the Group of not meeting these requirements and
expectations may be increased by the development of cloud-based
infrastructure and the 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 speed,
and the use of complex tools, machine learning and artificial
intelligence technologies to process, analyse and interpret this
data. New and currently unforeseeable regulatory issues may also
arise from the increased use of emerging technology. Regulatory
developments in cybersecurity and data protection (such as the
ongoing development of a holistic data governance regime in China,
including the Data Security Law, the Personal Information
Protection Law, which came into effect in November 2021, the
revised Measures for Cybersecurity Review and recently released
draft rules on the provision of internet healthcare services)
continue to progress worldwide. Such developments may increase the
complexity of requirements and obligations in this area, in
particular where they include national security restrictions or
impose differing and/or conflicting requirements with those of
other jurisdictions. These risks may also increase the financial
and reputational implications for Prudential of regulatory
non-compliance or a significant breach of IT systems or data,
including at its joint venture or third party service providers.
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 on its
operations. 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, and 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.
3.6
Prudential’s
Pulse platform may increase existing business risks to the Group or
introduce new risks as the markets in which it operates and its
features, partnerships and product offerings develop.
Prudential’s
digital platform, Pulse, is subject to a number of 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 and data privacy. the use
of models (including those using artificial intelligence) and the
handling of personal data. the resilience and integrity of IT
infrastructure and operations. and those relating 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 Pulse operates, each with
their own laws and regulations, regulatory and supervisory
authorities, the scope of application of which may be uncertain or
change at pace, may increase regulatory compliance
risks;
–
The implementation
of planned platform 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 platform
includes functionality relating to user generated content, which
may expose Prudential to legal liability or reputational risk in
the hosting of that content;
–
The increased
volume, breadth and sensitivity of data on which the business model
of Pulse 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 platform and
its services rely on a number of third party partners and
providers, which may vary according to the 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;
and
–
Support for, and
development of, the platform may be provided outside of the
individual markets in which the platform operates, which may
increase the complexity of local legal and regulatory
compliance.
New
product offerings and functionality may be developed and provided
through the platform, which may introduce new regulatory,
operational, conduct and strategic risks for the Group. Any
slowdown in digitalisation may reduce user adoption rates, the
current size of the user base of Pulse and/or the development of
product and service offerings, which may impact the ability of the
Group to deliver its digital strategy. Regulations may be
introduced which limit the permitted scope of online or digitally
distributed insurance, asset management or medical services, which
may restrict current or planned offerings provided by the Pulse
platform. Markets may also introduce regulations with specific
licensing requirements or requiring the provision of current or
planned services via locally incorporated entities, which increases
the regulatory and compliance risks associated with operating the
Pulse platform.
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.
3.7
Prudential
operates in certain markets with joint venture partners, minority
shareholders and other third parties. These businesses face the
same risks as the rest of the Group and also give rise to certain
risks to Prudential that the Group 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. The financial condition, operations and
reputation of Group may be adversely impacted, or the Group may
face 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. Reputational risks to the Group
are amplified where any joint venture or jointly owned businesses
carry the Prudential name.
A
material proportion of the Group’s business comes from its
joint ventures in China and India. For such 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. As a result, the level of oversight, control and
access to management information the Group is able to exercise over
the extent of the exposure to material risks at these operations
may be lower compared to the Group’s wholly owned businesses.
This may increase the uncertainty for the Group over the financial
condition of these operations, including the credit risk profile
and valuation of their investment portfolios and the extent of
their invested credit and counterparty credit risk exposure,
resulting in heightened risks to the Group as whole. This may
particularly be the case where the countries in which these
operations are located experience market or sector-specific
slowdowns, volatility or deterioration (such as the recent negative
developments in the China property sector). In addition, the level
of control exercisable by the Group could be affected by changes in
the maximum level of non-domestic ownership imposed on foreign
companies in certain jurisdictions. The exposure of the Group to
the risks detailed in risk factor 3.1 above may also increase
should the Group’s strategic initiatives include the
expansion of the Group’s operations through joint ventures or
jointly owned businesses.
In
addition, a significant proportion of the Group’s product
distribution is carried out through agency arrangements and
contractual arrangements with third party service providers not
controlled by Prudential, such as bancassurance arrangements, and
the Group is therefore dependent upon the 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 service providers, material
failure in controls (such as those pertaining to the third party
service provider 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.
3.8
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 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.
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. 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 persistency are significantly
different than assumed, the Group’s results of operations
could be adversely affected.
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, as well as
pharmaceutical treatments and vaccines (and their roll-outs) and
non-pharmaceutical interventions, 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 risk factor
1.1 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;
the risk of ambiguity in the reinsurance terms and conditions
leading to uncertainty whether an event is covered under a
reinsurance contract; and the risk of being unable to replace an
existing reinsurer, or find a new reinsurer, for the risk transfer
being sought.
Any of
the foregoing, individually or together, could have a material
adverse effect on Prudential’s business, financial condition,
results of operations and prospects.
4.
RISKS
RELATING TO LEGAL AND REGULATORY REQUIREMENTS
4.1
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 their interpretations and any accounting
standards in the markets in which it operates.
Changes
in government policy and legislation (including in relation to tax
and data security), 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 and expectations of customers-facing
processes including 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 or
restrictions on 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, including those
in respect of international sanctions, 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.
Further
information on specific areas of regulatory and supervisory
requirements and changes are included below.
(a)
Group-wide
Supervision
The
Hong Kong IA has been the Group-wide supervisor of Prudential since
21 October 2019. To align Hong Kong’s regulatory regime with
international standards and practices, the Hong Kong IA has
developed a 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. The GWS Framework
became effective for Prudential upon designation by the Hong Kong
IA on 14 May 2021, subject to transitional arrangements allowed in
legislation which have been agreed with the Hong Kong
IA.
Under
the GWS Framework, all debt instruments, both senior and
subordinated, issued by Prudential as at the date of designation
meet the transitional conditions set by the Hong Kong IA and are
included as eligible Group capital resources.
Whilst
the regulatory requirements have been finalised and are in effect,
given the early nature of the regime, there is a risk that the
interpretations of the principle-based regulatory requirements made
by the Group in complying with the regulatory requirements may
differ in some aspects from the interpretations made by the Hong
Kong IA in their supervision of these principle-based regulatory
requirements or as a result of the potential for further regulatory
guidance to be issued.
(b)
Global regulatory
requirements and systemic risk regulation
Currently
there are also a number of ongoing global regulatory developments
which could impact Prudential’s businesses in the many
jurisdictions in which they operate. These include the work of the
Financial Stability Board (the ‘FSB’) in the area of
systemic risk including the reassessment of the designation of
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. There remains a high degree of
uncertainty over the potential impact of such changes on the
Group.
Efforts
to curb systemic risk and promote financial stability are also
under way. At the international level, the FSB continues to develop
recommendations for the asset management and insurance sectors,
including ongoing assessment of systemic risk measures. The IAIS
has continued to focus on the following key
developments.
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’).
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.
The
IAIS has also been developing the ICS (‘Insurance Capital
Standard’) as part of ComFrame. The implementation of ICS
will be conducted in two phases: a five-year monitoring phase
followed by an implementation phase. The Aggregation Method is one
of the alternatives being considered to the default approach
undertaken for the ICS during the monitoring period and the related
proposals are being led by the National Association of Insurance
Commissioners (‘NAIC’).
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 well as under the
Hong Kong IA’s GWS Framework. 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.
There
continues to be material change in the regulatory guidance in this
area, including several areas still in development as part of the
IAIS’ HF implementation and any new or changing regulations
could have a further impact on Prudential. Recent developments
include:
–
On 18 January 2022,
the IAIS released its 2022-23 roadmap. In addition to those related
to the HF and ICS, key areas of focus will include activities and
initiatives focusing on operational and cyber resilience in the
insurance sector including IT third-party outsourcing, climate
change risk, financial inclusion, culture and conduct, diversity,
equity and inclusion, fintech and policyholder protection schemes
and their role in insurer resolution;
–
The IAIS is
proposing to introduce liquidity metrics to be used as ancillary
indicators, with the phase 2 consultation completed in January
2022;
–
A consultation on
an application paper on macroprudential supervision was also
launched by the IAIS in March 2021;
–
Following the
publication of its 2020 Resolution Report in November 2020, the FSB
released practice papers for consultation on intra-group
connectedness and resolution funding for insurers, with input
requested by 12 March 2022. Resolution regimes will continue to be
a near term focus in the FSB’s financial stability work,
potentially being a key tool in informing decisions around the
reformed G-SII designation. These consultations constitute the last
of the FSB’s systemic risk work for insurers, prior to the
designation assessment planned at year end 2022; and
–
The IMF released a
Financial System Stability Assessment for Hong Kong in June 2021.
One of the conclusions of the report was that there is room to
further strengthen the macroprudential framework by enhancing
systemic risk assessment and communication.
(c)
Regional regulatory
regime developments, including climate-related regulatory
changes
In the
Group’s key markets, regulatory changes and reforms are in
progress, with some uncertainty on the full impact to
Prudential:
–
In China,
regulatory tightening across a number of industries in 2021, which
may continue across other industries, has driven market volatility,
heightened credit risk, adversely impacted business sentiment, with
the potential for broader financial contagion. Other recent
regulatory developments in China which may potentially increase
compliance risk to the Group include the following:
-
Development of a
holistic data governance regime in China, which have recently
included the Data Security Law, the Personal Information Protection
Law, and the revised Measures for Cybersecurity
Review;
-
The CBIRC recently
released new regulations on internet life insurance sales in China
which include restrictions on the selling of certain long-term
products online, effective 31 December 2021; and
-
On 26 October 2021
the National Health Commission released for public comment draft
rules on the internet healthcare services, which include
restrictions on online AI-driven diagnosis and treatments as well
as requirements including real-time supervision by provincial
internet supervision platforms and meeting financial and
operational criteria, including certain risk management and
corporate governance ratings. These rules may have implications for
the Group’s plans for its Pulse platform in
China.
–
In Hong Kong, the
Hong Kong IA is seeking to align the territory’s insurance
regime with international standards and has been developing a
risk-based capital (‘RBC’) framework. The RBC framework
will comprise three pillars: quantitative requirements, including
assessment of capital adequacy and valuation; qualitative
requirements, including corporate governance, Enterprise Risk
Management as well as Own Risk and Solvency Assessment; and public
disclosures and transparency of information. The Hong Kong IA is
permitting applications for early adoption of the
framework.
–
In Malaysia, Bank
Negara Malaysia (‘BNM’), the central bank of Malaysia,
has initiated a multi-phase review of its current RBC frameworks
for insurers and takaful operators which has been conducted since
2018. The review aims to ensure that the frameworks remain
effective under changing market conditions, facilitate consistent
and comparable capital adequacy measurement across the insurance
and takaful industry, where appropriate, and achieve greater
alignment with key elements of the global capital standards such as
ICS, where appropriate. The timing of the effective date of the
updated rules currently remains uncertain but certain changes, such
as the applicable discount rate on liabilities, are expected to
come into effect in 2022.
–
In China, the China
Banking and Insurance Regulatory Commission (‘CBIRC’)
announced plans for its China Risk Oriented Solvency System
(‘C-ROSS’) Phase II in 2017. Quantitative impact
studies have been performed in 2020 and 2021. On 30 December 2021,
the CBIRC released the official regulation for C-ROSS II, which is
effective for Q1 2022 solvency reporting.
–
In Indonesia,
regulatory and supervisory focus on the insurance industry remains
high. The Financial Services Authority of Indonesia, the Otoritas
Jasa Keuangan (‘OJK’) has been revising investment
linked products (‘ILP’) regulations with the aim of
increasing insurance penetration and better protecting customer
interests and improving market conduct. The final regulations are
expected to be issued during 2022 and will have implications for
the product strategies and insurance and compliance risks for
insurers. General supervisory focus on insurer governance has
increased, in particular on the autonomy of decision-making of
local insurers. The OJK has also focused on consumer protection
regulations more broadly and has recently enhanced regulatory
requirements on IT risk management. Since the 2014 Insurance Law,
the industry has been subject to regulatory expectations on the
separation of conventional and Sharia business.
–
In Malaysia, BNM
issued a circular letter in Q1 2021 specifying requirements for the
design and disclosure of ILPs which provide extension of coverage
beyond the initial coverage term. These changes aim to improve the
appropriateness of product design and the customer disclosures
provided on ILP policy documents. The new requirements for ILP
products sold since March 2021 came into effect on 22 September
2021, while for all in-force products sold prior to March 2021 the
proposed effective date has been extended to 1 April 2022. The
changes are expected to materially impact insurer systems,
disclosures, customer communications, sales conduct and post-sale
processes.
The
pace and volume of climate-related regulatory changes is also
increasing. Regulators including the Hong Kong Monetary Authority,
the Monetary Authority of Singapore, BNM in Malaysia and the
Financial Supervisory Commission in Taiwan are in the process of
developing supervisory and disclosure requirements or guidelines
related to the environment and climate change. It is expected that
other regulators will develop similar requirements. These changes
may give rise to compliance, operational and disclosure risks
requiring Prudential to coordinate across multiple jurisdictions in
order to apply a consistent risk management approach.
Prudential’s
consolidated accounts are prepared in accordance with current IFRS
applicable to the insurance industry. In May 2017, the IASB
published its standard on insurance accounting (IFRS 17, 'Insurance
Contracts') which replaces the current IFRS 4 standard. Some
targeted amendments to this standard, including to the effective
date, were issued in June 2020 and December 2021. 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. Prudential has a Group-wide implementation
programme underway to implement this new standard. A reliable
estimate of the effect of changes required to the Group’s
accounting policies as a result of implementing this standard,
which is expected to alter the timing of IFRS profit recognition,
is not yet available as implementation is underway. The
implementation of this standard involves significant enhancements
to the IT, actuarial and finance systems of the Group.
Apart
from IFRS 17, any other changes or modification of IFRS accounting
policies may also require a change in the way in which future
results will be determined and/or a retrospective adjustment of
reported results to ensure consistency.
(e)
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 Secured Overnight Financing Rate
(‘SOFR’) in the US and the Singapore Swap Offer Rate
(‘SOR’) 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.
(f)
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.
4.2
The
conduct of business in a way that adversely impacts the fair
treatment of customers 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.
In the
course of its operations and at any stage of the product lifecycle,
the Group or its intermediaries may conduct business in a way that
adversely impacts customer outcomes and the fair treatment of
customers (‘conduct risk’). This may arise through a
failure to: design, provide and promote suitable products and
services to customers that meet their needs, are clearly explained
or deliver real value, provide and promote a high standard of
customer service, appropriately manage customer information, or
appropriately handle and assess complaints. A failure to identify
or implement appropriate governance and management of conduct risk
may result in harm to customers and regulatory sanctions and
restrictions, and 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.
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.
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.
4.3
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.
4.4
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.
The
Organisation for Economic Co-operation and Development
(‘OECD’) is currently undertaking a project intended to
modernise the global international tax system, commonly referred to
as Base Erosion and Profit-Shifting 2.0 (‘BEPS 2.0’).
The project has two pillars. The first pillar is focused on the
allocation of taxing rights between jurisdictions for in-scope
multinational enterprises that sell cross-border goods and services
into countries with little or no local physical presence. The
second pillar is focused on developing a global minimum tax rate of
15 percent applicable to in-scope multinational
enterprises.
On 8
October 2021 the OECD issued a statement setting out the high level
principles which have been agreed by over 130 jurisdictions
involved in the project. Based on the 8 October 2021 OECD
statement, Prudential does not expect to be affected by proposals
under the first pillar given they include an exemption for
regulated financial services companies.
On 20
December 2021 the OECD published detailed model rules for the
second pillar, with implementation of the rules envisaged by 2023.
These rules will apply to Prudential where implemented into the
national law of jurisdictions where it has entities within the
scope of the rules. On 11 January 2022, the UK government issued a
consultation on the UK implementation of these rules, with the
intention of including required legislation in Finance Bill 2022-23
and for the rules to be effective from 1 April 2023. Detailed
guidance from the OECD is awaited to assist with interpreting the
model rules. The early indications are that some jurisdictions may
also introduce a domestic minimum tax for in-scope multinationals
alongside introducing the global rules. As Prudential operates in a
number of jurisdictions where the effective tax rate can be less
than 15 per cent, the implementation of the model rules and/or
equivalent domestic minimum tax rules may have an adverse impact on
the Group. Until further clarity is provided on how the OECD model
rules are to be interpreted, how relevant jurisdictions will
implement them and any domestic minimum tax regimes, the full
extent of the long-term impact on Prudential’s business, tax
liabilities and profits remain uncertain.
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:
09 March 2022
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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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