a9986s
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, 2023
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, exhaustive 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 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
macroeconomic 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 has materially changed in recent periods. This
presents significant uncertainties and potential challenges. For
example, the rise in energy and commodity prices, exacerbated by
the Russia-Ukraine conflict and global supply chain stresses, has
contributed to the current inflationary environment. This has
resulted in central banks, led by the US, rapidly tightening
financial conditions with potential for further increases in
interest rates in major global economies and the markets in which
the Group operates, adversely impacting the valuation of fixed
income assets and future profits due to the use of higher discount
rates. In addition, the rising rates for developed economies have
also led to weakened exchange rates of a number of emerging
economies in which the Group operates, adversely impacting
Prudential's consolidated financial statements upon the translation
of results into US dollar, the Group's reporting currency. Other
market uncertainties also include the impact of factors such as the
nature and extent of central banks and governments actions in
response to the inflationary environment, and the rapid relaxation
of the Chinese Mainland's zero tolerance Covid-19 policy as well as
border reopening. These uncertainties may apply for a prolonged
period of time. The transition to a lower carbon economy, the
timing and speed of which is uncertain and will vary by country,
may also result in greater uncertainty, fluctuations or negative
trends in asset valuations and reduced liquidity, particularly for
carbon intensive sectors, and will have a bearing on inflation
levels.
The uncertain macroeconomic and financial market environment may
have a number of adverse impacts on the business, financial
condition and results of the Group, including increased strategic,
business, insurance, product and customer conduct risks. 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,
frauds, lapses, or surrenders of policies, and some policyholders
may choose to defer or stop paying insurance premiums or reduce
deposits into retirement plans. Uncertainty over livelihoods,
elevated cost of living and challenges in affordability may
adversely impact the demand for insurance products, and increase
regulatory risk in meeting regulatory definitions and expectations
with respect to vulnerable customers (see risk factor 3.8). 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, 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, sustained inflationary pressures driving
interest rates to even higher levels 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. High inflation, combined with an economic
downturn or recession, may also result in affordability challenges,
adversely impacting the ability of consumers to purchase insurance
products. Rising inflation, via medical claims inflation (with
rising medical import prices a factor under current market
conditions), may adversely impact the profitability of the Group's
businesses.
Global financial markets are subject to uncertainty and volatility
created by a variety of factors. These factors include actual or
expected changes in monetary policy in the Chinese Mainland, the US
and other jurisdictions together with their impact on base interest
rates and the valuation of all asset classes and inflation
expectations; slowdowns or reversals in world or regional economic
growth (particularly where this is abrupt, as has been the case
with the impact of the Russia-Ukraine conflict and geopolitical
tensions); sector-specific slowdowns or deteriorations which have
the potential to have contagion impacts (such as the negative
developments in the Chinese Mainland property sector); fluctuations
in global energy prices; and concerns over sovereign debt. Other
factors include fluctuations in global commodity prices, concerns
on the serviceability of sovereign debt in certain economies
(particularly as central banks continue to raise rates in response
to high inflation and the high indebtedness across sub-Saharan
Africa countries), the increased level of geopolitical and
political risk and policy-related uncertainty (including those
resulting from the Russia-Ukraine conflict and the uncertainty and
potential impact on business sentiment and the broader market
resulting from the relaxation of pandemic-related restrictions, and
border reopening, as well as regulatory tightening across sectors
in the Chinese Mainland) 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:
-
Changes to interest rates could reduce Prudential's capital
strength and impair its ability to write significant volumes of new
business. Increases in interest rates could adversely impact the
financial condition of the Group through changes in the present
value of future fees for unit-linked based businesses and/or the
present value of future profits for accident and health products;
and/or reduce the value of its assets and/or have a negative impact
on its assets under management and profit. Decreases in interest
rates could increase the potential adverse impact of product
guarantees included in non-unit-linked products with a savings
component; reduce investment returns arising on the Group's
portfolios; impact the valuation of debt securities; and/or
increase reinvestment risk for some of the Group's investments from
accelerated prepayments and increased redemptions.
-
A reduction in the financial strength and flexibility of corporate
entities, as experienced by a number of issuers within the Chinese
Mainland 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, or legal, regulatory or reputational restrictions on
the Group's ability to deal with, counterparties who have
transactions with Prudential (such as banks, reinsurers and
counterparties to cash management and risk transfer or hedging
transactions) to meet commitments 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, volatile 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.
-
Illiquidity of the Group's investments. 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. 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 the uncertainty over the accessibility of financial
resources which in extreme conditions could impact the functioning
of markets and 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.
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 may
particularly be the case in those markets 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.
1.2 Geopolitical and political risks and uncertainty may
adversely impact economic conditions, increase market volatility
and regulatory compliance risks, cause operational disruption to
the Group and impact the implementation of 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 diverse 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 regional and national financial markets. They may also
increase uncertainties and long-term complexity of legal and
regulatory compliance, and result in heightened sanctions risk
driven by geopolitical conflicts, as well as increase reputational
risks, or may adversely impact Prudential where they apply to, and
impact, the economic, business, legal and regulatory environment in
specific markets or territories in which the Group, its joint
ventures 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, in particular, may 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.
1.3 Covid-19 continues to have the potential to impact
financial market volatility and global economic activity, increase
operational disruption risks for businesses and adversely impact
Prudential's sales in affected markets and its financial condition,
results of operations and prospects.
Whilst most markets have moved to an endemic approach in managing
Covid-19, the broader long-term macroeconomic impacts of Covid-19
continue to add uncertainty to the stability and outlook of equity
markets, interest rates and credit spreads, and have the potential
to affect market liquidity and reduce global economic activity. The
potential adverse impacts to the Group of these effects are
detailed in risk factor 1.1 above. Where measures to contain
Covid-19 have been in effect, the level of sales activity in
affected markets has been adversely impacted through a reduction in
travel, and in agency and bancassurance activity. In particular,
sales in the Group's Hong Kong business have been adversely
impacted by the border restrictions in place with the Chinese
Mainland. The recent easing of pandemic-related restrictions and
the reopening of borders may help with recovery in sales levels in
Hong Kong, however, uncertainty remains on the return of Chinese
Mainland customers as well as the resumption of their demand for
the Group's products in Hong Kong. The longer-term effects of
Covid-19 have included, and may continue to 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).
In response to previous pandemic-related restrictions, Prudential
implemented changes to its sales and distribution processes in
specific markets. These included 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
operational and regulatory risks, in particular those focused on
customer outcomes and conduct. A failure to apply ongoing
appropriate governance and management of these risks may adversely
impact Prudential's reputation and brand and the results of its
operations. In markets where the level of sales under these
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.
1.4 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,
asset management, 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 geopolitical or political, social or
economic changes (including changes in governments, heads of state
or monarchs), military conflicts, pandemics and associated
disruption, and other events affecting the markets in which the
issuers of such debt are located and 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 (or in their agreed currency) 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 and availability 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, geopolitical tensions and conflicts 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, fiscal 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 certain occasions 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, as well as 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
acceptable 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 take in
response to any such actions, 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 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 non-US dollar transactions and the risks from the maintenance
of the HK dollar peg to the US dollar. In cases where a non-US
dollar denominated surplus arises in an operation which is to be
used to support Group capital or shareholders' interest (ie
remittances), this currency exposure may be hedged where considered
economically favourable. Prudential is also subject to the residual
risks arising from currency swaps and other derivatives that are
used to manage the currency exposure.
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 Group from meeting its ESG
commitments and the sustainability of Prudential by adversely
impacting the Group's reputation and brand, and its 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.
(a)
Environmental risks
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 stakeholders.
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 the
transition to a lower carbon economy, physical, reputational and
shareholder, customer or third-party litigation risks. The global
transition to a lower carbon economy may have an adverse impact on
investment valuations and liquidity 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 changes in public policy,
technology and 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. Direct physical and other
risks from climate change and the transition to a lower carbon
economy have 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 market and company-level
transition plans taking into consideration the impact on the
economies, businesses, communities and customers in these
markets.
The Group's ability to sufficiently understand and appropriately
respond to transition risk and its ability to deliver on its
external carbon reduction commitments and the implementation of ESG
considerations in existing or new ESG-orientated products may be
limited by insufficient or unreliable data on carbon exposure and
transition plans for the investee company 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. Such short-term and long-term changes in markets
where 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.
The pace and volume of global standards and climate-related
regulations emerging across the markets in which the Group
operates, the need to deliver on existing and new exclusions or
restrictions on investments in certain sectors, engagement and
reporting commitments and the demand for externally assured
reporting may give rise to compliance, operational and disclosure
and litigation risks which may be increased by the
multi-jurisdictional coordination required in adopting a consistent
risk management approach. The launch of ESG-orientated products, or
the (method of) incorporation of ESG considerations in the
investment process for existing products, may increase the risks
related to the perceived fulfilment of fiduciary duties to
customers by the Group's asset managers and may increase regulatory
compliance, customer conduct, product disclosure and customer
litigation risks. Prudential's voluntary memberships of, or
participation within, industry organisations and groups or their
initiatives may increase stakeholder expectations of the Group's
acquiescence or compliance with their publicised positions or aims
and therefore may increase the reputational risk of the Group where
their positions or aims evolve. See risk factor 4.1 for details of
ESG and sustainability-related regulatory and supervisory
developments with potential impacts the Group.
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.
(b)
Social risks
Social risks that could impact Prudential may arise from a failure
to consider the rights, diversity, well-being, changing needs,
human rights and interests of its customers and employees and the
communities in which the Group or its third parties operate.
Perceived inequity and income disparities (both with developed
markets and within the Group's markets), 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. Direct physical impacts of climate
change and deterioration of the natural environment and the global
transition to a lower carbon economy may disproportionately impact
the stability of livelihoods and health of lower socioeconomic
groups within the markets in which the Group operates. These risks
are heightened as Prudential operates in multiple jurisdictions and
vulnerable to climate change, 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.
The Group believes in supporting human rights and acting
responsibly and with integrity in everything the Group does, and is
committed to fostering an inclusive, diverse and open environment
for its employees in accordance with the principles of the
Universal Declaration of Human Rights and of the International
Labour Organisation's core labour standards. 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. The
Group is committed to zero tolerance of slavery, human trafficking,
child labour and any other form of human rights abuse within the
Group or in its supply chains globally.
(c)
Governance
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 inadequate
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, as well as a failure to implement and uphold
responsible business practices, may adversely impact the financial
condition and reputation of the Group. This may also 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, 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. The increased demands and
expectations of stakeholders for transparency and disclosure of the
activities that support these duties further heightens disclosure
risks for the Group, including those associated with potentially
overstating or mis-stating the positive environmental or societal
impacts of the Group's activities, products and services (eg
greenwashing).
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. 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 corporate restructuring, transformation
programmes and acquisitions and disposals across its business. Many
of these change initiatives are complex, inter-connected 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, employees, 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. There may also be adverse implications
for the Group in undertaking transformation initiatives such as
placing additional strain on employees, operational capacity, and
weakening the control environment. Implementing initiatives related
to significant accounting standard changes, such as IFRS 17, and
other regulatory changes in major businesses of the Group, such as
those related to the sale and management of investment-linked
products at the Indonesia businesses, may amplify these risks.
Leadership changes and changes to the business and operational
model of the Group increase uncertainty for its employees, which
may affect operational capacity and the ability of the Group to
deliver its strategy. 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's businesses are conducted in highly
competitive environments with rapidly developing demographic
trends. The profitability of the Group's businesses depends 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, ability to implement and comply with regulatory changes,
the imposition of regulatory sanctions, 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 (which may be impacted by broader economic
pressures) 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 or otherwise implement its
strategy. 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 or retain talent.
The Group's principal competitors include global life insurers,
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 growth prospects.
3.3 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 loss arising from inadequate or failed
internal 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 but not limited to
external technology, data hosting and payments) and service
partners. These include back office support functions, such as
those relating to technology 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 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 when
there are disruptions to 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.
This could damage Prudential's reputation and relationship with its
customers and business partners. A failure to adequately oversee
service partners (or their technology and operational systems and
processes) could result in significant service degradation or
disruption to Prudential's business operations and services to its
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 inter-connected technology 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 are 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, or due to other factors
impacting operational performance including adequacy of
skilled/experienced personnel, 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 and
services 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 technology, 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 technology
systems, data and processes, as with operational systems and
processes generally, may also be susceptible to failure or
security/data breaches.
3.4 Attempts to access or disrupt Prudential's technology
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 technology 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 and to exfiltrate data with a threat to publicly
expose Prudential data if a ransom payment is not paid), and
untargeted but sophisticated and automated attacks. 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. The Russia-Ukraine conflict has
coincided with a significant increase in reported cyber threats and
attacks during 2022. 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, and increasing adoption of
the Group's digital platforms 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.
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. As Prudential and its business partners
increasingly adopt digital technology in business operations, the
data the Group generates creates an opportunity to enhance customer
engagement while maintaining a responsibility to keep customers'
personal data safe. Prudential adheres to data minimisation and
'privacy-by-design' principles, ensuring that the Group only
collects and uses data for its intended purpose and does not retain
it longer than necessary, and that privacy elements are present
both at the onset and throughout the Group's entire data processes.
The handling of customer's data is governed by specific policies
and frameworks, such as the Group Information Security Policy, the
Group Privacy Policy and the Group Data Policy. A failure to adhere
to these polices 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 continue to
progress worldwide. Across the Group's markets these include the
ongoing development of a holistic data governance regime in the
Chinese Mainland, including the Data Security Law and Personal
Information Protection Law, and the revised Measures for
Cybersecurity Review. In Thailand, the Personal Data Protection Act
regulations came into effect in June 2022. 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
compared 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 ventures or third-party service
providers. The international transfer of data may, as a global
organisation, increase regulatory risks for the Group.
The Group has not, to date, experienced or been affected by any
cyber and data breaches which have 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, phishing and disruptive software campaigns.
Despite the multi-layers security defences in place, 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.
3.5 Prudential's digital platforms may heighten existing
business risks to the Group or introduce new risks as the markets
in which it operates, and its partnerships and product offerings
evolve.
Prudential's digital platforms, including Pulse, are subject to a
number of 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 and other
digital platforms operate, 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 digital platforms and services may
require the delivery of complex, inter-connected change initiatives
across current and planned markets. This may give rise to design
and execution risks, which could be amplified where these change
initiatives are delivered concurrently;
-
The increased volume, breadth and sensitivity of data on which the
business model of the platform 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 ethical, operational, conduct,
litigation and reputational risks where they do not function as
intended;
-
The digital platform and its services may rely on and/or
collaborate with 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 digital platforms, which may introduce new
regulatory, operational, conduct and strategic risks for the Group.
Regulations may be introduced, which limit the permitted scope of
online or digitally distributed insurance and asset management
services, and may restrict current or planned offerings provided by
the 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.
3.6 Prudential operates in certain markets with joint venture
partners and other shareholders and 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 (including associates). The
financial condition, operations and reputation of the 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 ventures or jointly owned businesses carry the
Prudential name.
A material proportion of the Group's business comes from its joint
venture and associate businesses in the Chinese Mainland and India,
respectively. 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 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 a whole. This may particularly be
the case where the geographies in which these operations are
located experience market or sector-specific slowdowns, disruption,
volatility or deterioration (such as the negative developments in
the Chinese Mainland 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. The effectiveness of these arrangements, or
temporary or permanent disruption to them, 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 providers' systems failure or the prevention of financial
crime), regulatory changes affecting the governance, operation, or
failure to meet any regulatory requirements could adversely affect
Prudential's reputation and its business, financial condition,
results of operations and prospects.
3.7 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. The
potential adverse impacts to the Group's persistency and morbidity
experience resulting from Covid-19 related restrictions are
described in risk factor 1.3 above. The potential adverse impacts
to the profitability of the Group's businesses from the upheavals
in financial markets and levels of economic activity on customer
behaviours are described in risk factor 1.1 above. While the Group
has the ability to re-price some of its products, the frequency of
re-pricing may need to be increased. Such repricing is dependent on
the availability of operational and resource capacity to do so, as
well as the Group's ability to implement such re-pricing in light
of the increased regulatory and societal expectations reflecting
the affordability of insurance products and the protection of
vulnerable customers, as well as the commercial considerations of
the markets the Group operates in. The profitability of the Group's
businesses also may be adversely impacted by medical reimbursement
downgrade experience following any re-pricing.
Prudential, like other insurers, 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 assumptions 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 assumptions. 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 Covid-19 are included in risk factor 1.3 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, financial
and non-financial disclosures and reported results and financing
requirements. Changes in regulations related to capital have the
potential to change the extent of sensitivity of capital to market
factors. 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), and 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 and volume 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. Geopolitical developments, such as the
Russia-Ukraine conflict and US-China tensions, may result in an
increase in the volume and complexity of international sanctions.
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 ('GWS')
To align Hong Kong's regulatory regime with international standards
and practices, the Hong Kong IA developed its GWS Framework for
multinational insurance groups under its supervision based on a
principle-based and outcome-focused approach, which 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. Whilst the regulatory requirements 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. Prudential
constructively engages with the Hong Kong IA as its Group-wide
supervisor to ensure ongoing sustainable compliance.
(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 ('FSB') in the area of systemic risk
including assessing and mitigating systemic risk through the
Holistic Framework ('HF') (replacing the Global Systemically
Important Insurer 'G-SII' designations) and the Insurance Capital
Standard ('ICS'), both being developed by the International
Association of Insurance Supervisors ('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 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 June 2022, the
IAIS released a paper on comparable outcomes of the Aggregation
Method for ICS. Feedback on this public consultation was received
by 15 August 2022 and the IAIS expects to adopt the comparability
criteria by March 2023.
In December 2020, the FSB endorsed a new HF, intended for the
assessment and mitigation of systemic risk in the insurance sector,
(implemented by the IAIS in 2020), and discontinued G-SII
designations. 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 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.
The FSB reserves the right to publicly express its views on whether
an individual insurer is systemically important in the global
context and the application of any necessary policy measures to
address such systemic importance. The FSB will also continue to
review the process of assessing and mitigating systemic risk based
on the HF and may adjust the process, including bringing back G-SII
designations if deemed necessary.
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:
-
At its Annual General Meeting in November 2022, the IAIS Executive
Committee agreed to publish the liquidity metrics that have been
under development to facilitate the monitoring of the global
insurance sector's liquidity risk.
-
A public consultation on the review of the individual insurer
monitoring assessment methodology was launched in January 2023 to
look at how to fine tune systemic risk indicators as part of the
regular tri-annual review of the Global Monitoring
Exercise.
-
The IAIS Executive Committee also adopted an aggregate report on
the outcomes of the intensive Targeted Jurisdictional Assessments
of the implementation of the HF supervisory material. A public
report is due to be released in the first half of 2023. A key
conclusion is that significant progress has been made in
implementing macroprudential supervisory requirements in recent
years.
(c)
Regional regulatory regime developments, including climate-related
regulatory changes
In 2022, regulators in Asia continue to focus on the financial and
operational resilience of the insurance industry as well as
customer and policyholder protection. New regulations were
continuously, and often concurrently, issued in a number of markets
to (1) manage insurance and financial risks, including capital and
solvency, and (2) implement effective customer protection,
information security and data privacy and residency, third party
and technology risk management controls with appropriate corporate
governance.
In some of the Group's key markets, major regulatory changes and
reforms are in progress, with some uncertainty on the full impact
to Prudential:
-
In the Chinese Mainland, regulatory developments across a number of
industries including the financial sector, have continued at pace,
potentially increasing compliance risk to the Group. Recent
regulatory developments in the Chinese Mainland which include the
following:
-
The China Banking and Insurance Regulatory Commission
('CBIRC') released the official regulation for its China Risk
Oriented Solvency System ('C-ROSS II') Phase II, which became
effective for Q1 2022 solvency reporting, subject to ongoing
transitional arrangements;
-
The Cyberspace Administration of China ('CAC') issued
the Measures on Security Assessment of Outbound Data Transfers in
Q3 2022, which, although provide more information on cross-border
data transfers, imposed new requirements including a mandatory
security assessment on outbound data transfers. Businesses that
collect and process the personal information of the Chinese
Mainland citizens are anticipating further requirements to be
introduced;
-
CBIRC issued updated rules since late 2022 for
consumer rights protection and information disclosures, where
insurers are required to establish mechanisms throughout the
business strategy and product lifecycle with proper governance and
customer protection. Sufficient product information and risk
disclosures should be also provided for different life insurance
products. These regulatory developments are intended to promote
industry professionalisation, customer satisfaction, and
sustainability in the long run;
-
In light of the continuous market developments
in Fintech, sustainability and social media, CBIRC is constantly
refining its supervisory directions including use of new technology
for onsite examinations, offsite surveillance and intelligence for
risk identification; and urged financial institutions to deploy
emerging technologies to improve the way businesses manage
regulatory compliance.
-
In Indonesia, regulatory and supervisory focus on the insurance
industry remains high. The Financial Services Authority of
Indonesia, the Otoritas Jasa Keuangan ('OJK') has significantly
revised investment linked products ('ILP') regulations with the aim
of increasing insurance penetration and better protecting customer
interests and improving market conduct. The final regulations were
enacted in Q1 2022 for a full adoption in Q1 2023, and have
implications for the product strategies and insurance and
compliance risks for insurers. Industry discussion with respect to
the implementation of some of the requirements under the new
regulations is ongoing. 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, enacting updated
regulations in April 2022, and has recently enhanced regulatory
requirements on technology risk management. The Personal Data
Protection Law came into effect in October 2022, which requires
actions to enhance data protection governance and procedures
including privacy assessments and designated data protection
personnel within a two-year transition period. Moreover, a new
financial sector law was passed by the Parliament. A notable change
includes a new policy guarantee agency in the insurance sector. The
Indonesia Deposit Insurance Corporation will expand their assurance
coverage on bank savings to also include insurance in case of
insurers going bankrupt, further details are expected.
-
In Malaysia, the BNM has initiated a multi-phase review of its
current RBC frameworks for insurers and takaful operators which has
been conducted since 2019. 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 roll out of the RBC
framework is planned in phases, which include quantitative impact
studies carried out in 2022, the issuance of exposure drafts in
2023, a Qualitative Impact Study ('QIS') and a parallel run planned
in 2024 prior to earliest implementation in 2025, subject to
results of the QIS and parallel run.
-
In Hong Kong, the Hong Kong IA has in place comprehensive
regulations covering all aspects of the insurance product
lifecycle. The regulator continues to place increasing focus of its
supervision on culture and conduct aspects of local insurers. At
the same time, the Hong Kong IA has sought to align the territory's
insurance regime with international standards and has been
developing a risk-based capital ('RBC') framework. The RBC
framework comprises 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
approved the early adoption of the framework at the Group's Hong
Kong business in April 2022. In late 2022, the regulator also
shared the ongoing industry priorities for 2023 including
Insurtech, ESG, and cybersecurity, which are essential in enabling
Hong Kong insurers' development in the Greater Bay Area, further
regulatory developments are anticipated. The Hong Kong Government
also proposed to establish a Policyholder Protection Scheme in
December 2022 as a safety net for policyholders in the event of an
insurer's insolvency. A public consultation is underway until end
of March 2023, followed by an industry level consultation within
the same year.
-
In Thailand, the Personal Data Protection Commission was
established in January 2022, as the regulator under Thailand's
Personal Data Protection Act which became effective in June
2022.
-
In Vietnam, the amended Insurance Law is set to take effect on 1
January 2023. Key amendments include provisions for online sales;
regulating outsourcing; and training and registration obligations
of agents. The new law also contains provisions on RBC, with a
five-year grace period, effective from 1 January 2028.
-
In India, the Insurance Regulatory and Development Authority of
India ('IRDAI') continues to focus on industry reform by boosting
innovation, competition, and distribution efficiencies, while
moving towards a principle-based regulatory regime with
considerations of technology developments. The regulator is in the
process of relaxing capital requirements and setting distribution
tie-up limits for corporate agents, as well as lengthening the
experimentation period for sandbox in order to introduce further
ease of doing business for growing India's insurance penetration by
2030.
The increasing use of emerging technological tools and digital
services across industry, is likely to lead to new and unforeseen
regulatory requirements and issues, including expectations
regarding the governance and ethical use of technology, artificial
intelligence and data. Distribution and product suitability linked
to innovation continues to set the pace of conduct regulatory
change in Asia. Prudential falls under the scope of these conduct
regulations requiring that regulatory changes are appropriately
implemented.
The pace and volume of climate-related regulatory changes is also
increasing. Regulators including the Hong Kong IA, the Monetary
Authority of Singapore, the BNM in Malaysia and the Financial
Supervisory Commission in Taiwan are in the process of developing
supervisory and disclosure requirements or guidelines related to
environmental and climate change risk management. Other regulators
are expected to develop, or are at the early stages of developing,
similar requirements. While the Hong Kong IA has yet to propose any
insurance-specific regulations on sustainability and climate, it
has regularly emphasised its increasing focus in this area in order
to support Hong Kong's position as a regional green finance hub,
and industry consultations are expected from the Hong Kong IA in
2023. International regulatory and supervisory bodies, such as the
International Sustainability Standards Board ('ISSB') and Taskforce
on Nature-related Disclosures, are progressing on global ESG and
sustainability-related disclosure requirements. Recent high-profile
examples of government and regulatory enforcement and civil actions
against companies for misleading investors on ESG and
sustainability-related information demonstrate that disclosure,
reputational and litigation risks remain high and may increase, in
particular as companies increase their disclosures or product
offerings in this area. These changes and developments may give
rise to regulatory compliance, customer conduct, operational,
reputational and disclosure risks requiring Prudential to
coordinate across multiple jurisdictions in order to apply a
consistent risk management approach.
The rapid pace and high volume of regulatory changes and
interventions, and swiftness of their application including those
driven by the financial services industry, have been observed in
recent years across many of the Group's markets. The transformation
and regulatory changes have the potential to introduce new, or
increase existing, regulatory risks and supervisory interest while
increasing the complexity of ensuring concurrent regulatory
compliance across markets driven by potential for increased
intra-Group connectivity and dependencies. In jurisdictions with
ongoing policy initiatives and regulatory developments which will
impact the way Prudential is supervised, these developments are
monitored at market and group level and inform the Group's risk
framework and engagement with government policy makers, industry
groups and regulators.
(d)
IFRS 17
IFRS 17 became effective from 1 January 2023 and the first external
reporting under this basis will be from half year 2023. The new
standard requires a fundamental change to accounting, presentation
and disclosures for insurance contracts as well as the application
of significant judgement and new estimation techniques. The Group
has been implementing IFRS 17 through a Group-wide implementation
programme over a multi-year period, involving significant
enhancements to technology, actuarial and finance systems and
processes across the Group. The Group has yet to complete
production of its 2022 comparatives using the IFRS 17 accounting
standard. IFRS 17 presents a significant change to the method of
accounting for insurance contracts. Therefore, in the short term,
it may take time for investors, rating agencies and other
stakeholders to gain familiarity with the new standard and to
interpret the Group's business performance and dynamics as reported
under IFRS 17, and in particular to understand the comparisons with
previous financial periods.
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 customer
and 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 and responsibly 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. There is an increased focus
by regulators and supervisors on customer protection, suitability,
and inclusion across the markets in which the Group operates,
therefore increasing regulatory compliance and reputational risks
to the Group in the event the Group is unable to effectively
implement the regulatory changes and reforms stated in risk factor
4.1 above.
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,
regulatory reviews of broader industry practices and products sold
(including in relation to lines of business that are no longer
active) 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 and the responsibility of
product providers 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 or from
a course of conduct taken by Prudential, including class action
litigation. 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. 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 per cent 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 initially envisaged
by 2023. These rules will apply to Prudential when implemented into
the national law of jurisdictions where it has entities within the
scope of the rules. On 14 March 2022 the OECD issued detailed
guidance to assist with interpreting the model rules. On 20
December 2022 the OECD issued additional documents including
proposals for safe harbours and a consultation on the proposed
information return. On 2 February 2023 the OECD also issued its
first tranche of agreed administrative guidance which is intended
to ensure that the model rules are implemented and applied in a
co-ordinated manner. It is expected that a revised version of the
guidance (which was issued in March 2022) will be released later
this year. Furthermore, the OECD is expected to publish further
agreed administrative guidance on an ongoing basis.
On 17 November 2022 the UK government confirmed its intention to
implement rules into UK legislation for the second pillar through
inclusion in the Spring Finance Bill 2023 with the rules applying
to accounting periods beginning on or after 31 December 2023. On 23
December 2022, the parliament of the Republic of Korea approved the
budget bill for 2023 which includes the enactment of rules for the
second pillar. This enactment of the rules in the Republic of Korea
is not, in isolation, expected to have any impact for
Prudential.
A number of jurisdictions in which Prudential has operations have
indicated that consideration is being given to introducing a
domestic minimum tax for in-scope multinationals alongside
introducing the model 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 all expected OECD documents are published and details of
implementing domestic legislation in relevant jurisdictions are
available, 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: 15 March
2023
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By:
/s/ James Turner
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James
Turner
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Group
Chief Financial Officer
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