Corporate Governance

Women on Boards
23rd August 2011
Statement from Alastair Lyons, Admiral Group Chairman:

"With reference to the report by Lord Davies of Abersoch entitled Women on Boards we strongly support the principle of boardroom diversity, of which gender is an important, but not the only aspect. What is important is diversity of thought, experience, and approach and each new appointment must complement what already exists at the Board table. We will, therefore, always appoint on merit against objective criteria, including diversity, and not just to achieve an externally prescribed number.

"Admiral already has strong female representation in both management and at Board. 43% of our senior managers are women, and on our Executive Committees women comprise 29% of that for the UK and 39% for our International operations. We would expect the proportion that women constitute of our plc Board, currently 18%, to rise over time and that we would, therefore, expect to meet or exceed the 25% target set for 2015."

2010 Corporate Governance Report

This report sets out the Group's approach to achieving in 2010 the standards of good corporate governance for which it is accountable to the Group’s shareholders. It has been prepared in accordance with the principles set out in the Combined Code on Corporate Governance (the 'Combined Code'), and details the extent to which the Company has complied with the principles and provisions of the Combined Code. In addition, following the release by the Financial Reporting Council (FRC) of the new UK Corporate Governance Code (the “Governance Code”), that became effective for accounting periods beginning on or after 29 June 2010, the Group has considered the requirements of the Governance Code and is taking appropriate steps to ensure compliance with them where it does not already do so.

The Board complied with the Combined Code in all respects during 2010 except for Code D.1.1, which requires that the Senior Independent Director should attend meetings with a range of shareholders. The Company has a comprehensive programme of meetings and dialogue with institutional investors, and the Chairman had individual meetings with the majority of the largest 10 such investors. The views of investors expressed through this dialogue are communicated to the Board as a whole on a regular basis through the investor relations report. All Directors can, therefore, develop an understanding of issues or concerns of major shareholders should any be raised. Feedback from shareholders suggests that these arrangements for communication between the Company and its shareholders continue to be viewed by them as effective. The Senior Independent Director is always available to meet with individual shareholders on request to ensure the Board is aware of any shareholder concerns that cannot be resolved through the routine mechanisms for investor communications.

The Admiral Group Board
The roles of the Chairman and Chief Executive
Board balance and independence
Professional development
Relations with shareholders
Conflicts of Interest
Board Committees
The Audit Committee
The Nominations Committee
Remuneration Committee
Internal control and risk management

The Admiral Group Board

The Board is the principal decision-making forum for the Group both providing leadership, either directly or through its committees of directors, and delegating authority to the Executive team in a manner that will promote the success of the Group and is consistent with good corporate governance practice. The Board is accountable to shareholders for setting and achieving the Group’s strategic objectives, for the creation and delivery of strong sustainable financial and operational performance, for ensuring that in carrying out its duties the Group’s legal and regulatory obligations are being met, and for ensuring that it operates within appropriately established risk parameters. The Group is responsible to the Financial Services Authority (FSA) for ensuring compliance with the Group’s UK regulatory obligations and that dealings with the FSA are handled in a constructive, cooperative and transparent manner.

The Board has adopted a formal schedule of matters specifically reserved to it, which is reviewed on an annual basis (this was last carried out on 24 August 2010). Matters reserved to the Board include the approval of:

The Group’s long term objectives and corporate strategy,
Operating and capital budgets, financial results, and any significant changes to accounting practices or policies,
The Group’s capital structure;
Results and financial reporting;
The maintenance and review of the system of internal control and risk management;
The Group’s overall risk appetite;
Changes to the structure, size and composition of the Board, including new appointments;
Succession plans for the Board and senior management;
Annual review of its own performance and that of its Board Committees;
Key business policies in relation to health and safety and environmental matters,
Dividend policy and proposals for dividend payments,
Major acquisitions, disposals, and other transactions outside delegated limits;
Review of the Group’s overall corporate governance arrangements.

The Board met on seven occasions in 2010 with six of these meetings being held over two days. The Board also held a strategy day and visited its operations in Italy. These overseas visits are used to combine the formal business of the Board with an opportunity for Board members, through informal discussion with local management, to obtain a deeper understanding of local market conditions and gain an appreciation of the operational and strategic challenges faced by each of the Group’s overseas operations. The Chairman visits each of these operations every year. In addition, the Non-executive Directors and the Chairman met during the year without the Executive Directors being present. Agendas and papers are circulated to the Board in a timely manner in preparation for Board and Committee meetings. These papers are supplemented by information specifically requested by the Directors from time to time. All Directors are, therefore, able to bring independent judgement to bear on issues such as strategy, risk management, performance, and resources. Additional meetings are called when required and there is frequent contact between meetings, where necessary, to progress the Group's business.

The Company Secretary

All the Directors have access to the advice and services of the Company Secretary. He has responsibility for ensuring that Board procedures are followed and for advising the Board, through the Chairman, on governance matters. The Company Secretary provides updates to the Board on regulatory and corporate governance issues, new legislation, and Directors’ duties and obligations. The appointment and removal of the Company Secretary is one of the matters reserved for the Board.

Board Effectiveness

The performance and effectiveness of the Board and its Committees is fundamental to the success of the Group and there is a rigorous evaluation each year to assess how well the Board, its committees, the directors and the Chairman are performing. In accordance with the Group’s policy of every three years using an external consultant to carry out a formal review of the Board’s performance, an external consultant, who has no connection with the Company, was used by the Group to lead the evaluation process in 2010.. The evaluation process consisted of the completion, by all Directors, of a comprehensive questionnaire evaluating the performance of the Board and its Committees. The questionnaire considered board processes and their effectiveness; board composition, board objectives, board support, content of discussion and focus at Board meetings and invited directors to indicate where specific improvements could be made. Completion of the questionnaire by each Director was followed by one-to-one discussions between each Director and the external consultant where the Board’s role and structure, process, relationships, and any emerging issues were discussed.

The overall results of the evaluation were summarised in a report prepared by the external consultant who also presented the principal recommendations for review and discussion by the Board in February 2011. The evaluation concluded that good progress had been achieved in most of the areas identified for action in the last independent Board Review in 2007 and that the Board and its Committees has continued to work very effectively in relation to most dimensions. In addition, the Chairman has concluded that each director contributes effectively and demonstrates full commitment to his/her duties. The following emerged as areas of particular focus going forward:-

Non-executive rotation as individual directors reach their maximum term over the next four years
Maintenance of non-executive knowledge and understanding of an increasingly broad and complex business
Moving still further the balance of Board consideration towards the strategic and away from the operational
Agreeing clear criteria for the evaluation of performance by line of business and how most effectively to report this to the Board

The Chief Executive, to whom they report, appraises annually the performance of the individual executive directors. The Chairman, taking into account the views of the other Directors, reviews the performance of the Chief Executive. The performance of the Chairman is reviewed by the Non-Executive Directors, led by the Senior Independent Director (“SID”), taking into account the views of the Executive Directors. Following the latest review, the SID considered and discussed with the Chairman the comments and feedback, relating to the Chairman’s performance, that had been received from the directors as part of the Board evaluation questionnaire. Following these discussions with the Chairman, the SID was able to confirm that the performance of the Chairman continues to be effective, and that the Chairman continues to demonstrate appropriate commitment to his role.

Directors are expected to attend all meetings of the Board and the Committees on which they serve and to devote sufficient time to the Group to perform their duties. The number of full Board meetings and Committee meetings of which they are a member attended by each Director during 2010 is provided in the table below.

	Board meetings	Audit Committee meetings	Nominations Committee meetings	Remuneration Committee meetings
Total meetings held	7	6	3	8
Alastair Lyons (Chairman)	7		3
Henry Engelhardt (Chief Executive)	7
David Stevens (Chief operating Officer)	7
Kevin Chidwick (Finance Director)	7
Manfred Aldag	5
Martin Jackson	7	6		8
Keith James	7	6	3
Margaret Johnson	7	6		8
Lucy Kellaway	7		3
John Sussens	6			7
Colin Holmes*	1			1

* Colin Holmes was appointed to the Board on 3 December 2010.

The roles of the Chairman and Chief Executive

The Board has approved a statement that sets out the clear division of responsibilities between the Chairman and the Chief Executive. The Chairman is primarily responsible for the leadership and workings of the Board, setting its agenda, and monitoring its effectiveness. The Chairman is not involved in the day-to-day management of the business. Save for matters reserved for decision by the Board, the Chief Executive, with the support of the other Executive Directors, is responsible for proposing the strategy to be adopted by the Group; the running of the business in accordance with the strategy agreed by the Board; and implementing specific Board decisions relating to the operation of the Group. The statement of division of responsibilities and matters reserved for decision by the Board were reviewed in December 2010.

Board balance and independence

The Board currently comprises eleven Directors, the Chairman (who was independent on appointment), three Executive Directors, six independent Non-Executive Directors, and one Non-Executive Director, Manfred Aldag, who is employed by a significant shareholder and is not, therefore, considered independent. There is no requirement that the significant shareholder has representation on the Board and, accordingly, Mr. Aldag’s appointment is subject to the same appointment and removal process as the other Board directors.

In December 2010 the Board appointed Colin Holmes as an independent non-executive director. Appointments to the Board are the responsibility of the Board as a whole, acting on the advice and recommendations of the Nominations Committee. Colin Holmes’s appointment followed a formal, rigorous and transparent procedure implemented and led by the Nominations Committee. Although Colin Holmes holds, with Alastair Lyons, a cross-directorship in Bovis Homes Group PLC, the Board has determined that Colin Holmes remains independent in character and judgement and that his holding of a cross-directorship will not affect his ability to present an objective, rigorous and constructive challenge to the assumptions and viewpoints presented by management and the Board nor will it affect his time commitment to the role. Colin Holmes will be subject to election by shareholders at the forthcoming AGM.

The Board has accepted the Nomination Committee’s assessment of the independence of the six Non-Executive Directors and is not aware of any relationships or circumstances which are likely to affect, or could appear to affect, the judgement of any of them. In the view of the Board, the independent Non-Executive Directors are of sufficient calibre and number that their views carry significant weight in the Board's decision making and that they are free from any relationship or circumstance that could affect, or appear to affect, their independent judgement.

Independent Non-Executive Directors are currently appointed for fixed periods of three years, subject to election by shareholders. The initial three-year period may be extended for two further three-year periods subject to re-election by shareholders. Their letters of appointment may be inspected at the Company's registered office or can be obtained on request from the Company Secretary.

Although the Chairman has served in his role since June 2000 the Board remains of the view that he should continue in office notwithstanding that he has completed in excess of nine years as Chairman and the Company’s leading institutional investors have also confirmed their support for the Board’s express intent. The Chairman, along with all the Directors, will now seek election by shareholders annually.

The Chairman does perform a number of other non-executive roles outside the Group and details of these, together with the Chairman's other commitments, are included in the Chairman's biography. The Board continues to be satisfied that these other commitments are not such as to interfere with the performance of his duties within the Group and will not impact on his ability to allocate sufficient time to discharge his responsibilities to the Group effectively.

John Sussens has been appointed as the Senior Independent Non-Executive Director. He is available to shareholders if they have concerns that contact through the normal channels of Chairman, Chief Executive, or Group Finance Director has failed to resolve or for which such contact is inappropriate. He is also responsible for leading the Board’s discussion on the Chairman’s performance and the appointment of a new chairman, when appropriate.

In accordance with the requirement under the Governance Code for annual election of directors and the best practice guidance that has been issued, all directors will be submitting themselves for re-election by shareholders at the forthcoming AGM. The Board is satisfied that all of the directors that are seeking election or re-election by shareholders are properly qualified for their appointment or reappointment by virtue of their skills and experience and their contribution to the Board and its committees.

The Directors are given access to independent professional advice at the Group's expense, should they deem it necessary, to carry out their responsibilities.

Professional development

On appointment, directors take part in a comprehensive induction programme where they receive financial and operational information about the Group; details concerning their responsibilities and duties; as well as an introduction to the Group’s governance, regulatory and control environment.

This induction is supplemented by visits to the Group's head office in Cardiff, overseas offices, and meetings with members of the senior management team and their departments. Development and training of directors is an ongoing process. Throughout their period in office the directors are regularly updated on the Group's business; legal matters concerning their role and duties; the competitive environments in which the Group operates; and any other significant changes affecting the Group and the industry of which it is a part. All Board members are also encouraged to attend relevant training courses at the Company’s expense.

The Board receives presentations from senior managers within the various Group companies on a regular basis and opportunity is also created for non-executive directors to make informal visits to different parts of the Group and to meet with local management.

Relations with shareholders

The Company attaches considerable importance to communications with shareholders and engages with them on a variety of issues. The Investor Relations team has day-to-day primary responsibility for managing communications with institutional shareholders through a combination of briefings to analysts and institutional shareholders, both at the half-year and full year results. A number of analysts and investors visited the Group’s Cardiff office during the year to meet with the executive directors and senior management in order to get a better understanding of how the Group operates and how it intends to achieve its strategic and operational objectives. Senior executives from the Group’s overseas businesses also visit the UK in order to present to, and meet with, analysts and investors. Site visits and individual discussions with the executive directors are also arranged throughout the year with individual shareholders. Regular dialogue with shareholders helps to ensure that the Company's strategy is understood and that any issues are addressed in a constructive way.

In addition the Chairman had individual meetings during the year with major shareholders, and reported to the Board on issues raised with him.

This is supplemented by feedback to the Board on meetings between management and investors. External analysts’ reports are circulated to all directors. In addition, the Investor Relations team produces a monthly Investor Relations Report that is circulated to the Board. The Report contains an analysis of share price performance; a summary of analyst reports received during the month and of meetings that have been held with investors and analysts; together with details of any significant changes to the shareholders’ register.

The Company’s Annual General Meeting (AGM) provides a valuable opportunity for the Board to communicate with its shareholders all of whom are invited to attend the AGM. The Chairmen of the Audit, Remuneration, and Nomination Committees attend the AGM along with the other directors and are available to answer shareholders' questions on the activities of the committees they chair. Shareholders are also invited to ask questions during the meeting and have an opportunity to meet with directors after the formal business of the meeting has been concluded. Details of proxy voting by shareholders, including votes withheld, are made available on request and are placed on the Company’s website following the meeting.

The Group maintains a corporate website (www.admiralgroup.co.uk) containing a wide range of information of interest to institutional and private investors.

Conflicts of Interest

In compliance with the requirements of the Companies Act 2006 regarding Directors’ duties in relation to conflicts of interest, the Group’s Articles of Association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits as it thinks fit. The Company has put in place updated procedures to deal with conflicts of interest. These procedures include each Board member completing, annually, a conflict of interest questionnaire that sets out any situation in which they, or their connected persons have, or could have, a direct or indirect interest that could conflict with the interests of the Company. Any current directorships that they, or their connected persons hold, any advisory roles or trusteeships held, together with any companies in which they hold more than 1% of the issued share capital are also disclosed. These conflict of interest procedures have operated effectively throughout 2010.

Board Committees

The Board has delegated authority to a number of permanent Committees to deal with matters in accordance with written terms of reference. The principal committees of the Board - Audit, Remuneration, and Nomination - all comply fully with the requirements of the Combined Code. They are all chaired by an independent director and exclusively comprise, or, in the case of the Nomination Committee (where the Chairman of the Board is a member), have a majority of independent directors. The committees are constituted with appropriate written terms of reference that are reviewed annually to ensure that they remain appropriate and reflect any changes in good practice and governance. These terms of reference are available on request from the Company Secretary and can also be found on the Company’s website: www.admiralgroup.co.uk. The minutes of the committee meetings are also circulated to the Board. Committees are authorised to obtain outside legal or other independent professional advice if they consider it necessary.

The Audit Committee

Constitution and membership

The membership at the end of the year was Martin Jackson (Chairman), Keith James, Margaret Johnson and Colin Holmes (appointed 3rd December 2010) The Company Secretary acts as Secretary to the Committee. Appointments to the Committee are made on the recommendation of the Nomination Committee and are for a period of up to three years, which may be extended for two further three year periods, provided the Director remains independent. The Committee meets at least three times per year and has an agenda linked to events in the Company’s financial calendar.

The Committee has formal terms of reference, which were reviewed by the Committee during the year and approved by the Board in December 2010.

The Board considers that the members of the Committee have the appropriate competence and experience to carry out their duties and further considers that Martin Jackson (Committee Chairman) has the appropriate recent and relevant financial experience having held the position of Group Finance Director of Friends Provident Plc between 2001 and 2003 and being a fellow of the Institute of Chartered Accountants, which imposes requirements for Continuing Professional Development. In addition, Colin Holmes is a Chartered Management Accountant and has considerable recent and relevant financial experience having previously been the UK Finance Director for Tesco plc, and until 2010 a member of its Group Executive Committee.

The Committee is kept up to date with changes to Accounting Standards and relevant developments in financial reporting, company law, and the various regulatory frameworks through presentations from the Group’s external auditors, Head of Finance, and Company Secretary. In addition members are provided with information on seminars and conferences provided by external bodies. The Terms of Reference of the Audit Committee include all the matters suggested by the Combined Code and have been updated in accordance with the requirements of the Governance Code.

Other individuals such as the Finance Director, Chief Operating Officer, Chief Executive, Chairman of the Board, the heads of Risk, Compliance, and Internal Audit and representatives of different parts of the Group may be invited to attend all or part of any meeting as and when appropriate. The external auditors are invited to attend meetings of the Committee on a regular basis.

The Chairman of the Committee reports to the subsequent meeting of the Board on the key issues covered by the Committee, and the Board also receives copies of the minutes of each meeting. The Chairman of the Committee attends the Annual General Meeting to respond to any shareholder questions that might be raised on the Committee’s activities.

Summary of key activities during 2010

During the year the Committee reviewed the following:

The annual report and interim results
Reports from the internal audit departments within the Group on the effectiveness of the Group’s risk management and internal control procedures, details of key audit findings, and actions taken by management to manage and reduce the impact of the risk identified;
Effectiveness of the Group’s system of internal control including within its overseas operations, particularly gaining assurance that the compliance, internal control and risk management processes were operating effectively.
Reports from the external auditors on their proposed audit scope, fees, audit, and auditor independence
Performance of the internal audit department.
The effectiveness of the Group’s arrangements in relation to its ‘whistle-blowing’ procedures.

The Committee reviewed its policy on non-audit services that, amongst other things, requires that the Committee approve all proposals for expenditure with the Group’s auditors of over £30,000 on non-audit services. The policy was last reviewed on 14 November 2010. The Group’s auditors, KPMG Audit plc, provide some non-audit services, the majority of which comprise compliance services related to various taxation issues within the Group, and which are not considered by the Committee to compromise their independence as auditors. The level of non-audit fees is reviewed at each Committee meeting and details are included in the Annual Report.

During the year the Committee carried out a review of its policy of carrying out a tender process for external audit services every five years other than in exceptional circumstances. It was agreed that a decision on whether to complete an external audit re-tender should be reviewed at least every 5 years and if deemed appropriate a tender for external audit services would be carried out. The last such tender was undertaken in 2006. Following the annual external audit effectiveness review the Committee concluded that the auditor, KPMG was fit for purpose and recommended that a re-tender process should not be undertaken in 2010 but that the relationship and the effectiveness of KPMG should be kept under review.

In accordance with agreed parameters, the expanding overseas operations in Spain and Italy have or will have their own locally based internal auditors, reporting to the respective country heads. Notwithstanding this, the UK internal audit department also carries out reviews of the quality and effectiveness of these overseas internal audit functions and where no such function exists reviews the overall system of risk management and internal controls in the overseas businesses.

The Head of Internal Audit in UK is invited to all Committee meetings and provides a range of presentations and papers to the Committee, through which the Committee monitors the effectiveness of the Group’s internal controls. The overseas internal auditors attend Committee meetings periodically. Committee members receive copies of all internal audit reports and are given the opportunity to raise questions on the content and recommendations contained within the reports. The Committee approves the internal audit programmes at the start of each calendar year and the activities; the effectiveness and workload of the internal audit functions and the adequacy of available resources are monitored throughout the year against progress made in achieving the plans.

The Audit Committee has unrestricted access to Company documents and information, as well as to staff and external professional advisers.

During the year, the Committee received presentations from senior managers on the risk management procedures that are in place in their key departments in order that the Committee could consider and evaluate the nature of the risks that each key department faces and gain assurance as to the appropriateness and efficacy of the Group’s risk management and risk mitigation procedures.

The Committee also approves the annual compliance review plan and receives copies of the resulting reports. The Head of Compliance, who has responsibility for the Compliance and Risk management functions, provides the Committee with quarterly Compliance and Risk Reports summarising activities in these areas.

In addition to the evaluation of the Committee’s effectiveness undertaken by the Board, the Committee also carried out a more detailed review of its own performance. As part of the review process, each Committee member completed a comprehensive online questionnaire designed to produce objective assessment of the Committee’s performance, including its effectiveness in monitoring internal and external audit.. The Committee discussed the results of the review and it was concluded that the Committee and the audit process was effective; that the Committee had appropriate terms of reference; and that it had achieved its remit.

The Audit Committee Terms of Reference can be found here.

The Nominations Committee

The membership at the year-end was Keith James (Chairman), Lucy Kellaway, and Alastair Lyons. The Company Secretary acts as Secretary to the Committee. The Committee invites the Chief Executive to attend meetings when it deems appropriate.

The Committee has formal terms of reference which were reviewed during the year and were approved by the Board in December 2010. The Committee met on three occasions during 2010.

The Committee leads the process for making appointments to the Board or where the appointee is likely to become a Board member. The Committee ensures there is a formal, rigorous and transparent procedure for the appointment of new Directors to the Board through a full evaluation of the skills, knowledge and experience required of Directors. The Committee also ensures plans are in place for orderly succession for appointments to the Board, and reviews the succession plans for other senior management positions. Responsibility for making senior management appointments rests with the Chief Executive.

During 2010, based on an assessment of the size of the Board, the balance of its composition and the length of service of some of the existing Board members, the Board decided to initiate a search for an additional non-executive director. The Nomination Committee led this process. The balance of skills, knowledge and experience on the Board was evaluated, and the Committee developed the appropriate specification identifying the need for the successful candidate to have recent and relevant financial experience in order that they may replace the existing Audit Committee Chairman, Martin Jackson, at such time as he decides to step down from that role. The Committee instructed external consultants to advise on and lead the identification and shortlisting of potential candidates. All members of the Committee interviewed the shortlisted candidates and unanimously recommended to the Board that Colin Holmes should be appointed to the Board. The Board approved the Committee’s recommendation and Colin Holmes was formally appointed to the Board on 3rd December 2010.

During 2010, the Committee continued to discuss with the Executive team the succession planning across the Group to identify and develop those individuals within the organisation who have the potential and necessary skills to succeed the current members of the Executive team and senior management. The Committee, at the meeting in October 2010, considered the Group’s current Succession Plan together with a Training and Development Plan that had also been produced. The Succession Plan considered the senior roles within the Group and identified whether there was emergency short term cover in place in the event that the individual left the organisation, and whether there was a permanent replacement available within the organisation, or whether the position would need to be filled externally. It also identified where there were individuals who would be capable of moving into particular senior management roles following the gaining of further experience. In addition, the Training and Development Plan identified those individuals within the Group who it was felt could become permanent replacements for senior roles on receipt of the necessary training and development.

The Committee remains satisfied that succession plans for directors and senior management are in place to ensure the continued ability of the Group to implement strategy and compete effectively in the markets in which it operates.

The Committee continues to review the current size, structure, and composition of the Board, to assess whether further appointments are necessary to maintain an appropriate balance of skills and experience within the Board, thereby ensuring that it can continue to provide effective leadership of the Company to support its successful operation within the various marketplaces in which it operates.

The Nominations Committee Terms of Reference can be found here.

Remuneration Committee

The membership at the year-end was John Sussens (Chairman), Martin Jackson, Margaret Johnson and Colin Holmes (appointed 3rd December 2010). The Company Secretary acts as Secretary to the Committee. The Committee invites the Chief Executive and Chairman to attend meetings where it deems appropriate.

The Committee has formal terms of reference which were reviewed and updated during the year and were approved by the Board in December 2010. The Committee met eight times during 2010.

During the year the Committee carried out the following activities:

Reviewed the Group’s overall remuneration policy and strategy
Recommended for approval individual remuneration packages for Executive Directors, and the Company Secretary
Reviewed the rules and performance measures of the Group share schemes and recommended for approval the grant, award, allocation or issue of shares under such schemes.

A separate Remuneration Report is included within the Report and Accounts.

During the year the Committee purchased consultancy services from Kepler Associates. In addition, the Company Secretary circulates market survey results as appropriate to enable the Committee to make judgments on the levels of remuneration appropriate for the Directors and to review the remuneration of the Group’s senior executives. PricewaterhouseCoopers (PwC) also provided advice on the structure of the Group’s share plans during the year.

The Remuneration Committee Terms of Reference can be found here.

Internal control and risk management

The Board is ultimately responsible for the Group’s system of internal control and, through the Audit Committee, has reviewed the effectiveness of these systems. The systems of internal control over business, operational, financial, and compliance risks are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board is of the view that there is an ongoing process for identifying, evaluating and managing the Group’s internal controls; that it has been in place for the year ended 31 December 2010; and that, up to the date of approval of the annual report and accounts, it is regularly reviewed by the Board and accords with the internal control guidance for Directors provided in the Combined Code.

A key element of the control system is that the Board meets regularly with a formal schedule of matters reserved to it for decision and has put in place an organisational structure with clearly defined lines of responsibility. In order to ensure these responsibilities are properly discharged, the Board has delegated the task of supervising risk management and internal control to the Risk Management Committee (RMC) in the UK and appropriate management committees for the Group’s other UK and overseas entities.

There are several key elements to the risk management environment throughout the Group. These include the setting of risk management policy at Board level; enforcement of that policy by the Chief Executive; delivery of the policy by the RMC and the Group’s other UK and overseas entities via the Group’s systems of internal control and risk management; and the overall assurance provided by the Audit Committee that the systems operate effectively. The Board recognises that the day-to-day responsibility for implementing these policies must lie with the Executive team whose operational decisions must take into account risk and how this can be controlled effectively. The Head of Compliance and the Risk Officer take responsibility for ensuring management are aware of their risk management obligations, providing them with support and advice, and ensuring that the risk management strategy is properly communicated. The head of each business unit or business area is required, with the support of the Risk Officer, to undertake a full process of assessment to identify and quantify the risks that their departments face or pose to the Group and the adequacy of the controls in place to mitigate or reduce those risks. Reports are produced showing the most significant risks identified and the controls in place. Internal Audit and the Compliance functions use the risk registers to plan their programme of audits around the most significant risks to the Group to ensure that the controls described are actually in place.

The RMC and other UK and overseas committees receive reports setting out key performance and risk indicators and consider possible control issues brought to their attention by early warning mechanisms that are embedded within the operational units. The RMC, the Group’s other UK and overseas committees and the Audit Committee also receive regular reports from their respective Internal Audit functions, which include recommendations for improvement of the control and operational environment. The Board undertakes periodic structured reviews of the Group’s risk map, focussing on the principal assessed exposures and the effectiveness of the mitigation strategies adopted. It receives reports from the Chairman of the Audit Committee as to its activities, together with copies of the minutes of both the RMC and the Audit Committee. In February 2011 the Board carried out the annual review of the effectiveness of the Group’s system of internal controls for the 2010 year by considering documentation from the Audit Committee, taking account of events since 31 December 2010, which includes the Internal Audit Annual Report prepared by the Group’s Head of Internal Audit.

The Audit Committee’s ability to provide the appropriate assurance to the Board depends on the provision of periodic and independent confirmation, primarily by Internal Audit, that the controls established by management are operating effectively and where appropriate provides a high-level challenge to the steps being taken to implement the risk management strategy.

The Board confirms that there were no significant issues arising during the year under review.

The Risk Management Committee (UK Car Insurance)

The Committee’s members include the three executive directors, the Head of Compliance (who chairs the meetings), the Risk Officer, and senior management representatives.

The Committee’s principal responsibilities are to:

Consider risk management best practice and recommend its inclusion within the risk management strategy and policy adopted by the Board;

Ensure that the risk management policy approved by the Board is implemented effectively throughout the UK operations;

Identify and monitor any UK regulatory issues and ensure that their resolution and action is appropriately recorded; and

Assess and monitor reinsurance protection.

The relevant UK and overseas management committees discharge similar responsibilities for the Group’s other UK and overseas operations.

The Committee has formal terms of reference that are reviewed on an annual basis. The Committee meets around 8 times a year and each Committee member receives an agenda and papers in a timely manner allowing the Committee to make informed decisions and take appropriate actions.

The Committee develops policies to ensure compliance with regulation and determines that appropriate action is taken by the management team to implement compliant systems and procedures.

Internal Audit

The Internal Audit functions assist management by providing them with timely, independent assurance that the controls established are operating effectively. This includes regular reviews of internal control systems and business processes, including compliance systems and procedures, and identification of control weaknesses and recommendations to management on improvements.

Corporate Information

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