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 August, 2023
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation
of registrant's name into English)
13/F, One International Finance Centre,
1 Harbour View Street, Central,
Hong Kong, China
(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, financial
condition and results of operations, including as a result of
increased strategic, business, insurance, product and customer
conduct risks. Prudential operates in a macroeconomic and global
financial market environment that continues to present significant
uncertainties and potential challenges. For example, while headline
inflation has moved down since mid-2022, on the back of
declining food and energy prices, core inflation has remained well
above central bank targets. As a result, central banks have
continued to raise rates to attempt to rein in inflation. Further
interest rate increases are expected in some jurisdictions and
tighter monetary policies could exert downward pressures on
growth. In the major emerging markets, inflation has generally been
less severe and monetary tightening is broadly expected to have
reached its peak. Nevertheless, this environment of higher global
interest rates and meaningful recession risk is putting pressure on
banks' balance sheets and margins. This could result
in a pullback in both credit supply and credit demand and
lead to a sharper tightening in global credit conditions. In the
Chinese Mainland, the recovery has been led by services while
manufacturing and import growth remain weak and authorities have
initiated new policy stimulus to respond to the signs of softness.
The weak growth in the Chinese Mainland could weigh on the broader
Asian region and the global economy's vitality going forward.
Furthermore, while Covid-19 has evolved into an endemic disease,
the broader long-term impacts of Covid-19 continue to cause
uncertainty to financial market volatility, global economic
activity and impact on sales, as well as insurance experience. Such
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 may have a bearing on inflation levels.
Global financial markets are also subject to uncertainty
and volatility created by a variety of other factors.
These factors include actual or expected changes in both monetary
and regulatory 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 Covid-19 lockdowns or the impact of the
Russia-Ukraine conflict and geopolitical
tensions); and sector-specific slowdowns or
deteriorations which have the potential to have contagion impacts
(such as challenges in the US and EU
banking sector, increasing risk in the US commercial
real estate sector, and the negative developments in the Chinese
Mainland property sector and more widely across the Chinese
Mainland economy). Other factors include fluctuations in
global commodity and energy 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 countries in Africa,
such as the sovereign debt restructuring in Ghana), the increased
level of geopolitical and political risk and policy-related
uncertainty (including those resulting from
the ongoing Russia-Ukraine conflict and tensions
between the Chinese Mainland and countries such as the
US and India, 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:
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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 businesses and/or the present
value of future profits for accident and health products; and/or
reduce the value of the Group's 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.
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A reduction in the financial strength and flexibility of corporate
entities, as experienced by a number of issuers within the Chinese
Mainland property sector and the US commercial real estate sector,
which may result in a deterioration of the credit rating profile
and valuation of the Group's invested credit portfolio (and which
may lead to 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.
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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.
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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.
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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.
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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.
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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.
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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 participating products, which
are impacted by the difference between actual investment returns of
the participating 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.
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, partial withdrawals 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 is 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.
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:
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The application of government regulations, executive powers,
sanctions, 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;
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An increase in the volume and pace of domestic regulatory changes,
including those applying to specific sectors;
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The increased adoption or implementation of laws and regulations
which may purport to have extra-territorial
application;
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Withdrawals or expulsions from existing trading blocs or agreements
or financial transaction systems, including those which facilitate
cross-border payments;
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The implementation of measures favouring local enterprises
including changes to the maximum level of non-domestic ownership by
foreign companies, differing treatment of foreign-owned businesses
under regulations and tax rules, or international trade disputes
affecting foreign companies; and
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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.
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The above risks may have an adverse impact on Prudential through
their effects on the macroeconomic outlook and the environment for
global regional and national financial markets. Prudential may also
face heightened sanctions risk driven by geopolitical conflicts as
well as increase reputational risks. The above risks may also
adversely 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. Increasing geopolitical and
political tensions may lead to conflict, civil unrest and/or
disobedience as well as increases in domestic and cross-border
cyber intrusion activity. 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 and geopolitical or
political risks which adversely impact Hong Kong's
international trading and economic relationships, 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 As a holding company, Prudential is dependent upon its
subsidiaries to cover operating expenses and dividend
payments.
The Group's insurance and asset 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.
1.4 Prudential's investment portfolio is subject to the risk
of potential sovereign debt credit deterioration.
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 or restructure 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.
1.5 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
its ability to market products, retain current policyholders or
attract new policyholders.
1.6 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, but in some markets Prudential also write
policies and invest in assets denominated in non-local currencies,
primarily in the US dollar. 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 inhibit the Group's ability to meet its
ESG commitments and undermine its sustainability credentials 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, but also including
those associated with biodiversity and nature degradation, 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 risks
associated with the impacts of climate change combined with the
potential economic impacts of the transition to a lower carbon
economy have the potential to disproportionately impact the Asia
and Africa markets in which Prudential operates and invests. 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 sustainability or
climate-orientated investment strategies and products may be
limited by insufficient or unreliable data on carbon exposure,
transition plans of the investee company assets in which it invests
or inability to divest as planned. The direct physical impacts of
climate change, including shorter-term event driven (acute)
physical risks and those associated with longer-term shifts in
climate patterns (chronic physical risks), 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 environmental 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 sustainability 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,
disclosure and litigation risks which may be increased by the
multi-jurisdictional coordination required in adopting a consistent
risk management approach. The launch of sustainability-focused
funds or 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 and investors by the Group's appointed asset
managers and may increase regulatory compliance, customer conduct,
product disclosure and 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. The reputational and litigation risks of the
Group may subsequently increase where the stated positions or aims
of such industry organisations or their initiatives continue to
evolve, or where jurisdictions interpret their objectives as
adversely impacting on markets or consumers, including for example,
perceived conflicts with anti-trust laws. See risk factor 4.1 for
details of sustainability and ESG-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, wellbeing, changing needs, human
rights and interests of its customers and employees and the
communities in which the Group or its third parties operate.
Perceived or actual 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 and impact the delivery of the
Group's strategy on developing affordable and
accessible products to meet the needs of people
across these markets. 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 that
are particularly 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), as well as migration due to factors
including climate-related developments, 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 the use of digital services, technologies
and distribution methods to customers. 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 increase in
technology risk as well as 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.
Failure to foster an inclusive, diverse and open environment for
the Group's employees in accordance with the principles of the
Universal Declaration of Human Rights and of the International
Labour Organisation's core labour standards could impact the
ability to attract and/or retain employees and increase potential
reputational risk. The business practices within the Group's
third-party supply chain and investee companies with regards to
topics including labour standards, respect of human rights and
modern slavery also expose the Group to potential reputational
risk.
(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 its local businesses and
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
sustainability and ESG 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 sustainability and ESG
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 undertake corporate restructuring, transformation
programmes and acquisitions/disposals across its business. Many
such 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. 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. 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 the revised strategy for the
Group, control environment transformation, significant accounting
standard changes, such as IFRS 17, and other regulatory changes in
major businesses of the Group, such as those related to the agency
transformation at the Indonesia businesses, may amplify these
risks. Risks relating to these regulatory changes are explained in
risk factor 4.1 below.
The speed of technological change in the business could outpace the
Group's ability to anticipate all the unintended consequences that
may arise from such change. Innovative technologies, such as
artificial intelligence, expose Prudential to potential additional
regulatory, information security, privacy, 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-centric 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 mature 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 strong 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 escalation of the
Russia-Ukraine conflict 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 (AI) technologies to process, analyse and interpret
this data. New and currently unforeseeable regulatory, reputational
and operational issues may also arise from the increased use of
emerging technology such as generative AI which require careful
consideration and guardrails established to enable its safe use.
Regulatory developments in cybersecurity and data protection
continue to progress worldwide. In 2023, the momentum in focus on
data privacy continues to increase, with regulators in Asia
introducing new data privacy laws or enhancing existing ones (eg
new data protection laws in Vietnam in June 2023 and extensive
amendments to the Korean data privacy law). 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.
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. To that end, the
Group's security strategy encompasses a cyber resilience theme
focusing on its ability to respond and recover from an attack in
order to maintain its reputation and customer trust.
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 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:
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The number of current and planned markets in which Prudential's
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;
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The implementation of planned digital platforms and services, which
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;
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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;
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Reliance on and/or collaboration 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
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Support for, and development of, the platform being provided
outside of some of the individual markets in which the platform
operates, which may increase the complexity of local legal and
regulatory compliance.
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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. In response, the Group has enhanced its
governance framework in the first half of 2023 to better oversee
the implementation and risk management of digital platforms. This
includes the establishment of digital governance forums that
oversee digital transformation from various dimensions such as
customer centricity, strategic, financial, operational and risk
management.
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 as
well as local regulatory constraints applicable to the joint
venture and associate businesses, such as listing requirements, 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 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 and more widely across the
Chinese Mainland economy). In addition, the level of
control exercisable by the Group could be affected by changes in
the maximum level of foreign 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 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 rollouts) and
non-pharmaceutical interventions, could have a material impact on
the Group's claims experience.
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).
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 or intervention of the Group, the level
of regulatory scrutiny arising from the Group's reported events,
the effects and pace of changes in the laws, regulations, policies
and their interpretations and any industry/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 customer-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, US-Chinese Mainland and India-Chinese
Mainland 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 Insurance Authority (IA) developed its
GWS Framework for multinational insurance groups under its
supervision based on a principles-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.
Prudential has in place a monitoring mechanism and controls to
promote constructive engagement 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 a number of ongoing global regulatory
developments which could impact Prudential's businesses in the many
jurisdictions in which they operate. These include the work of the
Financial Stability Board (the FSB) in the area of systemic risk
including assessing and mitigating systemic risk through the
Holistic Framework (HF) (replacing the Global Systemically
Important Insurer G-SII designations) and the Insurance Capital
Standard (the ICS) both being developed by the International
Association of Insurance Supervisors (the IAIS). There is a risk
attached to the manner in which regulators may choose to implement
the HF and ICS which could lead to additional burdens or adverse
impacts to the Group. As a result, there remains a high degree of
uncertainty over the potential impact of such changes on the
Group.
On 9 December 2022 the FSB announced its decision to discontinue
the annual identification of G-SII in favour of the HF for the
assessment and mitigation of systemic risk in the insurance sector.
The FSB will continue to receive an annual update on the outcomes
of the IAIS's global monitoring exercise which will include IAIS's
assessment of systemic risk. 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 HF supervisory policy measures to address such systemic
importance. In November 2025, the FSB will review the process for
assessing and mitigating systemic risk under the HF. In response to
this review the FSB will, as necessary, adjust its process which
could include reinstating an updated G-SII identification
process.
Many of the prior G-SII measures have been adopted into IAIS's
Insurance Core Principles (ICPs) and ComFrame, described below, 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. As the guidance is still
developing there remains some uncertainty on how these new
approaches to the global regulation of insurers will impact the
Group.
In November 2019 the IAIS adopted the Common Framework (ComFrame)
which establishes supervisory standards and guidance focusing on
the effective group-wide supervision of Internationally Active
Insurance Groups (IAIGs). 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 ICS is a consolidated group-wide capital standard for IAIGs.
The implementation of ICS is being conducted in two phases: a
five-year monitoring phase, which commenced at the beginning of
2020, followed by an implementation phase. An alternative to the
ICS called the 'Aggregation Method' has also been developed in the
United States by the National Association of Insurance
Commissioners; the IAIS is in the process of evaluating whether it
produces comparable outcomes to the ICS.
(c)
Regional regulatory regime developments, including climate-related
regulatory changes
In the first half of 2023, regulators in Asia continued 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 include the
following:
- The
National Administration of Financial Regulation (NAFR) officially
replaced the China Banking and Insurance Regulatory Commission
(CBIRC) on 18 May with the aim to strengthen and improve its
financial supervision through deepening the financial regulatory
sector reform, enhancing the quality and effectiveness of financial
regulation, and promoting full coverage of financial regulation in
the sector. Financial institutions and their obligations to
customers, including customer protection, are centrally supervised
by the NAFR going forward; and
- The
amendment of the Insurance Law of People's Republic of China is in
progress with emphasis on corporate governance including
appointment of directors, fiduciary duties, and supervision of
participating and investment-linked product (ILP) policies.
Consultation is ongoing.
-
In Indonesia, regulatory and supervisory focus on the insurance
industry remains high. The Financial Services Authority of
Indonesia, the Otoritas Jasa Keuangan (OJK) is planning to replace
the existing regulation on anti-money laundering (AML) and
counter-terrorist financing (CTF). To strengthen the financial
sector, the OJK has drafted the revised regulations on consumer
protection and complaints handling. Key proposed changes include a
defined scope of customer protection violations, agent commission
disclosures, and semi-annual filing of complaints. Industry
consultation is ongoing.
-
In Malaysia, the BNM has initiated a multi-phase review of its
current risk-based capital (RBC) frameworks for insurers and
takaful operators since 2019, which include quantitative impact
studies carried out in 2022, the issuance of exposure drafts and a
parallel run planned in 2023, prior to the potential full
implementation targeting by end of 2024. According to the BNM's
regulatory calendar, new regulatory developments in customer
conduct are anticipated. The BNM has revised its policy on
Management of Customer Information and Permitted Disclosure in
April 2023 with immediate effect. The policy sets out requirements
regarding controls in collection, storage, use, transmission,
sharing, disclosure and disposal of customer information.
Furthermore, a new regulation on professionalism of agents will
come into effect on 1 January 2024, which requires additional fit
and proper and due diligence procedures as enhanced agent
onboarding and screening requirements.
-
In Hong Kong, the revised Guideline on AML and CTF (GL3)
has been published with an effective date on 1 June 2023. 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 full
consideration of the public views is expected when finalising the
proposal to establish a Policyholder Protection
Scheme.
-
In Thailand, the Bank of Thailand imposed a restriction to prevent
banks from sending links via SMS, emails or social media to collect
personal data from 9 March 2023 onwards. The same practice is
expected for the insurance sector and such regulatory development
is being monitored.
- In Vietnam, the
amended Insurance Law took effect on 1 January 2023. The new law
also contains provisions on RBC, with a five-year grace period,
effective from 1 January 2028. The Vietnamese Government also
issued a decree on 17 April 2023 for personal data privacy guidance
with an effective date of 1 July 2023. It provides definitions of
personal data with examples of sensitive personal data, the rights
of data subjects, and notification and data transfer requirements
pertaining to the use of data.
- In the
Philippines, the financial product and customer service
requirements were issued by the Insurance Commission in
March 2023 with an 18-month transition period for the adoption. The
new requirements include product and service disclosures, demanding
a systematic approach for customer assistance and conduct risk
management, as well as additional complaints
filing.
- In
India, the Insurance Regulatory and Development Authority of India
(IRDAI) continues to focus on industry reform. A new income
tax rule took effect from 1 April 2023, which makes maturity
proceeds of insurance policies taxable for policies issued from
this date with annual premiums exceeding INR 500,000. Another IRDAI
regulation issued in March 2023 removed commission payment limits
for insurers, aimed to give more operational flexibility to
insurers and enhance insurance penetration.
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 and responsible 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
sustainability and ESG-related disclosure requirements. Recent
high-profile examples of government and regulatory enforcement and
civil actions against companies for misleading investors on
sustainability and ESG-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 is 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.
These changes mean that investors, rating agencies and other
stakeholders may take time to gain familiarity with the new
standard and to interpret the Group's business performance and
dynamics. In addition, comparison with previous financial reporting
periods will be more challenging in the short term. New systems,
processes and controls have been developed to align with the new
IFRS17 basis, and are expected to mature over time. In the short
term there may be increased operational risk associated with these
new systems and processes.
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)
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, asset 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 the Group 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.
As part of the OECD's development of the implementation framework,
the OECD published guidance on safe harbours, and public
consultations on information returns and tax certainty on 20
December 2022, and additional administrative guidance on 2 February
2023.
A number of jurisdictions in which the Group has operations have
commenced the process of introducing the OECD model rules into
domestic tax law through domestic consultations and/or issuing
proposed domestic legislation. Some jurisdictions where the Group
has operations may or will implement the OECD model rules with
effect from 1 January 2024; other jurisdictions, including Hong
Kong, have indicated the likely implementation will be from 1
January 2025. As the Group 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 the Group'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: 30 August
2023
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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|
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By:
/s/ Ben Bulmer
|
|
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Ben
Bulmer
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Group
Chief Financial Officer
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Prudential (NYSE:PUK)
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