Chief Executive Report

New Business Sales

In 2021 the Society made changes to the list of occupations we were able to underwrite, focussed on quality metrics with distributors and adjusted the moratorium underwriting rules. As we expected, in 2021 these actions reduced the volume of new business written by the Society. However, these positive changes combined with a focused, and well executed, marketing and distribution strategy saw new business sales increase in the second half of 2021 and continued to do so throughout 2022. It has been particularly pleasing to see so many new intermediary partners choosing to work with the Society. As a result, the Society’s earned premiums increased to £11.7m (2021: £11.4m) and are forecast to increase further in 2023.

Trading Surplus And Own Funds

The Society’s technical provisions increased in 2022 by £6.7m as a result of a change to the approach of modelling future premiums. Despite this change the Society’s trading returned a surplus in 2022 of £2.7m (2021 returned a deficit of £0.8m). However, after accounting for the fall in value of the Society’s investments and capital withdrawals made by members with ‘Holloway-style’ products the net deficit is £8.1m (£2.2m net deficit in 2021). The net deficit is taken from the Fund for Future Appropriations which has fallen to £28.1m (£36.1m in 2021). The Society’s Fund for Future Appropriations is forecast to grow in 2023 in line with a forecast increase in the Society’s membership.

Capital And Solvency

The Society is incorporated within the meaning of the Friendly Societies Act 1992 and, as such, it has no shareholders. Its members are the ultimate owners of the business. The Society’s structure is very simple in that all its capital is in tangible and realisable assets. In relation to Solvency II all capital is classed as Tier 1 – high quality capital which is generally more secure and capable of absorbing losses. The Society’s solvency capital requirement coverage ratio improved to 189% (161% at 2021). The improvement represents risk management measures taken by the Society and increases in interest rates, which were partly offset by a change in approach to modelling premiums. The risk management actions taken included the use of third party reinsurance to assist in writing new business and growing the Society. However, the Society’s balance sheet still holds an increasing amount of intangible ‘value in force’ representing the future returns of previously sold Income Protection policies. To reduce the risk associated with holding such an intangible asset, the Society regularly reviews options such as further reinsurance or other forms of financing. The Board regularly reviews, and monitors, the Society’s capital management strategy and will continue to assess the potential benefits of utilising further reinsurance arrangements in the future.

Claims

Providing financial support to members at their time of need is the very reason for our existence. We expect to receive new claims every year and every claim has a cost. If more members are unable to work than expected or members claim for longer than expected, then the Society becomes financially weaker. The Society continually monitors and reviews the volume of new claims and the reasons that members are unable to work. Active claims management is a key capability in the Society as we continue to support more members financially and aid their recovery and rehabilitation, allowing them to return to work sooner, whilst receiving the valuable support that the Society provides.

Expenses And Capital Investment

The Society’s 2022 net operating expenses reduced to £10.1m (£10.5m in 2021). The reduction was driven by lower three-year average commission payments made between 2020 and 2022 in comparison to the three-year average commission payments made between 2019 and 2021. Excluding commission, we can see that the Society’s expenses increased to £8.1m (£7.5m in 2021). This increase is driven by an enhanced sales, marketing and product development activity which has supported the Society’s return to growth. Developing the Society’s membership and managing the Society’s expense base in order to achieve a reduction in the cost of maintaining each policy, remains a key part of the Society’s strategic objectives.

People And Culture

The Society’s culture represents how we treat each other, our members and our partners. Mutuality and inclusivity are at the heart of the Society’s culture and drive our behaviours. Being a Mutual organisation owned by its members means we put our members at the heart of everything we do and we try to help every member with financial support and our Mutual Benefits and BF Care programmes.