Just Group plc | Annual Report and Accounts 2024
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GROUP AUDIT COMMITTEE REPORT continued
REVIEW OF SIGNIFICANT FINANCIAL REPORTING JUDGEMENTS The key areas of financial reporting judgements considered by the Committee in relation to the 31 December 2024 Group Annual Report are set out below. Further details on the significant judgements and estimates are included in note 1.3 of the financial statements.
SIGNIFICANT JUDGEMENTS
APPROACH
ACTION BY THE COMMITTEE
The Committee reviewed the significant judgements initially made on adoption of IFRS 17 and concluded that these remain appropriate.
Judgements applied in the measurement of insurance contract liabilities and reinsurance contract assets Longevity assumptions used in the measurement of LTMs and
The Group’s accounting policies for insurance contracts include judgements made on initial adoption of IFRS 17 regarding: • use of a top-down approach for determination of discount rates based on a reference portfolio of assets; • calibration of the risk adjustment to provide a 70% confidence level regarding the adequacy of reserves; and • weighting of coverage units based on the probability of the policy being in-force. The longevity assumptions regarding the Group’s Retirement Income and LTM customers are key assumptions used in valuing these contracts. As explained in notes 16(d)(vi) and 22(b)(ii)m: • changes to assumptions regarding mortality include adoption of the latest CMI 2023 model with updated overlay for expected post COVID-19 pandemic effects; and • a comprehensive review of the LTM basis for longevity, long-term care and voluntary redemption has been performed. As explained in notes 16(d)(vi) and 22(b)(iii), changes to yield curves used to discount insurance contract cash flows reflect an assessment of the latest trend analysis of defaults and current spreads in determining the allowance for both expected and unexpected credit risk. For LTM assets, updates have been made to reflect the outcomes from a review of recent experience regarding property sales completion timing. As explained in notes 16(d)(vi) and 22(b)(iv, v): • strengthening of assumptions regarding future expenses reflect the latest expense forecast and allocation model, and the impact of increased in-housing of investments; and • for LPI inflation, an update has been performed of the inflation model calibration. Where the Group concludes that there is no active market for an investment, judgement is applied in selecting an appropriate valuation technique. As explained in note 16(d)(vi), the Group applies a variant of the Black- Scholes option pricing formula with real world assumptions to measure the No-Negative-Equity-Guarantee (“NNEG”) included in LTM contracts. As explained in note 1.13.4: • in the absence of an active market internally developed valuation models are used to value illiquid assets. The results from these models are compared against independent price verifications provided by third parties to ensure their reasonableness. Key assumptions used in valuing illiquid assets include discount rates, credit spreads, projected inflation (which applies only to index-linked assets) and, notably, the credit quality of these assets, particularly for residential ground rents. See note 16(d) for further information.
The Committee considered management’s assessment of the latest mortality trends, including insights into the expected longer-term impacts on mortality following the COVID-19 pandemic. The Committee agreed with management’s recommendation and approved the proposed changes to demographic assumptions. The Committee reviewed the analysis of economic assumptions including those relating to credit risk and expectations regarding future expenses. The Committee approved strengthening of the basis for maintenance expenses for in-force business.
insurance contracts
Economic assumptions used in the measurement of insurance contracts
The Committee is satisfied that the Black-Scholes variant applied by the Group continues to be the most appropriate valuation model for determining the value of the NNEG. The Committee noted that management have performed independent price verification of illiquid assets comparing prices provided by asset managers and third-party vendors to those determined internally using its own methodologies, models, and key assumptions. Any differences outside the risk-based tolerance were investigated to identify the reasons, and the results shared with the Asset Valuation Committee which is a subcommittee of the Asset Liability Committee, prior to sharing with the Committee which supported it reach its conclusion that the fair values of the investments included in the financial statements are appropriate. The Committee reviewed management’s assessment of recent property price trends and agreed with management’s conclusion that there has been no clear indications of changes to longer-term expectations and as such it is appropriate that the assumptions for property price volatility and future house price growth should remain unchanged from the 2023 year end. In accordance with the Matching Adjustment Attestation Policy, the Committee reviewed the Matching Adjustment and considered the requirements under PS10/24 including fundamental spreads and any adjustments necessary to reflect compensation for the risks retained by the Group.
Selection of valuation approach for financial
instruments in the absence of an active market
Property assumptions used to value LTMs
The expected shortfall on redemption of LTMs in respect of the NNEG is determined using assumptions regarding future house price growth and volatility.
Matching Adjustment in the valuation of insurance contracts within the Solvency II balance sheet
The Matching Adjustment allows the Group to recognise a prudent view of expected future return on assets backing liabilities in the Solvency II balance sheet. The Group is required to comply with the requirements of the Prudent Person Principle (“PPP”) and other requirements as laid out in PS10/24, which is to include appropriate adjustments for credit risk via Fundamental Spread.
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