132 | Just Group PLC | Annual Report and Accounts 2024
INDEPENDENT AUDITORS’ REPORT continued to the members of Just Group plc
Key audit matter
How our audit addressed the key audit matter
Valuation of insurance contract liabilities – Credit default assumptions for illiquid assets (Group) Refer to Group Audit Committee Report, Accounting policy 1.7 Insurance contracts and note 22 Insurance contracts and related reinsurance. The Group, as permitted by IFRS 17 derives the discount rate for calculating the insurance contract liabilities (future cash flows and risk adjustment) is determined using a ‘top-down’ approach. In this approach the discount rate is set using the yield on a reference portfolio of assets (based on the actual assets held) with explicit deductions for both expected and unexpected credit default risk. The credit default assumptions are also used to determine the locked-in discount rate based on the target asset mix for new business written in the period (applicable to the contractual service margin). This is a key audit matter because the Group’s asset portfolio includes a material amount of illiquid assets for which the determination of credit default assumptions, including consideration of expected and unexpected default risk, requires a significant level of expert judgement. Valuation of insurance contract liabilities – Expense assumption (Group) Refer to Group Audit Committee Report, Accounting policy 1.7 Insurance contracts and note 22 Insurance contracts and related reinsurance. Future maintenance expenses and expense inflation assumptions are used in the measurement of the insurance contract liabilities. The assumptions reflect the expected future expenses that will be required to maintain the in-force policies at the balance sheet date, including an allowance for project costs and future inflation. In addition, acquisition expenses are also relevant in determining the contractual service margin component of the insurance contract liabilities at point of sale. The assumptions used require judgement, particularly with respect to the allocation of expenses between acquisition, maintenance and other.
We performed the following audit procedures to test the credit default assumptions: • Tested the design and operating effectiveness of controls over management’s analysis of change in discount rate (including credit default assumptions); • Tested change controls around the implementation of the credit default assumptions within the various tools used for current and locked-in discount rates for new business written in the period; • Tested accuracy of asset data used to determine credit default assumptions. For a sample, agreed asset data used to source documentation and/or market information; • Tested the methodologies used to derive the assumptions (including expected and unexpected risk) with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience. This also included analysis of any impact of the Solvency II Matching Adjustment Attestation on the credit default assumptions under IFRS 17; • Tested significant assumptions used by management against market observable data (to the extent available and relevant) and our experience of market practices. We have also considered the impact of current economic conditions on levels of expected and unexpected credit default risk; • Performed procedures to obtain comfort over the appropriateness of asset credit ratings. This included engaging our valuation experts to assess the appropriateness of the methodology and assumptions used for a sample of assets, and testing management’s oversight, review and challenge of ratings provided by external asset managers; and • Compared the assumptions selected against those adopted by peers using our independent annual benchmarking survey of the market assumptions (to the extent available). Based on the work performed and the evidence obtained, we consider the assumptions used for credit default risk to be appropriate. We performed the following audit procedures to test the expense assumptions: • Tested the design and operating effectiveness of controls related to the expense assumption process; • Assessed the methodology used by management to derive the assumptions with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience; • Tested the completeness and accuracy of the total cost base and allocation of expenses to the appropriate cost centre; • Assessed the appropriateness of significant judgements in application of the methodology, including excluded costs (for example, due to costs either not relating to the insurance business or being non-recurring in nature), expected future improvements in efficiency, and the allocation of expenses between acquisition and maintenance and to products. This assessment also considered the appropriateness of the treatment of non-discretionary project spend where we expect these costs to be included in the ongoing cost base; • Assessed the appropriateness of the rate at which expenses are assumed to inflate in the future, taking into account current and future market expectations of both price and earnings inflation; and • Tested the policy counts used in the derivation of per policy expense assumptions and considered whether any adjustments are required to reflect changes in future expected policy volumes, for example, to allow for diseconomies of scale. Based on the work performed and the evidence obtained, we consider the expense assumptions to be appropriate.
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