144 | Just Group PLC | Annual Report and Accounts 2024
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1. MATERIAL ACCOUNTING POLICIES continued 1.3. Material accounting policies and the use of judgements, estimates and assumptions
The preparation of financial statements requires the Group to select accounting policies and make estimates and judgements that affect items reported in the Consolidated statement of comprehensive income, Consolidated statement of financial position, other primary statements and Notes to the financial statements. All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and predictions of future events and actions. Actual results may differ significantly from those estimates. Sensitivities of investments and insurance contracts to reasonably possible changes in significant estimates and assumptions are included in notes 16(d) and 22(h) respectively. The major areas of judgement applied as part of accounting policy application are summarised below.
Note
Item involving judgement
Critical accounting judgement
1.7
Selection of the top-down approach and identification of the reference portfolio used to determine the discount rate for insurance and reinsurance contracts
The Group has elected to apply the top-down approach for the determination of discount rate for insurance and reinsurance contracts. Discount rates are determined based on a reference portfolio of assets and allow for deductions for credit risk (both expected and unexpected). Management have exercised judgement in identifying the reference portfolio which is based upon the actual asset portfolio backing the net of reinsurance best estimate liabilities and risk adjustment and is adjusted in respect of new contracts incepting in the period to allow for a period of transition from the actual asset holdings to the target portfolio where necessary. No adjustment for liquidity differences between the reference portfolio and the liabilities is made. For calculation of the Contractual Service Margin (“CSM”) at the inception of contracts, discount rates are based on the yields from a reference portfolio assumed to be represented by the current target portfolio mix based on the latest investment strategy. Consistent discount rates are used for calculation of the reinsurance CSM as used for the underlying business. A weighted average discount rate curve is used for accreting interest on the CSM and for calculating movements in the CSM due to changes in fulfilment cash flows relating to future service. This separate “locked-in” discount rate curve is determined for each annual cohort at the end of the cohort’s first year and then does not change throughout the remainder of life of the group of contracts. Future cash flows are adjusted by the risk adjustment for non-financial risk representing the level of compensation that the Group requires for bearing the uncertainty regarding the amount and timing of the cash flows that arise from non-financial risk. The Group has applied judgement in calibrating the risk adjustment using an appropriate confidence interval. The risk adjustment is calibrated to provide a 70% level of confidence that longevity, expense and insurance contract specific operational risks will be covered by the liabilities when viewed over the lifetime of the contracts and is used as a core parameter within the Group’s pricing framework when assessing the profitability of new business. The reinsurance risk adjustment represents the extent to which non-financial risks are transferred to reinsurers and is measured using the same calibrations as applied to the underlying contracts. Coverage units for phasing the recognition of CSM in profit or loss are determined by the type of service provided. Coverage units for the Group’s products are defined as follows: – In the deferred phase of Defined Benefit policies, investment return service coverage units are represented by the return on the funds backing the future cash flow liability in this accumulation phase. Insurance service in this phase is considered insignificant. – In the guaranteed phase of Defined Benefit and Guaranteed Income for Life policies, when payments outwards are being made regardless of any insurance event, investment return service is represented by the payments to annuitants. – In the life contingent phase of all policies, insurance service is represented by payments to annuitants, as confirmed by the IASB Interpretation Committee (“IFRIC”) during 2022. The Group applies judgement in weighting these disparate coverage units. The Group has determined that the appropriate weighting to apply is the probability of the policy being in force. This reflects the judgement made by the Group that the value of services provided to policyholders is broadly equivalent across the different phases in the life of contracts. Management exercises judgement in determining whether there is an active market for a particular security. Where the market is not active, management applies judgement in selecting the appropriate valuation technique. The Group has determined that the appropriate valuation model to fair value the No-Negative Equity Guarantee (“NNEG”) associated with the Group’s Lifetime Mortgages (“LTMs”) is a variant of the Black- Scholes option pricing formula with real world assumptions. The Group has selected to use real world assumptions instead of risk neutral assumptions due to the lack of relevant observable market inputs to support a risk neutral valuation approach.
1.7, 22 Calibration of risk adjustment for insurance contract liabilities and reinsurance assets and liabilities
1.7, 22 Determination of the weighting of coverage units for phasing the recognition of CSM in profit or loss
1.13 Assessment whether a market is active and the selection of an appropriate
measurement model to determine the fair value of financial assets where the market is not active
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