Strategic Report Governance
Financial Statements
147
1.7.2. Recognition The Group recognises a group of insurance contracts issued from the earliest of the following dates (point of sale): • The date of the beginning of the insurance coverage period of the group of contracts. • The date when the first payment from a policyholder in the group becomes due. • The date when facts and circumstances indicate that the group to which an insurance contract will belong is onerous. Premiums are considered to be due and the Group is “on risk” only after a contract with a policyholder has been completed. New contracts are added to the annual cohort group when they are issued, provided that all contracts in the Group are issued in the same financial year. Reinsurance is recognised from the start of the period during which the Group receives coverage for claims arising from the reinsured portions of the underlying insurance contracts. From time to time the Group may transact reinsurance coverage in respect of underlying contracts already in force, in which case recognition is from the date of the reinsurance contract. The Group recognises a group of contracts acquired as part of a business transfer as at the date of acquisition. 1.7.3. Level of aggregation Insurance contracts may be negotiated as a suite of legal arrangements which are combined into a single insurance contract where these are designed to achieve an overall commercial effect. This applies to certain DB schemes. In addition the Group has established framework agreements with reinsurers in order to facilitate the execution of subsequent DB scheme reinsurance contracts. The Group does not combine such contracts into a single contract as they are individually negotiated and not designed to achieve an overall commercial effect. The unit of account is a group of contracts and insurance contracts are aggregated into groups for measurement purposes. Within each legal entity, the Group identifies portfolios of insurance contracts which comprise contracts that are subject to similar risks, and are managed together. Risks included in this assessment comprise both risks transferred from the policyholder and other business risks. For this purpose, DB, GIfL, and Care contracts have been determined to represent a single portfolio that is managed together and subject to primarily longevity and financial risk. Minor products including the small protection portfolio that is in run-off have been included in the same portfolio on the grounds of immateriality. The single annual portfolio for reporting purposes is divided into three groups: • contracts that are onerous on initial recognition, if any; • contracts that have no significant likelihood of becoming onerous, if any; and • any remaining contracts in the portfolio. Contracts within the single portfolio that would otherwise fall into different groups are included in the same group where law or regulation specifically constrains the Group’s practical ability to set a different price or level of benefits for policyholders with different characteristics. This applies to contracts issued in the UK that are required by regulation to be priced on a gender-neutral basis. All GIfL and Care contracts are evaluated based on the margins that individual contracts contribute when measured on a gender-neutral basis. The Group has evaluated that these contracts all fall into the remaining contracts grouping in the current year. DB contracts are allocated either to the grouping of those contracts that have no significant likelihood of becoming onerous, or the remainder, based on whether contracts are capital generative at inception. Each group of insurance contracts is further divided by year of issue for calculation of the CSM. The resulting groups represent the level at which the recognition and measurement accounting policies are applied. The groups are established on initial recognition and their composition is not reassessed subsequently. Reinsurance treaties are allocated to portfolios depending on whether they transfer longevity and financial (inflation and/or investment) risk or longevity risk alone. The Group has concluded that both Just Retirement Limited (“JRL”) and Partnership Life Assurance Company Limited (“PLACL”) hold portfolios of reinsurance contracts that transfer only longevity risk, and that JRL holds a portfolio that transfers longevity risk and financial risks. Reinsurance CSM is computed separately for each reinsurance treaty for each underwriting year. 1.7.4. Contract boundaries The measurement of a group of contracts includes all of the future cash flows within the boundary of each contract in the group. Cash flows are within the boundary of a contract if they arise from substantive rights and obligations that exist during the current reporting period under which the Group has a substantive obligation to provide services or be compelled to pay reinsurance premiums, or can compel reinsurers to pay claims. 1.7.5. Initial measurement On initial recognition, the Group measures a group of profitable insurance contracts as the total of:
• the fulfilment cash flows; and • the CSM, if a positive value.
Fulfilment cash flows include payments to policyholders and directly attributable expenses including investment management expenses. Investment management expenses are considered to be directly attributable if they are in respect of investment activities from which the expected investment returns are considered in setting the price at outset for the policyholder benefits.
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