Strategic Report Governance
Financial Statements
179
The longevity reinsurance on JRL GIfL in-force business is as described for new business, noting the following differences in proportion reinsured: • Business written between 1 January 2016 and 31 December 2019 is reinsured at 100% following a change implemented in 2020 for in-force policies, which increased the reinsurance coverage from 75% to 100%. • Business written prior to March 2015 is not reinsured; business written from March to December 2015 is reinsured at 45%. The reinsurance on JRL DB written: • Between 1 January 2016 and 30 June 2019 is reinsured at 100% following a change implemented in 2019 for in-force policies, which increased the reinsurance coverage from 55% for underwritten schemes and 75% for non-underwritten schemes. • Between 1 July 2019 and 31 December 2023 is reinsured at 90% for non-underwritten schemes and 75% for underwritten schemes, and a small proportion has been reinsured using quota share reinsurance since 2020 via DB partnering. • DB Partner (funded re) in-force business is reinsured using quota share reinsurance arrangements at 100% reinsured. The reinsurance arrangements above are subject to collateral arrangements in order to mitigate the credit risk created by such contracts. Collateral arrangements for both quota share and longevity swap treaties are described in note 28(c)(iii). (b) Measurement of insurance contracts The Group’s long-term insurance contracts include retirement annuities, namely Defined Benefit and Guaranteed Income for Life products, and annuities to fund care fees (immediate needs and deferred). The value of insurance contracts in the financial statements comprises the following components: • Present value of future cash flows – estimates of future cash flows; – an adjustment to reflect the time value of money and the financial risks related to future cash flows, to the extent that the financial risks are not included in the estimates of future cash flows; • a risk adjustment for non-financial risk; and
• a contractual service margin. (i) Estimates of future cash flows
In estimating future cash flows, the Group incorporates, in an unbiased way, all reasonable and supportable information that is available without undue cost or effort at the reporting date. This information includes both internal and external historical data about claims and other experience, updated to reflect current expectations of future events. When estimating future cash flows, the Group takes into account current expectations of future events that might affect those cash flows. Cash flows within the boundary of a contract relate directly to the fulfilment of the contract, including those for which the Group has discretion over the amount or timing. These include payments to (or on behalf of) policyholders, insurance acquisition cash flows and other costs, including investment expenses, that are incurred when fulfilling contracts. The valuation of future policyholder payments is by its nature inherently uncertain, and is based on recognised mortality assumptions as described below. Insurance acquisition cash flows, and other costs that are incurred in fulfilling contracts, comprise both direct costs and an allocation of fixed and variable overheads. These may include costs incurred in providing the required level of benefits; policy administration and maintenance costs; transaction-based taxes and levies directly associated with the insurance contract; payments by the insurer in a fiduciary capacity to meet tax obligations incurred by the policyholder, and related receipts; costs the entity will incur performing investment activities to the extent the entity performs that activity to enhance benefits from insurance coverage for policyholders; and an allocation of fixed and variable overheads. Cash flows are attributed to acquisition activities, other fulfilment activities and other activities using activity-based costing techniques. Cash flows attributable to acquisition and other fulfilment activities are allocated to groups of contracts using methods that are systematic and rational and are consistently applied to all costs that have similar characteristics. Other costs are recognised in profit or loss as they are incurred. (ii) Mortality assumptions Mortality assumptions have been set by reference to appropriate standard mortality tables, adjusted to reflect the future mortality experience of the policyholders, taking into account the medical and lifestyle evidence collected during the underwriting process, premium size, gender and the Group’s assessment of how this experience will develop in the future. This assessment takes into consideration relevant industry and population studies, published research materials, and management’s own industry experience. The Group continues to make an explicit allowance in the Group’s mortality assumptions to reflect the emerging evidence of the future impacts of COVID infections and continuing and likely long-lasting disruption to healthcare services. This explicit allowance involved a mortality uplift of +2.8% in 2025, running down to +2.5% in 2030, +1.7% in 2040 and +1.3% in 2050. The revised allowance reflects the signal from the most recent mortality experience; updated views on future mortality drivers following the COVID-19 pandemic; and the impact of adopting the latest version of the CMI model. The Group will continue to follow closely the impact of COVID-19 as part of a comprehensive assessment of all factors influencing mortality trends, in keeping its assumptions under regular review.
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