Governance Financial Statements
Strategic Report
67
risk outlook
how this risk effects just just’s exposure to risk
outlook and how we manage or mitigate the risk
1 Political and Regulatory
Trend: Uncertain strategic priorities
Just monitors and assesses regulatory developments for their potential impact on an ongoing basis. We seek to actively participate in all regulatory initiatives which may affect or provide future opportunities for the Group. Our aims are to implement any changes required effectively and deliver better outcomes for our customers and a competitive advantage for the business. We develop our strategy by giving consideration to planned political and regulatory developments and allowing for contingencies should outcomes differ from our expectations. On 6 June 2024, the PRA published a new policy statement entitled “PS10/24 – Review of Solvency II: Reform of the Matching Adjustment”. The policy statement introduces a number of changes to the MA rules, including on the eligibility of MA portfolios, justification of the MA taken, and firms’ reporting. We expect that the PRA will provide further post-implementation guidance during 2025.
The Solvency II reform, including Matching Adjustment and Risk Margin reform is of key importance to the Group’s business model. The PRA published final policy and rules on the MA in 2024 with all changes relating to the Solvency II review effective on 31 December 2024. The Company has adapted and created processes to meet the requirements, including assessing the Fundamental Spread to support the required attestation. The Company understands the PRA will evaluate the outcomes in 2025 within an intent to provide further guidance at some point. This further guidance is uncertain. The Group is participating in the PRA’s Life Insurance Stress Test exercise in 2025 and expect the results of to be published in the second half of 2025. We expect the LIST results to inform regulatory policy and supervisory activity going forward. The Group holds a capital buffer above that required by regulation to withstand a 99.5% 1 year VaR shock. The target level of buffer is maintained in line with industry peers. The Group has limited Funded Reinsurance which is collateralised to ensure recapture risks remain within appetite considering the full balance sheet impacts. SS5/24 – Funded Reinsurance has created requirements for new treaties that include, but are not restricted to, models, limits, capacity available and correlations between counterparties. The FCA’s rules for consumer duty were fully implemented across the Group with the timeframes set and the annual Board report was submitted in July 2024. Following the PRA and FCA regulations on operational resilience from March 2022, Just identified its most important business services and set impact tolerances for each. These are subject to regular scenario testing and an annual self-assessment is prepared for Board approval. Just continues to evolve its operational resilience capability through the pillars that support the delivery of business services. The new Government has stated its intent to pursue leasehold reform, which the prior Government did not implement due to the election. The Group is closely monitoring the new Government’s agenda which remains uncertain following the King’s Speech and the possible impact of this on the Group’s £157m portfolio of residential ground rents. The value of these assets has been adjusted to reflect an expected increase in credit spread and consequential increase in the credit risk deduction for defaults. The Group has not made any change to the approach for determining this adjustment as at 31 December 2024.
Changes in regulation and/or the political environment can impact the Group’s financial position and its ability to conduct business. The financial services industry continues to see a high level of regulatory activity.
2 Climate and SUSTAINABILITY
Trend: Increasing strategic priorities
Our TCFD disclosures (pages 40 to 53) explain how climate-related risks and opportunities are embedded in Just’s governance, strategy and risk management, with metrics to show the potential financial impacts on the Group. The metrics reflect the stress-testing and scenario capabilities developed to date to assess the potential impact of climate risk on the Group’s financial position. The value of properties on which lifetime mortgages are secured can be affected by: (i) transition risk – such as potential government policy changes related to the energy efficiency of residential properties; (ii) physical risks – such as increased flooding due to severe rainfall, or more widespread subsidence after extended droughts. A shortfall in property sale price against the outstanding mortgage could lead to a loss due to the no-negative equity guarantee given to customers. The value of corporate bonds and illiquid investments can be affected by physical and transition risks from climate change on the assets or business models of corporate bond issuers and commercial borrowers. Yields available from corporate bonds may also be affected by any litigation or reputational risks associated with the issuers’ environmental policies or adherence to emissions targets.
Just is proactive in pursuing its sustainability responsibilities and recognises the importance of its social purpose. We have set targets for Scope 1 and 2 to be carbon net zero by 2025. For emissions from Scope 3 including, but not limited to, our investment portfolio, properties on which lifetime mortgages are secured and supply chain we have set net zero targets by 2050, with a 50% reduction in these emissions by 2030. Performance against these targets is being monitored and reported. We continue to look to improve stress and scenario testing capabilities to support the monitoring of potential climate change impact on our investment and LTMs portfolios with a particular focus on refining the quality of input data. The lifetime mortgage lending criteria will be kept under review and adjustments made as required. Under Just’s Responsible Investment Framework, the sustainability risks, including climate change, are considered for liquid and illiquid assets. Risks arising from flooding, coastal erosion and subsidence are taken into account in lifetime mortgage lending decisions. The consideration of sustainability in investment decisions may restrict investment choice and the yields available; but may also create new opportunities to invest in assets that are perceived to be more sustainable. Following the Bank of England and PRA Climate and Capital Conference, in March 2023, the Bank of England published a report setting out its thinking. This included consideration of whether firms assess risks within the matching adjustment (“MA") adequately to allow for the capture of climate risk. They will also start to explore whether it is appropriately reflected in external credit ratings (or firms’ own internal ratings) and if resulting MA benefits could be too large. The ABI are maintaining engagement with key stakeholders including Just.
Climate change could impact our financial position by impacting the value of residential properties in our lifetime mortgage portfolio and the yields and default risk of our investment portfolios. Just’s reputation could also be affected by missed emissions targets or inadequate actions on environmental issues or broader sustainability issues.
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