FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit. The impact of uncertainties related to COVID-19 on the Group and Company, which was a key audit matter last year, is no longer included because it is now clearer and assessed as having limited effect on the operations or the going concern assessment performed by the directors. We have therefore removed this as a specific key audit matter and have, to the extent relevant, referred to the impact of COVID-19 on our audit work within other key audit matters. Otherwise, the key audit matters below are consistent with last year.
Key audit matter
How our audit addressed the key audit matter
Valuation of insurance contract liabilities (Group) Refer to Group Audit Committee Report, Accounting policy 1.21 Insurance liabilities and note 23 Insurance contracts and related reinsurance.
The inherent uncertainty involved in setting the assumptions used to determine the insurance liabilities represents a significant area of management judgement for which small changes in assumptions can result in material impacts to the valuation of these liabilities. As part of our consideration of the entire set of assumptions, we focused particularly on longevity assumptions, credit default risk assumptions and expense assumptions as these are considered the most significant and judgemental.
The work to address the valuation of the insurance contract liabilities included the following procedures: • Tested the design and, where applicable, the operating effectiveness of controls related to the completeness and accuracy of policyholder data used in the valuation of insurance contract liabilities; • For a sample, agreed data used in the actuarial model to source documentation; • Using our actuarial specialist teammembers, we applied our industry knowledge and experience to assess the appropriateness of the methodology, model and assumptions used against recognised actuarial practices; • Performed testing over the actuarial model calculations. We have placed reliance on model baselining carried out as part of our first year audit, whereby we independently replicated the liability cash flows for a sample of policies in order to validate that the model calculations were operating as intended. In 2021 we performed additional procedures over changes in the model and tested the analysis of change in modelled results, to assess whether the model continues to operate as expected; • Tested the derivation of the valuation rate of interest used to discount the insurance contract liabilities; • Used the results of an independent PwC annual benchmarking survey of assumptions to further challenge the assumption setting process by comparing certain assumptions used relative to the Group’s industry peers; • Understood the process and tested controls in place over the determination of the insurance contract liabilities, including those relating to model inputs, model operation and extraction and
consolidation of results from the actuarial model; and • Assessed the disclosures in the financial statements.
Further testing was also conducted on the annuitant mortality, credit default and expense assumptions as set out below.
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