JUST GROUP PLC Annual Report and Accounts 2021
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
34 CAPITAL continued Further information on the Group’s Solvency II position, including a reconciliation between the regulatory capital position to the reported capital surplus, is included in the Business Review. This information is estimated and therefore subject to change. It is also unaudited. The Group and its regulated insurance subsidiaries are required to comply with the requirements established by the Solvency II Framework directive as adopted by the Prudential Regulation Authority (“PRA”) in the UK, and to measure and monitor its capital resources on this basis. The overriding objective of the Solvency II capital framework is to ensure there is sufficient capital within the insurance company to protect policyholders and meet their payments when due. They are required to maintain eligible capital, or “Own Funds”, in excess of the value of their Solvency Capital Requirements (“SCR”). The SCR represents the risk capital required to be set aside to absorb 1-in-200 year stress tests over the next one year time horizon of each risk type that the Group is exposed to, including longevity risk, property risk, credit risk and interest rate risk. These risks are all aggregated with appropriate allowance for diversification benefits. The capital requirement for Just Group plc is calculated using a partial internal model. Just Retirement Limited (“JRL”) uses a full internal model and Partnership Life Assurance Company Limited (“PLACL”) capital is calculated using the standard formula. Group entities that are under supervisory regulation and are required to maintain a minimum level of regulatory capital include: • JRL and PLACL – authorised by the PRA, and regulated by the PRA and FCA. • HUB Financial Solutions Limited, Just Retirement Money Limited and Partnership Home Loans Limited – authorised and regulated by the FCA. The Group and its regulated subsidiaries complied with their regulatory capital requirements throughout the year. Capital management The Group’s objectives when managing capital for all subsidiaries are: • to comply with the insurance capital requirements required by the regulators of the insurance markets where the Group operates. The Group’s policy is to manage its capital in line with its risk appetite and in accordance with regulatory expectations; • to safeguard the Group’s ability to continue as a going concern, and to continue to write new business; • to ensure that in all reasonable foreseeable circumstances, the Group is able to fulfil its commitment over the short-term and long term to pay policyholders’ benefits; • to continue to provide returns for shareholders and benefits for other stakeholders; and • to provide an adequate return to shareholders by pricing insurance and investment contracts commensurately with the level of risk. • to generate capital from in-force business, excluding economic variances, management actions, and dividends, that is c.£36m greater than new business strain.
The Group regularly assesses a wide range of actions to improve the capital position and resilience of the business.
To improve resilience, we have significantly reduced the property risk exposure related to LTMs by selling two blocks of LTMs and transacting three no-negative equity guarantee (“NNEG”) hedges. A third LTM sale completed subsequent to the year end as referred to in note 37. The Group will continue to assess options to reduce our balance sheet exposure to UK residential property, including, but not limited to increasing the level of NNEG hedges. In managing its capital, the Group undertakes stress and scenario testing to consider the Group’s capacity to respond to a series of relevant financial, insurance, or operational shocks and the on-going impact of COVID-19 or changes to financial regulations should future circumstances or events differ from current assumptions. The review also considers mitigating actions available to the Group should a severe stress scenario occur, such as raising capital, varying the volumes of new business written and a scenario where the Group does not write new business. Regulatory developments The PRA approved the Group’s major model change application on 1 December 2021. The updated model ensures that the model remains appropriate for the risk profile of the business and meets regulatory expectations in respect of the Effective Value Test (“EVT”), a diagnostic validation test, relating to the matching adjustment for liabilities that are matched with LTMs, and the requirement for it to be used in stress to validate the SCR from 31 December 2021. We are planning to apply to the PRA to approve further developments to our internal model to refine our credit risk model and to bring PLACL onto the internal model. At 31 December 2021, Just passed the PRA EVT with a buffer of 0.75% (unaudited) over the current minimum deferment rate of 0.5% (allowing for volatility of 13%, in line with the requirement for the EVT). At 31 December 2020, the buffer was 0.63% (unaudited) compared to the minimum buffer for the phase-in period of 0%. In June 2020, the government announced that it would review certain features of Solvency II. The PRA launched a Quantitative Impact Study (“QIS”) in H2 2021 which the Group participated in. The key features for the Group that were considered in the QIS are the risk margin and the matching adjustment. We plan to engage with the PRA consultation, expected in 2022, on the potential changes to Solvency II.
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