Strategic Report | Governance | Financial Statements | 127
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.
Valuation of insurance contract liabilities and reinsurance assets and liabilities - Implementation of IFRS 17: Judgements, new models and data flows is a new key audit matter this year. In addition, the key audit matters on annuitant mortality assumptions, credit default and expense assumptions have been updated to reflect changes as a result of IFRS 17 implementation. Disclosure of the expected impact of initial application of IFRS 17 ‘Insurance Contracts’ in accordance with IAS 8, which was a key audit matter last year, is no longer included because IFRS 17 has been fully implemented for the current period so this key audit matter has been replaced by the new key audit matter on implementation of IFRS 17 noted above. 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 1.5 IFRS 17 accounting policies and note 26 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 annuitant mortality assumptions, credit default risk assumptions and expense assumptions as these are considered the most significant and judgemental. Adoption of IFRS 17 in the accounting period involves additional uncertainty around certain judgements. These have been considered separately in the key audit matter on IFRS 17 implementation as well as part of the ongoing key audit matters post transition below.
We performed the following audit procedures to test the valuation of insurance contract liabilities (including best estimate liabilities, risk adjustment and contractual service margin): • Tested the design and, where applicable, operating effectiveness of the 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; • Tested the design and, where applicable, the operating effectiveness of controls related to policyholder data used in the valuation of insurance contract liabilities; • For a sample, agreed policyholder data used in the actuarial model to source documentation; • Using our actuarial specialist team members, 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 prior audits (in 2020 and 2022), 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. We have also performed supplementary model testing performed as part of the IFRS 17 implementation (see IFRS 17 implementation key audit matter below). In addition to this, we performed procedures over changes in the models and examined the analysis of change in modelled results, to assess whether the model continues to operate as expected; • Tested the derivation of the current, new business and annual locked in discount rates used to discount the insurance contract liabilities; and • 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 (where available and applicable). Further testing was also conducted on the annuitant mortality, credit default and expense assumptions as set out below.
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