Strategic Report | Governance | Financial Statements | 147
1. MATERIAL ACCOUNTING POLICIES continued 1.3.3. Fully retrospective approach
On transition to IFRS 17, the Group has applied the fully retrospective approach unless it has concluded it is impracticable (see notes 1.3.4 and 1.3.5). The Group has applied the fully retrospective approach on transition for all insurance contracts issued on or after 1 January 2021 and prior to the 1 January 2023 effective date. For all contracts issued after 1 January 2021, the Group has applied the accounting policies described in note 1.5 for the measurement and recognition of insurance and reinsurance contracts and used the quantitative inputs described in note 1.3.2 to determine the best estimate and risk adjustment. The locked-in discount rates for the 2021 cohort, which have been determined on a fully retrospective basis are:
JRL GIfL
JRL DB
PLACL Care 0.8% 1.1% 1.0% 1.0% 0.9%
1 year 5 years 10 years 20 years 30 years
2.2% 3.1% 3.2% 2.9% 2.7%
2.2% 2.7% 2.7% 2.4% 2.4%
For all groups of insurance and associated reinsurance contracts issued prior to this, the fair value approach has been applied (see notes 1.3.4 and 1.4). 1.3.4. Fair value approach Where the Group has concluded that the fully retrospective approach is impracticable, it has applied the fair value approach on transition for all groups of insurance and associated reinsurance contracts. For each legal entity, fair value basis cohorts have been grouped across multiple underwriting years into a single unit for each product type and reinsurance treaty for measurement purposes, which is the unit of account applied. The fair value approach was selected as the modifications allowed by the modified retrospective approach were not deemed to be sufficient to enable that approach to be adopted. The assumptions, models and the results of the determination of the fair value of the insurance and reinsurance contracts under this approach are explained in note 1.4. 1.3.5. Impracticability assessment IFRS 17 requires firms to apply the Standard fully retrospectively, unless it is impracticable to do so, in which case either a modified retrospective approach or fair value approach may be taken. For insurance and reinsurance contracts where the effective date of the contract was prior to 1 January 2021, the Group concluded that it would be impracticable to apply the standard on a fully retrospective basis due to the inability of determining the risk adjustment, a new requirement in terms of IFRS 17, in earlier years without the application of hindsight. Guidance contained in IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” requires that hindsight should not be applied in the application of an accounting standard on a retrospective basis. Impracticability of application of risk adjustment on the fully retrospective approach (insurance contracts) The most significant issue identified was the absence of an approved Group Risk Adjustment framework, policy and methodology prior to 2021, with any target setting to prior year information representing the application of hindsight which is prohibited by the Standard. The risk adjustment is a new requirement of IFRS 17 and represents the compensation that an entity requires to take on non-financial risk. Defining “compensation that the entity requires” to take on risk differs to any of the risk-based allowances adopted for either existing regulatory or statutory reporting purposes. A new framework and policy have been defined and implemented to measure the risk adjustment. The new risk adjustment policy was developed and adopted during 2021 with calculation of the risk stresses to be applied from 1 January 2021. Under this policy, the Group determines a target confidence level based upon an assessment of the current level of risks that the business is exposed to and the compensation required to cover the risks. Key factors for consideration here include: the size of the business, products offered, reinsurance structures, regulatory challenges and market competitiveness. These factors are not necessarily stable from period to period, and today’s understanding of these aspects should be excluded from any historic assessment of risk as doing so would be to apply hindsight. The Group has assessed whether other information used in previous reporting cycles, including pricing for new business, could be used to determine the risk adjustment, but has concluded that none of these alternatives would be an appropriate proxy for the risk adjustment. The development of the new approach for IFRS 17 represents a significant enhancement in the approach used to determine the Group’s allowance for non-financial risk, with the use of a target confidence interval and probability distributions providing a more meaningful quantification of allowance for risk compared with IFRS 4 reporting. Therefore, the Group has concluded that the fully retrospective approach is impracticable prior to 2021 in respect of risk adjustment as it would require the use of hindsight. Impracticability assessment for reinsurance contracts held The risk adjustment for reinsurance contracts held in IFRS 17 reflects the “amount of risk being transferred” to the reinsurer, therefore where the risk adjustment for insurance contracts is impracticable then, by definition, the reinsurance risk adjustment is also impracticable. Approach adopted After considering the severity of these factors, the Group concluded that it was impracticable to determine the value of insurance and reinsurance contracts on a fully retrospective approach basis for those years of business transacted prior to 2021. As a result of this impracticality, the IFRS 17 standard allows an accounting policy choice of the fair value approach or modified retrospective approach from which the Group elected to apply the fair value approach.
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