148 | Just Group PLC | Annual Report and Accounts 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1. MATERIAL ACCOUNTING POLICIES continued 1.4. Determination of fair value 1.4.1. Fair value principles The Group has used the principles contained in IFRS 13 “Fair Value Measurement” except the principles relating to demand features, to determine the fair value of the insurance and reinsurance contracts. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). For certain assets and liabilities, observable market transactions or market information may be available. For other assets and liabilities, such as insurance obligations and associated reinsurance agreements, observable market transactions and market information are not widely available. There is no active market for the transfer of insurance liabilities and associated reinsurance between market participants and therefore there is limited market observable data. Although there may be transactions for specific books of annuity business, the profile of the cash flows and nature of the risks of each book of business is unique to each, with key inputs underlying the price of these transactions not being widely available public knowledge, and therefore it is not possible to determine a reliable market benchmark from these transactions. When a price for an identical asset or liability is not observable, the Group measures fair value using an alternative valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. Because fair value is a market-based measurement, it is determined using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. The initial determination of the fair value was calculated on a gross and net of reinsurance basis. The fair value of the reinsurance contracts was • a similar monoline, rather than a multi-product line insurer; • the portfolios are transferred as closed books of business; • transferral of the associated reinsurance contracts currently in place, as these would be expected to transfer at the point of sale alongside the underlying insurance contracts; and • treatment of the business under a Solvency II Internal Model approach including a matching adjustment as it is expected that a market participant would adopt this approach. This is regardless as to whether the business as part of the Group today has an internal model and/or applies the matching adjustment. The measurement of the fair value of insurance contracts and associated reinsurance contracts have therefore been classified in terms of the financial reporting fair value hierarchy as Level 3. 1.4.2. Aggregation of contracts for the determination of fair value The Group has aggregated contracts issued more than one year apart when determining groups of insurance and reinsurance contracts under the fair value approach at transition as permitted by IFRS 17. For the application of the fair value approach, the Group has used reasonable and supportable information available at the transition date in order to identify groups of insurance and reinsurance contracts. All insurance contracts which are valued at the date of transition using the fair value transition method have been allocated to the “any remaining The fair value approach adopted by the Group calculates the theoretical premium (market premium approach) required by a market participant to accept insurance liabilities. The quantification of the premium required for the gross insurance liabilities and the associated reinsurance contracts was determined separately. The market premium required at the transition date has been determined as follows: • the premium required to earn the target rate of return on capital (“RoC”) on reserves held in respect of Solvency II Best Estimate Liability, Risk Margin and Solvency Capital Requirements, adjusted for associated Solvency II Transitional Measure on Technical Provisions (TMTP) benefits for the relevant pre-2016 business; • the level of Solvency Capital assumed to be required has been determined as 140% of the solvency capital required under Solvency II regulations, being based on an external benchmark of a market participant’s requirement for a closed book of business (refer to note 1.4.4.2); and • the target Return on Capital has been determined as 8%, being based on an external benchmark of a market participant’s target return for a closed book of business (refer to note 1.4.4.3). then determined based on the difference between the gross and net of reinsurance results. In arriving at the definition of a “market participant” the Group has assumed the following: contracts” profitability grouping (refer to note 1.5.3). 1.4.3. Overview of the fair value approach applied These assumptions and other key inputs into the fair value calculations have been reviewed by an independent firm of accountants who have access to industry surveys and other benchmarking, and their review conclusions were made available to the Group Audit Committee. The fair value result has been benchmarked against any publicly available and relevant market information as well as an independent internal calculation based upon a Dividend Discount Model (“DDM”) approach used in industry for the valuation of insurance business.
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