Strategic Report | Governance | Financial Statements | 149
1. MATERIAL ACCOUNTING POLICIES continued 1.4.4. Principal inputs used to determine fair value 1.4.4.1. Best estimate and risk margin
The estimates for the best estimate and the risk margin are determined on a basis consistent with Solvency II. The inputs used for JRL are based on its Internal Model, and for PLACL are based on the assumed results that would be derived from its internal model. An allowance for Solvency II TMTP benefits on relevant pre-2016 business is reflected within the valuation. The longevity assumptions used for the determination of the best estimate and risk margin are consistent with the basis used in the Just Group plc Solvency and Financial Condition Report as at 31 December 2021. The discount rate assumption used for the determination of JRL and PLACL best estimate liabilities is the prescribed Solvency II risk-free rate term structure including a Matching Adjustment (“MA”) based upon the JRL asset portfolio as at 31 December 2021. 1.4.4.2. Solvency Capital Requirement (“SCR”) coverage ratio The target SCR coverage ratio assumed for the determination of fair value at the date of transition is based on a market participant view for a closed book of business. A target ratio of 140% is assumed in the fair value calculation after consideration of the current ranges quoted by similar peers, notably those principally operating closed books of business in the market and other publicly available data. The fair value calculated is based on the purchase of the insurance contracts liabilities and the associated reinsurance agreements and does not include a premium associated with writing new business. 1.4.4.3. Return on Capital – Weighted Average Cost of Capital (“WACC”) The fair value measurement guidance within IFRS 13 requires that the Return on Capital assumption should be based upon a Weighted Average Cost of Capital (“WACC”) applicable to a “generic” market participant, rather than the Group’s specific WACC. Consequently, an appropriate market participant WACC is computed for the Group’s business based on debt and equity cost of capital for companies that have closed books of insurance business, using input from brokers, and the cost of external debt sourced from an external pricing provider. The market participant WACC determined was 8% and is applied to all books of business irrespective of the expected duration of the underlying schemes. 1.4.5. Summary of fair value results The following table summarises the fair value of insurance and reinsurance contracts determined at the 1 January 2022 transition date.
Estimate of present value of future cash flows £m
Contractual service margin £m
Fair value £m 20,475
Risk adjustment £m
Insurance contract liabilities Reinsurance contract assets Reinsurance contract liabilities Net reinsurance contracts (asset)
18,343
905 115 395 510 395
1,227
716
546
54
(165)
(677) (131)
119 173
551
Insurance contract liabilities – net of reinsurance
19,924
18,474
1,054
The amounts previously reported under IFRS 4 on 1 January 2022 for insurance contract liabilities and net reinsurance contracts, where the fair value approach to transition has been adopted was £19,529m and £2,566m respectively. Disclosure of the fair value component of the transition approach can be found in note 1.3.1.
Powered by FlippingBook