Strategic Report | Governance | Financial Statements | 193
26. INSURANCE CONTRACTS AND RELATED REINSURANCE continued (vi) Risk adjustment
The best estimate liability represents the present value of future net cash outflows to settle claims and expenses quantified at the 50th percentile confidence interval. The risk adjustment for non-financial risk is determined to reflect the compensation that the Group requires for bearing longevity, expense, and insurance-contract specific operational risks. The risk adjustment represents an additional reserve held that increases the ultimate time horizon confidence interval by 20% up to the 70th percentile and amounts to £0.3bn (2022 £0.3bn) net of reinsurance. Based upon the latest risk adjustment calibration exercise, a 5% increase in the ultimate run-off confidence interval would increase the net of reinsurance risk adjustment by c£0.1bn (2022: c£0.1bn). The Group determines the risk adjustment for non-financial risk using a “value at risk” technique. The primary non-financial risks allowed for are longevity and expenses, which is consistent with the primary life underwriting risks allowed for in Solvency II reporting. On an annual basis, the Group uses the probability distributions of the future net of reinsurance cash flows from insurance contracts on a one-year time horizon as used within JRL’s internal model for Solvency II reporting for the aforementioned non-financial risks, which are then converted to ultimate horizon distributions in order to determine stress parameters at the target percentile. The risk adjustment in PLACL uses the same risk adjustment stress factors as determined for JRL as these represent the compensation the Group requires in light of there being no standalone PLACL internal model for Solvency II reporting. Financial risks are reflected as adjustments to discount rates (by comparison, both financial and non-financial risks are included in the Solvency II SCR). The risk adjustment for non-financial risk is then calculated as the excess of the value at risk at the target confidence level percentile over the expected present value of the future cash flows. The Group targets an ultimate confidence interval at the 70th percentile. At the point of calibration, this calibration represents an approximately one-in-ten year stress on a one-year basis. The calibration is carried out on an annual basis ahead of the financial reporting year end, therefore the actual confidence interval as at the valuation date may differ slightly, for example, due to economic movements in the intervening period. The Group’s IFRS risk adjustment for non-financial risk is considered by management to provide an economic view of the profitability of new business and is therefore used for pricing purposes as well as representing the basis used within the new business profits KPI. The confidence level is targeted on a net of reinsurance basis as this reflects how insurance risk is managed by the Group. The reinsurance risk adjustment represents the amount of risk being transferred by the holder of the reinsurance contract to the issuer of that contract. Reinsurance contracts held by the Group transfer longevity risk proportional to the underlying insurance contract. Consequently, the same risk adjustment stresses for this non-financial risk are applied to both gross and reinsurance contracts to determine the respective risk adjustment for each. Expense and operational risks are not transferred to reinsurers as part of the reinsurance contract held by the Group and hence there are no stresses applied for these in the reinsurance risk adjustment. Allowance is made for diversification between risks within legal entities, but not between the different legal entities within the Group. (c) Movements analyses – insurance contracts (i) Insurance contracts analysis of remaining coverage
Liability for remaining coverage £m
Incurred claims £m
Total £m
Year ended 31 December 2023
Opening insurance contract liabilities balance (restated) Changes in the statement of comprehensive income Insurance revenue Insurance service expenses – Incurred claims and directly attributable expenses – Amortisation of insurance acquisition cash flows
(19,720)
73
(19,647)
1,555
–
1,555
–
(1,377)
(1,377)
(19) (19)
–
(19)
(1,377) (1,377)
(1,396)
Insurance service result Investment component
1,536
159
233
(233)
–
(2,006)
– –
(2,006)
Net finance expenses from insurance contracts
26
26
Exchange rate movements
Total changes in the statement of comprehensive income
(211)
(1,610)
(1,821)
Cash flows Premiums received
(4,494)
–
(4,494)
Claims and other insurance service expenses paid, including investment components
–
1,648
1,648
183
–
183
Insurance acquisition cash flows
Total cash flows
(4,311) (24,242)
1,648
(2,663) (24,131)
Closing insurance contract liabilities balance
111
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