Strategic Report | Governance | Financial Statements | 69
RISK OUTLOOK
HOW THIS RISK EFFECTS JUST
JUST’S EXPOSURE TO RISK
OUTLOOK AND HOW WE MANAGE OR MITIGATE THE RISK
Financial market volatility leads to changes in the level of market prices of assets and liabilities. Our business model and risk management framework have been designed to remain robust against market headwinds. Our policy is to manage market risk within pre-defined limits. Investment in fixed income investments exposes the Group to default risk and subsequent losses should collateral and recovery be less than the expected investment value. Additionally, the Group is exposed to concentration risk and to the downgrade of assets which shows an increased probability of default. Credit risk exposures arise due to the potential default by counterparties we use to: • provide reinsurance to manage Group exposure to insurance risks, most notably longevity risk; • provide financial instruments to mitigate interest rate and currency risk exposures; and • hold our cash balances. To reduce risk, the Group ensures it trades with a wide range of counterparties to diversify exposures. All over-the-counter derivative transactions are conducted under standardised International Swaps and Derivatives Association master agreements. The Group has collateral agreements with relevant counterparties under each master agreement. Reinsurance transactions are collateralised to reduce the Group’s exposure to loss from default. The Group measures reinsurance default with respect to its regulatory balance sheet as expected by SS 24/23. Contracts offer protections against termination due to various events. Exposure to liquidity risk arises from: • short-term cash flow volatility leading to mismatches between cash flows from assets and liabilities, particularly servicing collateral requirements of financial derivatives and reinsurance agreements; • the liquidation of assets to meet liabilities during stressed market conditions; • higher-than-expected funding requirements on existing LTM contracts, lower redemptions than expected; and • liquidity transferability risk across the Group. Risks to the Group’s strategy arise from regulatory change as the Group operates in regulated markets and has partners and distributors who are themselves regulated. Actions by regulators may change the shape and scale of the market or alter the attractiveness of markets. Changes in the nature or intensity of competition may impact the Group and increase the risk the business model is not able to be maintained. The actions of our competitors may increase the exposure to the risk from regulation should they fail to maintain appropriate standards of prudence.
Global growth has held up in 2023 despite tighter fiscal and monetary policy. 2024 is likely to see weaker growth with a recession possible in the UK and the countries in which the Group invests. Financial markets are likely to remain volatile during this period. Our investment assets may experience increased movements in downgrade and/or default experience. 2023 saw limited changes to UK residential property prices; however, sustained high interest rates may result in price falls, increasing the Group’s exposure to the risk of shortfalls in expected repayments due to no-negative equity guarantee within its portfolio of lifetime mortgages. Any commercial property price falls would reduce the value of collateral held within our loan portfolio secured against commercial properties. Our balance sheet sensitivities to these risks can be found in note 20. Credit risk on cash assets is managed by imposing restrictions over the credit ratings of third parties with whom cash is deposited.
5 MARKET AND CREDIT RISK Fluctuations in interest rates,
residential property values, credit spreads, inflation and currency may result, directly or indirectly, in changes in the level and volatility of market prices of assets and liabilities. Investment credit risk is a result of investing to generate returns to meet our obligations to policyholders.
TREND INCREASING
STRATEGIC PRIORITIES 1. 3. 5.
Financial markets are expected to remain volatile into the foreseeable future with an increased level of liquidity risk. At the same time, Just is experiencing strong market demand for defined benefit de-risking solutions from pension schemes. Just’s use of derivative positions is planned to increase in proportion to its planned growth. Throughout any period of heightened volatility, Just maintains robust liquidity stress testing and holds a high level of liquidity coverage above stressed projections.
6 LIQUIDITY RISK
Having sufficient liquidity to meet our financial obligations as they fall due requires ongoing management and the availability of appropriate liquidity cover. The liquidity position is stressed to reflect extremely volatile conditions such as those triggered by the September 2022 “mini-Budget”.
TREND INCREASING
STRATEGIC PRIORITIES 1. 3. 5.
Regulation changes, such as Solvency II reform, have been agreed recently and it is likely the Group’s regulators will not make any significant change until these have been embedded. There is a risk that pension scheme regulation may change as a result of schemes’ exposures. Demand for de-risking solutions is expected to remain stable. The Government is keen for the development of Collective Defined Contributions (CDC) Schemes. The Group believes that CDC would likely be complementary to the existing decumulation market rather than replace it. Both the ABI and the Group continue to actively contribute to ongoing discussions specific to this matter.
7 STRATEGIC RISK The choices we make about the markets in which we compete and the demand for our product and service offering may be affected by external risks including changes to regulation, competition, or social changes.
TREND STABLE
STRATEGIC PRIORITIES 1. 2. 3. 4. 5.
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