100 JUST GROUP PLC Annual Report and Accounts 2020
INDEPENDENT AUDITORS’ REPORT continued
Key audit matter
How our audit addressed the key audit matter
Valuation of insurance contract liabilities (Group) Refer to Audit Committee Report, Accounting policy 1.22 Insurance liabilities and note 23 Insurance contracts and related reinsurance.
The inherent uncertainty involved in setting the assumptions used to determine the insurance liabilities represents a significant area of management judgement for which small changes in assumptions can result in material impacts to the valuation of these liabilities. As part of our consideration of the entire set of assumptions we focused particularly on longevity assumptions, credit default risk assumptions and expense assumptions given they are the most significant and judgemental assumptions.
The work to address the valuation of the insurance contract liabilities included the following procedures: • Validated the design and operating effectiveness of controls related to the completeness and accuracy of policyholder data used in the valuation of insurance contract liabilities; • For a sample, agreed data used in the actuarial model to source documentation; • Using our actuarial specialist teammembers, we applied our industry knowledge and experience to assess the appropriateness of the methodology, models and assumptions used against recognised actuarial practices; • Performed detailed audit testing of the actuarial model calculations or ‘model baselining’ as part of our first year audit. For the most material products, we used our own modelling tools to replicate the liability cash flows for a sample of policies in order to validate that the models’ calculations are operating as intended; • Tested the derivation of the valuation interest rate used to discount the insurance contract liabilities; • Used the results of an independent PwC annual benchmarking survey of assumptions to further challenge the assumption setting process by comparing certain assumptions used relative to the Group’s industry peers; • Understood the process and tested controls in place over the determination of the insurance contract liabilities, including those relating to model inputs, model operation and extraction and consolidation of results from the actuarial models; and • Assessed the disclosures in the financial statements. Further testing was also conducted on the annuitant mortality, credit default and expense assumptions as set out below.
Valuation of insurance contract liabilities – Annuitant mortality assumptions (Group) Refer to Audit Committee Report, Accounting policy 1.22 Insurance liabilities and note 23 Insurance contracts and related reinsurance.
Annuitant mortality assumptions are an area of significant management judgement, due to the inherent uncertainty involved. Whilst the Group manages the extent of its exposure to annuitant mortality risk through reinsurance, we consider these assumptions underpinning gross insurance contract liabilities to be a key audit matter given the Group’s exposure to a large volume of annuity business. The annuitant mortality assumption has two main components: Base mortality assumption This part of the assumption is mainly driven by internal experience analyses, but judgement is also required. For example, in determining the most appropriate granularity at which to carry out the analysis; the time window used for historic experience, or whether data should be excluded from the analysis; and in selecting an appropriate industry mortality table to which management overlays the results of the experience analysis. Rate of mortality improvements This part of the assumption is more subjective given the lack of data and the uncertainty over how life expectancy will change in the future. The allowance for future mortality improvements is inherently subjective, as improvements develop over long timescales and cannot be captured by analysis of internal experience data. The Continuous Mortality Investigation Bureau (CMIB) provides mortality projection models which are widely used throughout the industry and contain a standard core set of assumptions including initial rates of improvement, calculated by the CMIB based on the most recent available population data. In addition, a margin for prudence is applied to the annuitant mortality assumptions.
We performed the following to test the annuitant mortality assumptions (including base mortality assumptions, future mortality improvements and IFRS prudential margins): • Validated the appropriateness of the methodology used to perform the annual experience studies. This involved the assessment of key judgements with reference to relevant rules, actuarial guidance and by applying our industry knowledge and experience; • Tested the controls in place around the performance of annuitant mortality experience analysis studies, approval of the proposed assumptions and implementation within actuarial models; • Validated the appropriateness of areas of expert judgments used in the development of the mortality improvement assumptions, including the selection and parameterisation of the CMI model including the choice of the smoothing parameter, initial rate, long term rate and tapering at older ages. In particular we considered the alignment of bases for improvements between Just Retirement Limited and Partnership Life Assurance Company Limited; • Assessed the appropriateness of the IFRS prudence margin and its consistency over time; • Compared the annuitant mortality assumptions selected by management against those used by peers using our annual survey of the market; • In respect of COVID-19, assessed management’s considerations and any allowances made for changes in current and future expected rates of annuitant mortality; and • Assessed the disclosure of the annuitant mortality assumptions and the commentary to support the profit arising, if any, from changes in these assumptions over 2020. Based on the work performed and the evidence obtained, we consider the assumptions used for annuitant mortality to be appropriate.
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