146 JUST GROUP PLC Annual Report and Accounts 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
34 FINANCIAL AND INSURANCE RISK MANAGEMENT continued Insurance risk arises through exposure to longevity, mortality and morbidity and exposure to factors such as withdrawal levels and management and administration expenses. Individually underwritten GIfL are priced using assumptions about future longevity that are based on historic experience information, lifestyle and medical factors relevant to individual customers, and judgements about the future development of longevity improvements. In the event of an increase in longevity, the actuarial reserve required to make future payments to customers may increase. Loans secured by mortgages are used to match some of the liabilities arising from the sale of GIfL and DB business. In the event that early repayments in a given period are higher than anticipated, less interest will have accrued on the mortgages and the amount repayable will be less than assumed at the time of sale. In the event of an increase in longevity, although more interest will have accrued and the amount repayable will be greater than assumed at the time of the sale, the associated cash flows will be received later than had originally been anticipated. In addition, a general increase in longevity would have the effect of increasing the total amount repayable, which would increase the LTV ratio and could increase the risk of failing to be repaid in full as a consequence of the no-negative equity guarantee. There is also morbidity risk exposure as the contract ends when the customer moves into long-term care. Underpinning the management of insurance risk are: • the development and use of medical information including PrognoSys™ for both pricing and reserving to provide detailed insight into longevity risk; • adherence to approved underwriting requirements; • controls around the development of suitable products and their pricing; Concentration of insurance risk comes from improving longevity. Improved longevity arises from enhanced medical treatment and improved life circumstances. Concentration risk is managed by writing business across a wide range of different medical and lifestyle conditions to avoid excessive exposure. (b) Market risk Market risk is the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market prices of assets, liabilities and financial instruments, together with the impact of changes in interest rates. Significant market risk is implicit in the insurance business and arises from exposure to interest rate risk, property risk, inflation risk and currency risk. The Group is not exposed to any equity risk or material currency risk. Market risk represents both upside and downside impacts but the Group’s policy to manage market risk is to limit downside risk. Falls in the financial markets can reduce the value of pension funds available to purchase Retirement Income products and changes in interest rates can affect the relative attractiveness of Retirement Income products. Changes in the value of the Group’s investment portfolio will also affect the Group’s financial position. In mitigation, Retirement Income product monies are invested to match the asset and liability cash flows as closely as practicable. In practice, it is not possible to eliminate market risk fully as there are inherent uncertainties surrounding many of the assumptions underlying the projected asset and liability cash flows. For each of the material components of market risk, described in more detail below, the market risk policy sets out the risk appetite and management processes governing how each risk should be measured, managed, monitored and reported. (i) Interest rate risk The Group is exposed to interest rate risk through its impact on the value of, or income from, specific assets, liabilities or both. It seeks to limit its exposure through appropriate asset and liability matching and hedging strategies. The Group’s strategy is to actively hedge the interest rate risk to which its Solvency II balance sheet is exposed; some exposure remains on an IFRS basis. The Group’s exposure to changes in interest rates is concentrated in the investment portfolio, loans secured by mortgages and its insurance obligations. Changes in investment and loan values attributable to interest rate changes are mitigated by corresponding and partially offsetting changes in the value of insurance liabilities. The Group monitors this exposure through regular reviews of the asset and liability position, capital modelling, sensitivity testing and scenario analyses. Interest rate risk is also managed using derivative instruments e.g. swaps. The following table indicates the earlier of contractual repricing or maturity dates for the Group’s significant financial assets. • review and approval of assumptions used by the Board; • regular monitoring and analysis of actual experience; • use of reinsurance to minimise volatility of capital requirement and profit; and • monitoring of expense levels. Concentrations of insurance risk
Less than one year £m 1,128.5
One to five years £m
Five to ten years £m
Over ten years £m
No fixed term £m
Total £m
2020
–
– –
– –
– 1,128.5
Units in liquidity funds
37.0 139.1
–
176.1
Investment funds
789.3 1,823.4 2,322.7 6,126.0
– 11,061.4
Debt securities and other fixed income securities
99.7 11.1
–
–
–
– –
99.7
Deposits with credit institutions
35.0
84.9 669.0
800.0
Derivative financial assets
–
–
–
– 8,261.1 8,261.1
Loans secured by residential mortgages Loans secured by commercial mortgages
36.0 270.5 221.2 179.3
–
707.0
0.4
81.7
157.1 796.8
– 1,036.0
Other loans
Total
2,102.0 2,349.7 2,785.9 7,771.1 8,261.1 23,269.8
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