34 JUST GROUP PLC Annual Report and Accounts 2020
Principal risks and uncertainties
DESCRIPTION AND IMPACT
MITIGATION AND MANAGEMENT ACTION
RISK
The financial services industry continues to see a high level of regulatory activity and intense regulatory supervision. This is shown in the 2020/21 Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”) Business Plans. This was also highlighted as a result of regulatory activity relating to the COVID-19 pandemic and the impact on financial services. The PRA published PS19/19, which follows on from PS31/18, both of which updated SS3/17 in respect of the valuation of no-negative equity guarantees (“NNEG”) in equity release mortgages (“ERMs”). The PRA’s proposals took effect on 31 December 2019, subject to a two year phase-in period. The actions Just have taken have led to a reduction in the Matching Adjustment (“MA”) available from ERMs and a consequential increase in the costs of the NNEG, partially offset by an increase in TMTP. Just has also taken action to review its ERM investment limits, given the change in MA. There has been significant academic and market debate concerning the methodology and models for valuation of no-negative equity guarantees. The approach used by the Group is in line with common industry practice. The PRA has published PS14/20 and SS1/20 which confirms their expectations of firms’ compliance to the Prudent Person Principle with regard to managing investment risk. The proposals took effect on 27 May 2020. The PRA has heightened their focus on the use of illiquid assets as insurers expand asset allocations in this area, clarifying the regulatory expectations of qualitative and quantitative assessments. The Group has extensively reviewed and is further enhancing its investment strategy, including taking steps to significantly reduce exposure to property risk through LTMs. In 2019 the PRA published PS11/19 and SS3/19 requiring firms to set out plans for identifying and managing financial risks from climate change. In July 2020 the PRA issued a follow up “Dear CEO” letter requiring firms to have fully implemented these plans by the end of 2021. The FCA published PS20/17 in December 2020 which sets out that premium-listed firms (which includes Just Group plc) are expected to comply with the recommendations of the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (“TCFD”). Climate change could affect Just Group’s financial risks in two ways: (i) transitional risk – the increased consideration of sustainability in investment decisions may restrict investment choice, including in properties; it may also create new opportunities to invest in assets that are perceived to be more sustainable; and (ii) increased physical risks such as flooding, due to severe rainfall or tidal surges, or heatwaves leading to increased subsidence, which may affect the value of properties not seen as having such an exposure at present. A fall in property values could affect our ability to recover the full balances of lifetime mortgages as a result of the NNEG. The PRA and FCA have issued several consultation papers on new requirements to strengthen operational resilience in the financial services sector. This is a key priority for the regulators. Just Group is currently aligning its approach to the regulators’ expectations ahead of the implementation deadline expected to be the end 2021. The FCAs Mortgage Intermediaries Portfolio Strategy and Lifetime Mortgage Providers Letters (published in October 2020 and November 2020 respectively), set out a programme of work which the FCA are undertaking to assess whether firms and their senior managers are taking reasonable steps to mitigate the risk of harm to customers and/or remedy harms that have occurred. Just has reviewed the implications of the letters and no significant gaps have been identified. There is a potential risk to the reputation of the overall LTMmarket. The risk-free rate used for valuing liabilities will be updated from 31 July 2021 to reference SONIA as opposed to LIBOR. Any difference between the risk-free curves on this date will have an impact on excess own funds. Given that the Group continues to experience a high level of regulatory activity and intense regulatory supervision, there is also the risk of PRA intervention, not limited to the matters described in the paragraphs above, which could negatively impact on the Group’s capital position.
We monitor and assess regulatory developments on an on-going basis. We actively seek to participate in all regulatory initiatives which may affect or provide future opportunities for the Group. Our aims are to implement any required changes effectively, and to deliver better outcomes for our customers and competitive advantage for the business. We develop our strategy by giving consideration to planned political and regulatory developments and allow for contingencies should outcomes differ from our expectations. The Group also keeps under regular review the possible need to reduce new business volumes or close to new business. A key focus for the Group has been to address the expectations of the updates to SS3/17, whilst maintaining the confidence of our stakeholders. During 2020 we have completed two further NNEG hedges, sold a portfolio of LTMs and increased GIfL longevity reinsurance; this improved the Group’s solvency capital position and reduced the sensitivity of the solvency balance sheet to UK house prices. Subject to the outcome of HMT’s review of Solvency II launched this autumn, it is anticipated that the UK’s withdrawal from the EU will have limited direct impact on the Group from a regulatory change perspective due to the on-shoring of existing EU regulatory framework into UK law. Whilst a trade deal was agreed between the UK and the EU before the end of the transition period, this does not address the specific issue of UK insurers continuing payments to EU/ EEA resident customers from 1 January 2021. However, following engagement with EU/EEA regulators over the past 12-18 months, permanent or interim solutions are in place in jurisdictions where material numbers of our customers reside. Just will continue to engage with national regulators as required to ensure any further measures to allow payments to policyholders to continue are completed. HMT are undertaking a review of the future regulatory framework in the UK post-Brexit. This covers the general regulatory framework and roles of the UK regulators as well as a review specifically focused on adapting Solvency II to fit the UK insurance market. Just are currently reviewing the potential implications and opportunities these reviews present. Just has an approved partial internal model to calculate the Group Solvency Capital Requirement, which it reviews for continued appropriateness. Just’s regulatory priorities include a major model change application for JRL’s internal model, expected to be submitted in 2021 as well as agreeing the satisfactory regulatory treatment for the NNEG risk transfer transactions already completed. Further actions to reduce our balance sheet sensitivity to UK property prices and the amount of capital we have to hold for LTMs continues to be a key focus, with a range of actions being explored to build on the NNEG hedging and LTM portfolio sale transactions completed to date. We intend to continue to actively monitor the academic and market debate concerning the valuation of no-negative equity guarantees. Just is enhancing its ESG approach in its investment strategy as set out in the sustainable investment framework in Just’s Green Bond documentation. We have identified the potential impacts of climate change on the Group’s financial risks and are developing stress testing capabilities to further improve monitoring of the potential impact of climate change on our investment and equity release portfolios. The Group’s risk management framework is being developed to accommodate and report on climate risks and appropriate disclosures in line with TCFD recommendations.
RISK A RISKS FROM REGULATORY CHANGES AND SUPERVISION
Strategic objective
2. 3. 4. 5. 1.
Change in the year
Risk outlook
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