Just group PLC | Annual Report and accounts 2022
INDEPENDENT AUDITORS’ REPORT continued
Key audit matter
How our audit addressed the key audit matter
Valuation of insurance contract liabilities – Annuitant mortality assumptions (Group) Refer to Group Audit Committee Report, Accounting policy 1.21 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 in setting them. 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 annuities. The annuitant mortality assumptions have two main components as set out below and a margin for prudence is then applied to these components. Base mortality assumptions This component of the assumption is mainly driven by internal experience analyses. It requires expert judgement, in determining the most appropriate granularity at which to carry out the analysis; the period used for historic experience (considering COVID-19 in recent periods); 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 future mortality improvements This component 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, with additional uncertainty around the longer term impact of COVID-19 on future mortality rates. 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 calculated by the CMIB based on the most recent available population data.
We performed the following audit procedures to test the annuitant mortality assumptions (including base mortality assumptions, rate of future mortality improvements and margin for prudence): • Assessed 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 over the performance of annuitant mortality experience analysis studies, approval of the proposed assumptions and implementation within the actuarial model; • Assessed the appropriateness of areas of expert judgments used in the development of the mortality improvement assumptions, including the assessment of COVID-19 adjustments applied to future mortality rates as well as the selection and parameterisation of the CMI model such as the choice of the smoothing parameter, initial rate, long term rate and tapering at older ages; • Assessed the appropriateness of the margin for prudence and its consistency over time; • Compared the annuitant mortality assumptions selected by management against those used by peers using our independent annual benchmarking survey of assumptions (to the extent available); • Assessed the disclosure of the annuitant mortality assumptions and the commentary to support the impact, if any, from changes in these assumptions over the period. Based on the work performed and the evidence obtained, we consider the assumptions used for annuitant mortality to be appropriate.
Valuation of insurance contract liabilities – Credit default assumptions (Group) Refer to Group Audit Committee Report, Accounting policy 1.21 Insurance liabilities and note 23 Insurance contracts and related reinsurance.
The credit default assumptions are applied as a deduction to the valuation rate of interest and therefore have a significant impact on the valuation of the insurance contract liabilities. The appropriate deduction is subjective and requires expert judgement. The Group’s investment portfolio primarily consists of corporate bonds and a material amount of illiquid assets, including Lifetime Mortgages, where there is greater uncertainty. For corporate bonds, the assumption is based upon historical observed default rates with an additional allowance when current observed spreads are in excess of an assumed long-term level. For Lifetime Mortgages, the assumption is set with reference to the No Negative Equity Guarantee (“NNEG”) and for other illiquid assets, the assumption is set as an adjustment to the equivalent corporate bond assumption. In addition, a margin for prudence is applied to the credit default assumptions.
We performed the following audit procedures to test the credit default assumptions: • Assessed the methodologies used to derive the assumptions (including margin for prudence) with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience; • Assessed significant assumptions used by management against market observable data (to the extent available and relevant) and our experience of market practises; • Tested the controls in place over the application of credit default assumptions within the valuation interest rate calculation; approval of the proposed assumptions and implementation within the actuarial model; • Compared the assumptions selected against those adopted by peers using our independent annual survey of assumptions (to the extent available); • Assessed the appropriateness of the margin for prudence for each asset class individually and in aggregate and its consistency over time; and • Assessed the disclosure of the credit default risk assumptions and the commentary to support the impact, if any, from changes in these assumptions over the period. Based on the work performed and the evidence obtained, we consider the assumptions used for credit default risk to be appropriate.
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