Just group PLC | Annual Report and accounts 2022
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1 SIGNIFICANT ACCOUNTING POLICIES continued Firms are required to apply IFRS 17 fully retrospectively, unless it is impracticable to do so, in which case either a modified retrospective approach or fair value approach may be taken. For insurance and reinsurance contracts where the effective date of the contract was prior to 1 January 2021, management have concluded that it would be impracticable to apply the standard on a fully retrospective basis due to the inability of determining the risk adjustment, a new requirement in terms of IFRS 17, in earlier years without the application of hindsight. Guidance contained in the IAS 8 accounting standard ‘Accounting Policies, Changes in Accounting Estimates and Errors’ requires that hindsight should not be applied in the application of an accounting standard on a retrospective basis. The risk adjustment is a new requirement of IFRS 17 and represents the compensation that an entity requires to take on non-financial risk. Defining “compensation that the entity requires” to take on non-financial risk differs to any of the risk-based allowances adopted by the Group for either existing regulatory or statutory reporting purposes. The Group’s new risk adjustment policy was developed and adopted during 2021 with calculation of the risk stresses to be applied from 1 January 2021. Under this policy, management determines a target confidence level based upon an assessment of the current level of risks that the business is exposed to and the compensation required to cover those risks. Key factors for consideration here include: the size of the business, products offered, reinsurance structures, regulatory challenges and market competitiveness. These factors are not necessarily stable from period to period, and today’s understanding of these aspects should be excluded from any historic assessment of risk as doing so would be to apply hindsight. Management have assessed whether other information used in previous reporting cycles, including for pricing new business, could be used to determine the risk adjustment, but have concluded that none of these alternatives would be appropriate. The development of the new approach for IFRS 17 represents a significant enhancement in the approach used to determine the Group’s allowance for non-financial risk, with the use of a target confidence interval and probability distributions providing a more meaningful quantification of allowance for risk compared with IFRS 4 reporting. The reinsurance risk adjustment in IFRS 17 reflects the “amount of risk being transferred” to the reinsurer, so where the risk adjustment for insurance contracts is impracticable then, by definition, the reinsurance risk adjustment is also impracticable. For contracts for which the Fully Retrospective Approach is impracticable, the Group will apply the Fair Value Approach. A reconciliation of our primary financial statements under IFRS 17 to those in accordance with IFRS 4 will be provided in the 2023 interim financial statements. Fair value calculations Under the fair value approach, the Contractual Service Margin (“CSM”) will be determined as the difference between the fair value of a group of contracts and the fulfilment cash flows at the transition date. Fair values have been calculated in accordance with IFRS 13 which requires that entities should consider market observable data. There is no active observable market for the transfer of insurance liabilities and associated reinsurance between market participants and therefore there is limited market observable data. The fair value methodology adopted by the Group calculates the premium that would be required by a market participant to accept the insurance liabilities together with associated reinsurance. The fair value models have been based on Just’s internal pricing models as used for pricing new business. By basing the fair values on results from pricing models used in the active insurance markets, management believes that the results are representative of market fair values. Key assumptions used as inputs within the models are the Solvency Capital Requirement coverage ratio, the Return on Capital (“RoC”) assumption and the backing asset mix. These assumptions and other key inputs into the fair value calculations have been reviewed by an independent firm of accountants who have access to industry surveys and other benchmarking, and their review conclusions made available to the Group Audit Committee. The fair value result has been benchmarked against any publicly available and relevant market information as well as an independent internal calculation based upon a Dividend Discount Model (“DDM”) approach sometimes used in industry for the valuation of insurance business. Contractual Service Margin The recognition of the Contractual Service Margin (“CSM”) liability represents a major change from existing accounting treatment under which profits in excess of prudence margins are immediately recognised in the income statement. The CSM is held on the balance sheet as part of insurance contract liabilities, and represents the unearned profit of insurance contracts. The CSM in respect of contracts gross of reinsurance cannot be negative; in this event, a loss will be reported in the statement of comprehensive income (the “income statement”) to the extent that fulfilment cash flows represent a net outflow over the coverage period. Under the general model, the CSM is adjusted at each subsequent reporting period, using discount rate determined at inception, for changes in expected future cash flows. Changes in ful lment cash ows are recognised as follows: • Changes relating to future services adjusted against the CSM (or recognised in the insurance service result in the income statement if the group is onerous). • Changes relating to current or past services are recognised in the insurance service result in the income statement. • Effects of the time value of money, nancial risk and changes therein on estimated future cash ows are recognised as insurance nance income or expenses in the income statement. Interest is accreted on the CSM at rates locked in at initial recognition of a contract (i.e. discount rate used at inception to determine the present value of the estimated cash flows). The CSM will be released into the income statement based on coverage units which reflect the quantity of the benefits provided and the expected coverage duration of the remaining contracts in the group. The Group provides the following services to customers: By their nature, coverage units will vary depending on the type of service provided. A weighting then needs to be applied to the different types of coverage unit in order to calculate an aggregate value of the proportion of the CSM balance that is to be released. The Group will use the probability of the policy being in force in each time period for weighting the disparate types of coverage unit. This weighting reflects management’s view that the value of services provided to policyholders is broadly equivalent across the different phases in the life of contracts. These weightings are applied to the coverage units which are defined as follows: • In the deferred phase, investment return service coverage units are represented by the return on the funds backing the future cash flows in this accumulation phase and the insurance service is considered insignificant; • In the guaranteed phase when payments outwards are being made, investment return service is represented by the payments to annuitants; and • In the life contingent phase, insurance service is represented by payments to annuitants. The coverage units and the weightings used to combine coverage units are discounted using the locked-in discount rates and financial risk assumptions as at inception of the contracts. The weightings applied are updated each period for changes in life expectancies. • Investment return service when a customer is in the deferred or guarantee phase; and • Insurance coverage services when an annuitant is in payment period for annuitants.
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