STRATEGIC REPORT
GOVERNANCE
financial statements
1 SIGNIFICANT ACCOUNTING POLICIES continued IFRS 17 fulfilment cash flows
The IFRS 17 fulfilment cash flows comprise a best estimate component, the ‘estimate of present value of future cash flows’, and a risk adjustment for non-financial risks. The best estimate cash flows are expected to be consistent with the current IFRS 4 cash flows after removing the prudence margins. Risk adjustment for non-financial risks A further change introduced by IFRS 17 is the inclusion of the risk adjustment for non-financial risk (risk adjustment) as an explicit reserve within insurance liabilities to reflect the compensation required by the Group for bearing the uncertainty in respect of the amount and timing of the future cash flows. This component replaces an implicit allowance for prudence within the IFRS 4 reserves. The determination of the risk adjustment within Just follows a value-at-risk type approach, representing the maximum loss within a retained confidence level. Applying a confidence level technique, the Group will estimate the probability distribution of the expected present value of the future cash flows from the contracts at each reporting date and calculate the risk adjustment for non-financial risk as the excess of the value at risk at the target confidence level over the expected present value of the future cash flows allowing for the associated risks over all future years. The Group is targeting a confidence level of 70% on an ultimate run off basis. This target level has been chosen in light of it being commensurate to a 1 in 10 year risk confidence level on a one-year basis. No diversification of risk adjustment for non-financial risk between legal entities is assumed. Discount rates The Group will continue to use the ‘top-down’ approach for determining the discount rates as it currently does for IFRS 4. Following this approach, the effect of factors within the yield that are not characteristic of the insurance cash flows, notably credit risk, both expected and unexpected, must be removed. This marks a change from IFRS 4, which simply requires that a prudent allowance is made for credit risk. The quantification of the allowance for credit risk within asset yields is not observable in the market or readily available data sources and hence involves subjective judgement. The Group will make an allowance for unexpected default risk and remove the IFRS 4 prudence for different investment types, with the overall change not expected to be significant in the context of the insurance contracts balance. No adjustment for liquidity differences between the reference portfolio and the liabilities is made. Discount rates at the inception of each contract are based on the yields within a hypothetical reference portfolio of assets which the Group expects to acquire to back the portfolio of new insurance liabilities (the “target portfolio”). This is consistent with the approach taken for the current new business operating profit metric. For the purposes of the CSM relating to each group of contracts, a weighted average of these discount rate curves is determined to lock-in each annual cohort. At each valuation date, the estimate of the present value of future cash flows and the risk adjustment for non-financial risk are discounted based on the yields within a reference portfolio of assets consisting of the actual asset portfolio backing the net of reinsurance liabilities. The reference portfolio is adjusted in respect of new contracts incepting in the period to allow for a period of transition from the target portfolio to the actual asset portfolio. Level of aggregation The Group’s life companies will aggregate all insurance contracts into single portfolios as their products bear similar risks and are managed together. The CSM is computed for separate contract groupings based on annual cohorts split between DB, GIfL and Care products. These groupings are further subdivided at the date of initial recognition into three groupings: onerous (if any); contracts which have no significant possibility of becoming onerous subsequently (if any); and the remaining contracts. Reinsurance The Group will measure reinsurance contracts separately to the underlying contracts using consistent assumptions in cases where the reinsurance is transacted or in place in the same accounting period, in accordance with the standard. The level of aggregation for CSM calculation purposes will be at treaty (contract) level. The existing treaties for which the deposit back arrangements are currently reported separately as financial liabilities will be included within the value of the associated reinsurance contracts under IFRS 17. Impact We have estimated that the post-tax impact on accumulated profit of the Group at transition will be a decrease of between £0.9bn and £1.1bn. The corresponding impact will primarily be recorded as CSM within the insurance contract balance. The results from the models used to calculate the post-tax impact on accumulated profit have been through validation processes by the company which have enabled us to present the range above. Further checks and system refinements are being undertaken as part of the production of the transition balance sheet which will be reported as part of our interim results for the six month period ending 30 June 2023. The implementation of the comprehensive end state control environment will continue as Just introduces business as usual controls throughout the first half of 2023, and in the meantime we have only presented the impact on accumulated profits of the Group at transition. The impact of the transition to IFRS 17 will be to de-recognise profits that were previously taxed under IFRS 4, thereby creating a tax loss. Transition relief for tax purposes was enacted in December 2022 which spreads relief for the tax loss over a ten year period. The Group anticipates full recovery of this tax loss against profits to be earned in future years. Under IFRS 17, new business pro ts and changes in non-economic assumptions will be recognised in the income statement over the lifetime of the contracts. The timing of the recognition of the CSM in the income statement will be determined based on services that are provided, and the risk adjustment for non- nancial risk as the related risk expires. The Group expects that, even though the total pro t recognised over the lifetime of the contracts will not change, it will emerge more slowly under IFRS 17. Under IFRS 4, pro ts are currently recognised in the income statement account on initial recognition of the contracts. The different timing of pro t recognition will result in an increase in liabilities on adoption of IFRS 17 because a portion of pro ts previously recognised and accumulated in equity under IFRS 4 will be included in the measurement of the liabilities under IFRS 17. Disclosures IFRS 17 requires extensive new financial statement disclosures. The format of the Statement of Comprehensive Income will be fundamentally altered to report a net profit or loss from insurance services separately from the investment result. New detailed disclosures will include a roll-forward from the prior period of the insurance balances split by component, including risk adjustment and CSM. Information on the expected CSM emergence pattern will be provided, as well as disclosures about signi cant judgements made when applying IFRS 17.
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