STRATEGIC REPORT
GOVERNANCE
financial statements
1 SIGNIFICANT ACCOUNTING POLICIES continued Collateral
The Group receives and pledges collateral in the form of cash or securities in respect of derivative, reinsurance or other contracts such as securities lending. Cash collateral received that is not legally segregated from the Group is recognised as an asset with a corresponding liability for the repayment in other financial liabilities. Cash collateral pledged that is legally segregated from the Group is derecognised and a receivable for its return is recorded in the Consolidated statement of financial position. Non-cash collateral received is not recognised as an asset unless it qualifies for derecognition by the transferor. Non-cash collateral pledged continues to be recognised in the Consolidated statement of financial position within the appropriate asset classification when the Group continues to control the collateral and receives the economic benefit. The Group has various reinsurance collateral arrangements including funds withheld, funds transferred and premium deposit-back arrangements. The recognition/derecognition of the collateral assets is determined by the IAS 39 recognition/derecognition criteria. An assessment is made of the contractual terms, including consideration of the Group’s exposure to the economic benefits. See accounting policy 1.18 and note 29 for further details. Determination of fair value The financial investments measured at fair value are classified into the three-level hierarchy described in note 17 on the basis of the observability of the inputs that are significant to the fair value measurement of the financial investment concerned. The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are valued using prices provided by third parties. If there is no active established market for an investment, the Group applies an appropriate valuation technique as described below. The Group holds certain financial investments which are not quoted in active markets. These include loans secured by residential mortgages, derivatives and other financial investments for which markets are not active. When the markets are not active, there is generally no or limited observable market data that can be used in the fair value measurement of the financial investments. The determination of whether an active market exists for a financial investment requires management’s judgement. For all listed fixed maturity securities, a third party fixed income liquidity provider is used to determine whether there is an active market for a particular security. If the market for a financial investment of the Group is not active, the fair value is determined using valuation techniques. The Group establishes fair value for these financial investments by using quotations from independent third parties or internally developed pricing models. The valuation technique is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models. The valuation techniques may include a number of assumptions relating to variables such as credit risk and interest rates and, for loans secured by mortgages, mortality, future expenses, voluntary redemptions and house price assumptions. Changes in assumptions relating to these variables impact the reported fair value of these financial instruments positively or negatively. Deferral of IFRS 9 IFRS 4, Insurance contracts, permits the deferral of the application of IFRS 9 until accounting periods commencing on 1 January 2023 to align with the effective date of IFRS 17, the replacement insurance contracts standard. The option to defer the application of IFRS 9, which the Group has continued to adopt for 2022, is subject to meeting criteria relating to the predominance of insurance activity. Eligibility for the deferral approach was based on an assessment of the Group’s liabilities as at 31 December 2016, the end of the annual period during which the acquisition of Partnership Assurance Group plc took place and the most recent period of significant change in the magnitude of the Group’s activities. At this date, the Group’s liabilities connected with insurance exceeded the 90% threshold required for the carrying amount of the Group’s total liabilities. In the Statement of financial position at this date, the Group’s total liabilities were £22,283.9m and liabilities connected with insurance were £21,497.7m, consisting of insurance contracts within the scope of IFRS 4 of £15,748.0m, investment contract liabilities of £222.3m, and amounts within other financial liabilities and insurance payables which arise in the course of writing insurance business of £5,527.4m, giving a predominance ratio of 96%. 1.18 Reinsurance Reinsurance assets and liabilities Amounts recoverable from reinsurers are measured in a consistent manner with insurance liabilities and are classified as reinsurance assets. If a reinsurance asset is impaired, the carrying value is reduced accordingly and that impairment loss is recognised in the Consolidated statement of comprehensive income. Reinsurance longevity swap arrangements are classified as either reinsurance assets or reinsurance liabilities based on the net position on the swap at the reporting date. Amounts receivable/payable Where reinsurance contracts entered into by the Group include longevity swap arrangements, such contracts are settled on a net basis and amounts receivable from or payable to the reinsurers are included in the appropriate heading under either Insurance and other receivables or Insurance and other payables. Amounts due on quota share reinsurance contracts are included within Insurance and other payables. Financial liabilities The Group has reinsurance collateral arrangements whereby the reinsurer deposits back the reinsurance premium. An assessment against the IAS 39 recognition/derecognition criteria is made based on the collateral terms within the reinsurance contracts in order to conclude whether such deposit assets are recognised on the Group’s balance sheet. Where the assets are recognised the Group also recognises an obligation for the repayment of the collateral. This obligation is not exposed to longevity risk and is only exposed to financial risk. As such it is unbundled from the IFRS 4 Reinsurance contract balance and is classified in accordance with IAS 39 within Other financial liabilities. The obligation for the return of deposits received from reinsurers is designated at fair value through profit or loss in order to avoid an accounting mismatch with the valuation of the associated IFRS 4 reinsurance balance.
145
Powered by FlippingBook