Just group PLC | Annual Report and accounts 2022
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
23 INSURANCE CONTRACTS AND RELATED REINSURANCE continued Reinsurance in the table above includes reinsurance assets net of reinsurance liability positions that can arise on longevity swaps which are presented as liabilities in the Consolidated statement of financial position. Effect of changes in assumptions and estimates during the year Economic assumption changes The principal economic assumption changes impacting the movement in insurance liabilities during the year relate to discount rates and inflation. Discount rates The movement in the valuation interest rate captures the impact of underlying changes in risk-free curves and spreads and cash flows arising on backing assets held over the course of the year. The movement of the discount rate includes the effect of any change in the underlying assets over the period, for example due to purchases to support new business and trading for risk management purposes. For the year to 31 December 2022, changes in discount rates resulted in a net reduction of insurance liabilities of £4,659m (2021: £813m) which was due to large increases in risk-free rates over the period (e.g. the 10- year risk-free rate increased by 276bps) and changes to the backing asset portfolio, including as a consequence of the LTM portfolio sale during 2022. Inflation Insurance liabilities for inflation-linked products, most notably Defined Benefit business and expenses on all products are impacted by changes in future expectations of RPI, CPI and earnings inflation. For the year to 31 December 2022, changes in inflation, driven by a rise in market-implied expectations of future RPI and CPI inflation, resulted in a net increase of insurance liabilities of £153.3m (2021: £348m). This includes an impact of a £49m reduction in respect of the change in approach since 31 December 2021 to the derivation of the annuity escalation curves required for LPI linked liabilities and is a reduction in liabilities. Non-economic assumption changes The principal non-economic assumption changes impacting the movement in insurance liabilities during the year relate to mortality assumptions for both JRL and PLACL products. Note that impacts quoted below relate specifically to the liability cash flow impact of these changes; any resulting change to the discount rate is captured above. Mortality The mortality bases applied are outlined above in note 23(b). A decrease in future expectations of longevity decreases the carrying value of the Group’s insurance liabilities. (d) Estimated timing of net cash outflows from insurance contract liabilities The following table shows the insurance contract balances analysed by duration. The total balances are split by duration of payments in proportion to the policy cash flows estimated to arise during the year. Expected cash flows (undiscounted) Carrying value (discounted) £m 2022 Within 1 year £m 1-5 years £m 5-10 years £m Over 10 years £m Total £m
Gross
1,505.9 5,884.3 6,954.4 20,876.9 35,221.5 18,332.9
Reinsurance
(209.4)
(762.1)
(801.7)
(1,567.4)
(3,340.6)
(1,981.1)
Net
1,296.5 5,122.2 6,152.7 19,309.5 31,880.9 16,351.8
Expected cash flows (undiscounted)
Carrying value (discounted) £m
Over 10 years £m
Within 1 year £m
Total £m
1-5 years £m
5-10 years £m
2021
Gross
1,435.4
5,465.3 6,356.3 16,893.6 30,150.6 21,812.9
Reinsurance
(201.7)
(733.5)
(786.3)
(1,650.8)
(3,372.3)
(2,533.5)
Net
1,233.7
4,731.8
5,570.0 15,242.8 26,778.3 19,279.4
Reinsurance in the table above includes reinsurance assets net of reinsurance liability positions that can arise on longevity swaps which are presented as liabilities in the Consolidated statement of financial position. (e) Sensitivity analysis The Group has estimated the impact on profit before tax for the year in relation to insurance contracts and related reinsurance from reasonably possible changes in key assumptions relating to financial assets and to liabilities. The sensitivities capture the liability impacts arising from the impact on the yields of the assets backing liabilities in each sensitivity. The impact of changes in the value of assets and liabilities has been shown separately to aid the comparison with the change in value of assets for the relevant sensitivities in note 17. To further assist with this comparison, any impact on reinsurance assets has also been included within the liabilities line item. The sensitivity factors are applied via financial models either as at the valuation date or from a suitable recent reporting period where appropriate to do so. The analysis has been prepared for a change in each variable with other assumptions remaining constant. In reality, such an occurrence is unlikely, due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts cannot necessarily be interpolated or extrapolated from these results. The extent of non-linearity grows as the severity of any sensitivity is increased. For example, in the specific scenario of property price falls, the impact on IFRS profit before tax from a 5% fall in property prices would be slightly less than half of that disclosed in the table below. Furthermore, in the specific scenario of a mortality reduction, a smaller fall than disclosed in the table below or a similar increase in mortality may be expected to result in broadly linear impacts.
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