GOVERNANCE
FINANCIAL STATEMENTS
strategic report
HOW THIS RISK AFFECTS JUST
JUST’S EXPOSURE TO THE RISK
OUTLOOK AND HOW WE MANAGE OR MITIGATE THE RISK
Financial market volatility leads to changes in the level of market prices of assets and liabilities. Our business model and risk management framework have been designed to remain robust against market headwinds. Our policy is to manage market risk within pre-defined limits. Investment in fixed income investments involves default, credit rating downgrade and concentration risks. Other credit risk exposures arise due to the potential default by counterparties we use to: • provide reinsurance to manage longevity risk and to fund new business. • provide financial instruments to mitigate interest rate and currency risk exposures. • holding our cash balances. All over-the-counter derivative transactions are conducted under standardised International Swaps and Derivatives Association master agreements. The Group has collateral agreements with relevant counterparties under each master agreement. Credit risk on cash assets is managed by imposing restrictions over the credit ratings of third parties with whom cash is deposited. Exposure to liquidity risk arises from: • short term cash flow volatility leading to mismatches between cash flows from assets and liabilities, particularly servicing collateral requirements of financial derivatives and reinsurance agreements; • the liquidation of assets to meet liabilities during stressed market conditions; • higher-than-expected funding requirements on existing LTM contracts, lower redemptions than expected; and • liquidity transferability risk across the Group. Financial markets have experienced significant volatility recently. Just was not directly affected by the Liability Driven Investment (“LDI”) crisis following September’s “mini-budget,” which impacted defined benefit pension schemes unprepared for the effect on many collateralised derivative positions of a sudden increase in interest rates. However, the market turmoil, including the fall in the value of sterling, did create a sharp increase in collateral calls for the Group, which were managed through its liquidity risk framework. Risks to the Group’s strategy arise from regulatory change as the Group operates in regulated markets and has partners and distributors who are themselves regulated. Actions by regulators may change the shape and scale of the market or alter the attractiveness of markets. Changes in the nature or intensity of competition may impact the Group and increase the risk the business model is not able to be maintained. The actions of our competitors may increase the exposure to the risk from regulation should they fail to maintain appropriate standards of prudence.
Tightening fiscal and monetary policy are expected to weaken global growth significantly in 2023, with a sustained recession possible in the UK. Financial markets are likely to remain volatile during this period. Our investment assets may experience increased movements in downgrade and/or default experience in 2023. Residential property price falls may increase the Group’s exposure to the risk of shortfalls in expected repayments due to no-negative equity guarantee within its portfolio of lifetime mortgages. Any commercial property price falls would reduce the value of collateral held within our commercial mortgage portfolio. Our balance sheet sensitivities to these risks can be found in note 17.
5 Market and credit risk Fluctuations in interest rates, residential property values, credit spreads, inflation and currency may result, directly or indirectly, in changes in the level and volatility of market prices of assets and liabilities. Investment credit risk is a result of investing to generate returns to meet our obligations to policyholders. Global factors have led to high inflation, increased interest rates and significant volatility in financial markets in 2022.
STRATEGIC PRIORITIES 1, 3, 4
TREND INCREASING
Financial markets are expected to remain volatile into the foreseeable future with an increased level of liquidity risk. At the same time (partly as a result of the LDI crisis) Just is experiencing strong market demand for defined benefit de-risking solutions from pension schemes. Just’s use of derivative positions is planned to increase in proportion to its planned growth. Throughout any period of heightened volatility, Just maintains robust liquidity stress testing and holds a high level of liquidity coverage above stressed projections.
6 Liquidity risk Having sufficient liquidity to meet our financial obligations as they fall due requires ongoing management and the availability of appropriate liquidity cover. The liquidity position is stressed in extremely volatile conditions such as those triggered by the September 2022 “mini-budget.”
STRATEGIC PRIORITIES 1, 3, 4
TREND INCREASING
Regulation changes, such as Solvency II reform, have been agreed recently and it is likely the Group’s own regulators will not make any significant change until these have been embedded. There is a risk that pension scheme regulation may change as a result of schemes’ exposures. Demand for de-risking solutions is expected to remain stable.
7 Strategic risk The choices we make about the markets in which we compete and the demand for our product and service offering may be affected by external risks including
changes to regulation, competition, or social changes.
STRATEGIC PRIORITIES 1, 2, 3, 4, 5
TREND STABLE
65
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