106 JUST GROUP PLC Annual Report and Accounts 2019
INDEPENDENT AUDITOR’S REPORT CONTINUED
The risk
Our response
Valuation of loans secured by residential mortgages
Subjective valuation The loans are measured at fair value determined through projecting future discounted cash flows using a mark to model valuation approach under the income method per IFRS 13. The Group is required to use judgment in the selection of key assumptions in determining the projected cash flows and in determining the liquidity premium applied to the discount rate. The key assumptions include the property price at the valuation date, property price inflation, property price volatility, mortality (determined by reference to the Group’s own experience and expected levels of future mortality) and the liquidity premium added to the swap curve. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of loans secured by residential mortgages has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 16) disclose the The Group uses complex actuarial models to calculate the valuation of loans secured by residential mortgages. There is a risk that the modelling does not appropriately reflect the model specifications and / or the product features due to incomplete data input into the model and/or unauthorised or erroneous changes to the models. sensitivity estimated by the Group. Calculation error and data capture
We used our own actuarial specialists to assist us in performing our procedures in this area. Our procedures included: Control design and performance: • Testing of the design, implementation and operating effectiveness of key controls over the processes to determine the valuation of loans secured by residential mortgages including the change management controls over the actuarial models. • Testing of the design, implementation and operating effectiveness of the reconciliation controls to ensure completeness of data flows from policy administration systems and data warehouses to the actuarial models. Methodology choice: • Evaluating the methodology applied for the valuation of the loans to confirm that it is consistent with the principles of IFRS 13. • Evaluating the appropriateness of the methodology for selecting assumptions by applying our understanding of developments in the business and expectations derived from market experience. Benchmarking assumptions and sector experience: • Evaluating the appropriateness of the property price inflation assumption used within the valuation process by assessing the expected property price inflation with reference to market data and industry benchmarks. • Assessing the reasonableness of the property price volatility assumption by considering historic volatility in property prices and comparing the assumption to industry benchmarks. • Assessing the appropriateness of the index used to determine the property prices at the valuation date by comparing management’s valuation for a sample of properties to the value from alternative market valuation sources and surveyor valuations. • Evaluating the Group’s historic mortality data used to prepare the Group’s mortality experience analysis, together with industry data on expectations of future mortality improvements and assessing whether this supports the assumptions adopted, • Assessing the appropriateness of the liquidity premium applied to the risk-free rate, by reference to industry practice and our expectations derived frommarket experience. Independent reperformance: • Using our own valuation models to value the loans secured by residential mortgages balance for a sample of policies and comparing to the balances recorded by the Group. Expectation vs Outcome: • Evaluating the analysis of the movements in the loans secured by residential mortgages during the year, including consideration of whether the movements were in line with the methodology and assumptions adopted. Assessing transparency: • Considering the adequacy of the Group’s disclosures in relation to the valuation of loans secured by residential mortgages, in particular the sensitivity of the valuations adopted to alternative outcomes. Our findings We found the resulting estimate to be at the optimistic end of the acceptable range (2018: optimistic end of the acceptable range) and the related disclosures to be proportionate (2018: proportionate).
(2019: £7,981 million, 2018: £7,192 million)
The risk compared to the prior year has increased. Refer to page 72 (Audit Committee report), page 121 (accounting policy) and pages 123 to 156 (financial disclosures)
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