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3. Insurance liabilities and reinsurance
assets
ACCOUNTING POLICY
For the purpose of this accounting policy, the
term 'motor
insurance' covers all the Group's products,
which includes Motor
Vehicle, Motorcycle and Taxi insurance.
A. Insurance and reinsurance contracts
classification
The Group issues insurance contracts in the
normal course of business, under which it accepts significant
insurance risk from a policyholder by agreeing to compensate the
policyholder if a specified uncertain future insured event
adversely affects the policyholder.
As a general guideline, the Group determines
whether it has significant insurance risk, by comparing benefits
payable after an insured event with benefits payable if the insured
event did not occur.
The Group issues only non-life insurance to
individuals and businesses. Non-life insurance products offered by
the Group are Motor Vehicle, Motorcycle and Taxi insurance. These
products offer protection of a policyholder's assets and
indemnification of other parties that have suffered damage as a
result of a policyholder's accident.
In the normal course of business, the Group
uses reinsurance to mitigate its risk exposures. A reinsurance
contract transfers significant risks if it transfers substantially
all of the insurance risk resulting from the insured portion of the
underlying insurance contacts, even if it does not expose the
reinsurer to the possibility of a significant loss.
B. Insurance and reinsurance contracts accounting
treatment
(i) Separating components from insurance and
reinsurance contracts
The Group assesses its non-life insurance and
reinsurance products to determine whether they contain distinct
components which must be accounted for under another IFRS instead
of under IFRS 17. After separating any distinct components, the
Group applies IFRS 17 to all remaining components of the (host)
insurance contract. Currently, the Group's products do not include
any distinct components that require separation.
(ii) Aggregation and recognition of insurance and
reinsurance contracts
Insurance contracts
Insurance contracts are aggregated into groups
for measurement purposes. Groups of insurance contracts are
determined by identifying portfolios of insurance contracts, each
comprising contracts subject to similar risks and managed together,
and dividing each portfolio into annual cohorts (i.e. by year of
issue) and each annual cohort into three groups based on the
expected profitability of contracts:
- Any
contracts that are onerous on initial recognition
- Any
contracts that, on initial recognition, have no significant
possibility of becoming onerous subsequently
- Any
remaining contracts in the annual cohort
The Group recognises groups of insurance
contracts it issues from the earliest of:
- The
beginning of the coverage period of the group of
contracts
- When
the first payment from a policyholder in the group becomes due or
when the first payment is received if there is no due
date
- When
facts and circumstances indicate that the contract is
onerous
The Group adds new contracts to the group in
the reporting period in which that contract meets one of the
criteria set out above.
The profitability of groups of contracts is
assessed by actuarial valuation models that take into consideration
existing and new business. The Company assumes that no contracts in
the portfolio are onerous at initial recognition unless facts and
circumstances indicate otherwise. For contracts that are not
onerous, the Company assesses, at initial recognition, that there
is no significant possibility of becoming onerous subsequently by
assessing the likelihood of changes in applicable facts and
circumstances. The Company considers facts and circumstances to
identify whether a group of contracts are onerous based
on:
- Pricing
information
- Results
of similar contracts it has recognised
-
Environmental factors, e.g. a change in market experience or
regulations
Reinsurance contracts
Some reinsurance contracts provide cover for
underlying contracts that are included in different groups.
However, the Group concludes that the reinsurance contract's legal
form of a single contract reflects the substance of the Group's
contractual rights and obligations, considering that the different
covers lapse together and are not sold separately. As a result, the
reinsurance contract is not separated into multiple insurance
components that relate to different underlying groups.
The Group recognises a group of reinsurance
contracts held at the earlier of the following:
- The
beginning of the coverage period of the group of reinsurance
contracts held
- The
date the Group recognises an onerous group of underlying insurance
contracts if the Group entered into the related reinsurance
contract held in the group of reinsurance contracts held at or
before that date
The Group adds new contracts to the group in
the reporting period in which that contract meets one of the
criteria set out above.
(iii) Measurement
Summary of measurement approaches
The Group uses the following measurement
approaches to its insurance and reinsurance contacts.
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Product classification
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Measurement model
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Insurance contracts issued
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Motor insurance
|
Insurance contracts
issued
|
Premium Allocation Approach
("PAA")
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Reinsurance contracts held
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Motor insurance - excess of loss
reinsurance
|
Reinsurance contracts
held
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Premium Allocation Approach
("PAA")
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The Group applies the premium allocation
approach to all the insurance contracts that it issues and
reinsurance contracts that it holds, as the coverage period of each
contract in the group is one year or less, including insurance
contract services arising from all premiums within the contract
boundary. The Group does not expect significant variability in the
fulfilment cash flows that would affect the measurement of the
liability for remaining coverage during the period before a claim
is incurred.
All the Group's insurance contracts have a
coverage period of one year or less. The Group's reinsurance
contracts held are excess of loss contracts and are loss occurring.
The Group does not issue any reinsurance contracts.
Insurance contracts issued
On initial recognition of each group of
contracts, the carrying amount of the liability for remaining
coverage ("LRC") is measured at:
- The
premiums received on initial recognition
- Minus
any insurance acquisition cash flows allocated to the group at that
date
-
Adjusted for any amount arising from the derecognition of any
assets or liabilities previously recognised for cash flows related
to the group (including assets for insurance acquisition cash
flows)
The Group has chosen not to expense insurance
acquisition cash flows when they are incurred.
Subsequently, the Group measures the carrying
amount of the LRC at the end of each reporting period as the LRC at
the beginning of the period:
- Plus
premiums received in the period
- Minus
insurance acquisition cash flows
- Plus
any amounts relating to the amortisation of insurance acquisition
cash flows recognised as an expense in the reporting
period
- Minus
the amount recognised as insurance revenue for the services
provided in the period
On initial recognition of each group of
contracts, the Group expects that the time between providing each
part of the services and the related premium due date is no more
than a year. Accordingly, the Group has chosen not to adjust the
liability for remaining coverage to reflect the time value of money
and the effect of financial risk.
If at any time during the coverage period,
facts and circumstances indicate that a group of contracts is
onerous, then the Group recognises a loss in Profit or Loss and
increases the liability for remaining coverage to the extent that
the current estimates of the fulfilment cash flows that relate to
remaining coverage exceed the carrying amount of the liability for
remaining coverage. The fulfilment cash flows are discounted (at
current rates) if the liability for incurred claims is also
discounted.
The Group recognises the liability for
incurred claims ("LIC") of a group of insurance contracts at the
amount of the fulfilment cash flows ("FCF") relating to incurred
claims. The fulfilment cash flows are discounted (at current rates)
unless they are expected to be paid in one year or less from the
date the claims are incurred.
The carrying amount of a group of insurance
contracts issued at the end of each reporting period is the sum
of:
- The
LRC
- The
LIC
Risk
adjustment for non-financial risk
An explicit risk adjustment for non-financial
risk is estimated separate from the other estimates. Unless
contracts are onerous, the explicit risk adjustment for
non-financial risk is only estimated for the measurement of the
LIC.
This risk adjustment represents the
compensation that the Group requires for bearing the uncertainty
about the amount and timing of cash flows that arise from
non-financial risk. Non-financial risk is risk arising from
insurance contracts other than financial risk, which is included in
the estimates of future cash flows or the discount rate used to
adjust the cash flows. The risks covered by the risk adjustment for
non-financial risk are insurance risk and other non-financial risks
such as lapse risk and expense risk.
The risk adjustment for non-financial risk for
insurance contracts measures the compensation that the Group would
require to make it indifferent between:
-
Fulfilling a liability that has a range of possible outcomes
arising from non-financial risk
-
Fulfilling a liability that will generate fixed cash flows
with the same expected present value as the insurance
contracts
Reinsurance contracts held
The excess of loss reinsurance contracts held
provide coverage on the motor insurance contracts originated for
claims incurred during an accident year and are accounted for under
the PAA. The Group measures its reinsurance assets for a group of
reinsurance contracts that it holds on the same basis as insurance
contracts that it issues. For reinsurance contracts held, on
initial recognition, the Group measures the remaining coverage at
the amount of ceding premiums paid. For reinsurance contracts held,
at each of the subsequent reporting dates, the remaining coverage
is:
-
Increased for ceding premiums paid in the period
-
Decreased for the amounts of ceding premiums recognised as
reinsurance expenses for the services received in the
period
Assets for reinsurance contracts consist of
the asset for remaining coverage ("ARC") and the asset for incurred
claims ("AIC") being the reinsurers' share of claims that have
already been incurred.
For reinsurance contracts held, the risk
adjustment for non-financial risk presents the amount of risk being
transferred by the Group to the reinsurer.
Asset for insurance acquisition cash flows
The Group includes the following acquisition
cash flows within the insurance contract boundary that arise from
selling, underwriting and starting a group of insurance contracts
and that are:
a. Costs directly attributable to
individual contracts and groups of contracts
b. Costs directly attributable to
the portfolio of insurance contracts to which the group belongs,
which are allocated on a reasonable and consistent basis to measure
the group of insurance contracts
Insurance acquisition cash flows arising
before the recognition of the related group of contracts are
recognised as an asset. Insurance acquisition cash flows arise when
they are paid or when a liability is required to be recognised
under a standard other than IFRS 17. Such an asset is recognised
for each group of contracts to which the insurance acquisition cash
flows are allocated. The asset is derecognised, fully or partially,
when the insurance acquisition cash flows are included in the
measurement of the group of contracts.
Recoverability
assessment
At each reporting date, if facts and
circumstances indicate that an asset for insurance acquisition cash
flows may be impaired, then the Group:
a. Recognises an impairment loss
in Profit or Loss so that the carrying amount of the asset does not
exceed the expected net cash inflow for the related
group
b. If the asset relates to future
renewals, recognises an impairment loss in Profit or Loss to the
extent that it expects those insurance acquisition cash flows to
exceed the net cash inflow for the expected renewals and this
excess has not already been recognised as an impairment loss under
(a)
The Group reverses any impairment losses in
Profit or Loss and increases the carrying amount of the asset to
the extent that the impairment conditions have improved.
Modification and derecognition
The Group derecognises insurance contracts
when:
- The
contract is extinguished (i.e. when the obligation specified in the
insurance contract expires or is discharged or
cancelled)
- The
contract is modified and certain additional criteria are
met
When an insurance contract is modified by the
Group as a result of an agreement with the counterparties or due to
a change in regulations, the Group treats changes in cash flows
caused by the modification as changes in estimates of the FCF,
unless the conditions for the derecognition of the original
contract are met. The Group derecognises the original contract and
recognises the modified contract as a new contract if any of the
following conditions are present:
a. If the modified terms had been
included at contract inception and the Group would have concluded
that the modified contract:
i. Is not in scope of IFRS 17
ii. Results in different separable
components
iii. Results in a different contract
boundary
iv. Belongs to a different group of
contracts
b. The original contract was
accounted for under the PAA, but the modification means that the
contract no longer meets the eligibility criteria for that
approach
When an insurance contract accounted for under
the PAA is derecognised, adjustments to the FCF to remove relating
rights and obligations and account for the effect of the
derecognition result in the following amounts being charged
immediately to Profit or Loss:
a. If the contract is
extinguished, any net difference between the derecognised part of
the LRC of the original contract and any other cash flows arising
from extinguishment
b. If the contract is transferred
to the third party, any net difference between the derecognised
part of the LRC of the original contract and the premium charged by
the third party
c. If the original contract is
modified resulting in its derecognition, any net difference between
the derecognised part of the LRC and the hypothetical premium the
entity would have charged had it entered into a contract with
equivalent terms as the new contract at the date of the contract
modification, less any additional premium charged for the
modification
(iv) Presentation
The Group has presented separately, in the
Statement of Financial Position, the carrying amount of portfolios
of insurance contracts issued and portfolios of reinsurance
contracts held.
The Group has elected to disaggregate part of
the movement in LIC resulting from the changes in discount rates
and present this in the Statement of Comprehensive Income. The
Group disaggregates the total amount recognised in the Profit or
Loss Account and the Statement of Comprehensive Income into an
insurance service result, comprising insurance revenue and
insurance service expense, and insurance finance income or
expenses.
The Group does not disaggregate the change in
risk adjustment for non-financial risk between a financial and
non-financial portion and includes the entire change as part of the
insurance service result.
The Group separately presents income or
expenses from reinsurance contracts held from the expenses or
income from insurance contracts issued.
AMOUNTS RECOGNISED IN THE STATEMENT OF PROFIT OR
LOSS
Insurance service result from insurance contracts
issued
Insurance revenue
As the Group provides insurance contract
services under the group of insurance contracts, it reduces the LRC
and recognises insurance revenue. The amount of insurance revenue
recognised in the reporting period depicts the transfer of promised
services at an amount that reflects the portion of consideration
that the Group expects to be entitled to in exchange for those
services.
The Group measures all insurance contracts
under the PAA and recognises insurance revenue based on the passage
of time over the coverage period of a group of
contracts.
Insurance service expenses
Insurance service expenses include the
following:
-
Incurred claims and benefits
- Other
incurred directly attributable expenses
-
Amortisation of insurance acquisition cash flows
- Changes
that relate to past service - changes in the FCF relating to the
LIC
- Changes
that relate to future service - changes in the FCF that result in
onerous contract losses or reversals of those losses
Amortisation of insurance
acquisition cash flows is based on the passage of time.
Other expenses not meeting the
above categories are included in other operating expenses in the
Profit or Loss Account.
Insurance service result from reinsurance contracts
held
Net income/(expense) from reinsurance contracts
held
The Group presents separately on the face of
the Profit or Loss Account and the Statement of Comprehensive
Income, the amounts expected to be recovered from reinsurers, and
an allocation of the reinsurance premiums paid. The net
income/(expense) from reinsurance contract held
comprise:
-
Reinsurance expenses
- For
groups of reinsurance contracts measured under the PAA, broker fees
are included within reinsurance expenses
-
Incurred claims recovery
- Other
incurred directly attributable expenses
- Changes
that relate to past service - changes in the FCF relating to
incurred claims recovery
- Effect
of changes in the risk of reinsurers' non-performance
- Amounts
relating to accounting for onerous groups of underlying insurance
contracts issued
Reinsurance expenses
are recognised similarly to insurance revenue. The amount of
reinsurance expenses recognised in the reporting period depicts the
transfer of received insurance contract services at an amount that
reflects the portion of ceding premiums that the Group expects to
pay in exchange for those services. Broker fees are included in
reinsurance expenses.
All groups of reinsurance contracts held are
measured under the PAA and reinsurance expenses are recognised
based on the passage of time over the coverage period of a group of
contracts.
AMOUNTS RECOGNISED IN THE STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME
Insurance finance income or expenses
Insurance finance income or expenses comprise
the change in the carrying amount of the group of insurance
contracts arising from:
- The
effect of the time value of money and changes in the time value of
money
- The
effect of financial risk and changes in financial risk
For contracts measured under the PAA, the main
amounts within insurance finance income or expenses are:
a. Interest accreted on the
LIC
b. The effect of changes in
interest rates and other financial assumptions
The Group disaggregates insurance finance
income or expenses on motor insurance contracts issued between
Profit or Loss and OCI. The impact of changes in market interest
rates on the value of the insurance assets and liabilities are
reflected in OCI in order to minimise accounting mismatches between
the accounting for financial assets and insurance assets and
liabilities. The Group's financial assets backing the motor
insurance portfolios are predominantly measured at
FVOCI.
Risk management
Refer to Notes 3.6 and 3.7 for
detail on risks relating to insurance liabilities and reinsurance
assets, and the management thereof.
critical accounting estimates and
judgements
Management considers that their use of
estimates, assumptions and judgements in application of the Group's
accounting policies are inter-related and therefore discuss them
together with the major sources of estimation uncertainty and
critical judgements separately identified.
The key assumptions concerning the future and
other key sources of estimation uncertainty at the reporting date,
that have a significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities within the next
financial year are discussed below. The Group based its assumptions
and estimates on parameters available when the financial statements
were prepared. Existing circumstances and assumptions about future
developments, however, may change due to market changes or
circumstances arising that are beyond the control of the Group.
Such changes are reflected in the assumptions when they occur. The
Group disaggregates information to disclose major product lines
namely, Motor Vehicle, Motorcycle and Taxi.
The Group applies the PAA to simplify the
measurement of insurance contracts. When measuring liabilities for
remaining coverage, the PAA is broadly similar to the Group's
previous accounting treatment under IFRS 4. However, when measuring
liabilities for incurred claims, the Group now discounts cash flows
that are expected to occur more than one year after the date on
which the claims are incurred and includes an explicit risk
adjustment for non-financial risk.
A. Liability for remaining coverage ("LRC")
Insurance acquisition cash flows
The Group applies judgement in determining the
inputs used in the methodology to systematically and rationally
allocate insurance acquisition cash flows to groups of insurance
contracts. This includes judgements about the amounts allocated to
insurance contracts expected to arise from renewals of existing
insurance contracts in a group and the volume of expected renewals
from new contracts issued in the period.
At the end of each reporting period, the Group
revisits the assumptions made to allocate insurance acquisition
cash flows to groups and where necessary revises the amounts of
assets for insurance acquisition cash flows accordingly.
Critical
estimates
In determining the liability for remaining
coverage, the Group considers the term over which insurance
policies apply, the distribution of expected claims occurrence
during the life of those policies and, in determining whether or
not a group of contracts is onerous, the expected profitability of
each group of contracts written. The profitability of each group of
contracts is estimated with reference to:
- Underwriting performance to date for each
group of contracts
- The strategic goals assigned to each group
of contracts, including target underwriting performance
- Projections of changes to underwriting
performance resulting from pricing decisions taken during the life
of each group of contracts
B. Liability for incurred claims ("LIC")
The ultimate cost of outstanding claims is
estimated by using a range of standard actuarial claims projection
techniques, such as Chain Ladder and Bornheutter-Ferguson
methods.
The main assumption underlying these
techniques is that a Group's past claims development experience can
be used to project future claims development and hence ultimate
claims costs. These methods extrapolate the development of paid and
incurred losses, average costs per claim (including claims handling
costs), and claim numbers based on the observed development of
earlier years and expected loss ratios. Historical claims
development is mainly analysed by accident years, but can also be
further analysed by geographical area, as well as by significant
business lines and claim types. Large claims are usually separately
addressed, either by being reserved at the face value of loss
adjuster estimates or separately projected in order to reflect
their future development. In most cases, no explicit assumptions
are made regarding future rates of claims inflation or loss ratios.
Instead, the assumptions used are those implicit in the historical
claims development data on which the projections are based.
Additional qualitative judgement is used to assess the extent to
which past trends may not apply in future, (e.g., to reflect
one-off occurrences, changes in external or market factors such as
public attitudes to claiming, economic conditions, levels of claims
inflation, judicial decisions and legislation, as well as internal
factors such as portfolio mix, policy features and claims handling
procedures) in order to arrive at the estimated ultimate cost of
claims that present the probability weighted expected value outcome
from the range of possible outcomes, taking account of all the
uncertainties involved.
The Group has the right to pursue third
parties for payment of some or all costs. Estimates of salvage
recoveries and subrogation reimbursements are considered as an
allowance in the measurement of ultimate claims costs. Other key
circumstances affecting the reliability of assumptions include
variation in interest rates and delays in settlement.
Critical
estimates
The critical estimates in calculating the LIC
are the amount and timing of future claims payments in relation to
claims already incurred. This is primarily assessed with reference
to past performance, including past settlement patterns, as per the
actuarial methodology outlined above. This includes estimating the
likely changes in inflation as relates to claims already incurred,
as well as the expected frequency of claims which have occurred but
which have not yet been reported. The ongoing cost of handling
claims already incurred is estimated with reference to the
historical cost-per-claim calculated over the past 12
months.
C. Discount rates
Insurance contract liabilities are calculated
by discounting expected future cash flows at a risk-free rate, plus
an illiquidity premium where applicable. Risk-free rates are
determined by reference to the yields of highly liquid AAA-rated
sovereign securities in the currency of the insurance contract
liabilities. The illiquidity premium is determined by reference to
observable market rates.
Discount rates applied for discounting of
future cash flows are listed below:
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31 December
2023
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31 December
2022
|
|
|
1 year
|
3 years
|
5 years
|
10 years
|
1 year
|
3 years
|
5 years
|
10 years
|
|
Motor insurance
|
5.05%
|
3.98%
|
3.67%
|
3.59%
|
4.75%
|
4.62%
|
4.35%
|
4.00%
|
Critical
estimates
The discount rate is determined as the
risk-free rate adjusted for an illiquidity premium. The risk-free
rate is determined using the Solvency II risk-free rate sourced
from the Bank of England. The illiquidity premium represents the
differences in liquidity characteristics between the financial
assets used to derive the risk-free rate and the relevant liability
cash flows.
D. Risk adjustment for non-financial risk
The risk adjustment for non-financial risk is
the compensation that the Group requires for bearing the
uncertainty about the amount and timing of the cash flows of groups
of insurance contracts. The risk adjustment reflects an amount that
an insurer would rationally pay to remove the uncertainty that
future cash flows could vary from the expected value
amount.
Critical
estimates
The Company has estimated the risk adjustment
using a methodology which targets a confidence level (probability
of sufficiency) approach between the 80th and 85th percentile. At
31 December 2023, the risk margin applied equates to an approximate
confidence interval of 81.3% (31 December 2022: 82.0%) That is, the
Company has assessed its indifference to uncertainty for all
product lines (as an indication of the compensation that it
requires for bearing non-financial risk) as being equivalent to the
80th to 85th percentile confidence level less the mean of an
estimated probability distribution of the future cash flows. The
Company has estimated the probability distribution of the future
cash flows, and the additional amount above the expected present
value of future cash flows required to meet the target
percentiles.
3.1. Composition of the Statement of Financial
Position
An analysis of the amounts presented
on the Statement of Financial Position for insurance contacts is
included in the table below.
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2023
|
2022
Restated
(1)
|
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|
Notes
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£'k
|
£'k
|
|
Insurance
contract liabilities
|
|
|
|
|
Insurance
contract liabilities
|
|
|
|
|
Motor Vehicle insurance
|
|
321,720
|
276,171
|
|
Motorcycle insurance
|
|
32,370
|
26,928
|
|
Taxi insurance
|
|
29,482
|
17,204
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|
Asset for
insurance acquisition cash flows
|
|
|
|
|
Motor Vehicle insurance
|
3.3
|
(6,933)
|
(4,324)
|
|
Motorcycle insurance
|
3.3
|
(867)
|
(629)
|
|
Taxi insurance
|
3.3
|
(933)
|
(1,009)
|
|
Total
insurance contract liabilities
|
|
374,839
|
314,341
|
|
|
|
|
|
|
Reinsurance
contracts assets
|
|
|
|
|
Motor Vehicle insurance
|
|
143,364
|
123,991
|
|
Motorcycle insurance
|
|
13,502
|
8,526
|
|
Taxi insurance
|
|
9,860
|
4,437
|
|
Total
reinsurance contract assets
|
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166,726
|
136,954
|
(1) See Note 1.3.1 IFRS 17 "Insurance
Contracts"
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