Annual Report 2023KLP Group, Sustainability Report and KLP

There is one new international accounting standard which came into effect for the financial year starting 1 January 2023 and have been adopted by the Group. This is IFRS 17 Insurance Contracts. The Group has also adopted IFRS 9 Financial Instruments.

• IFRS 17 Insurance Contracts
  The new standard for insurance contracts was adopted by the Group from 1 January 2023, and comparative figures for 2022 have also been restated. The definition of what constitutes an insurance contract has not changed, but there have been some clarifications that define what is a qualifying contract to be handled according to IFRS 17. The standard also includes rules on how insurance contracts should be valued and presented. New and extended note requirements have also come in with the introduction of the standard.

For insurance contracts, the principles in the standard require the use of discretion and a number of other interpretations, including the definition of who is the policyholder, and whether issued insurance contracts contain investment components.

The effect of the transition on 1 January 2023 was shown with preliminary figures in Note 37 to the annual accounts for 2022. No significant changes in the opening balance have emerged since that time.

• IFRS 9 Financial Instruments
  This standard was adopted by the Group from 1 January 2023. The standard covers the recognition, classification, measurement and derecognition of financial assets and liabilities, and introduces new rules for hedge accounting and a new impairment model for financial assets. IFRS 9 has been implemented prospectively, i.e. comparative figures for previous periods have not been restated. The effect of the transition on 1 January 2023 was shown with preliminary figures in Note 37 to the annual accounts for 2022. No significant changes in transition effects have been found since then
• IAS 12 has been amended to make it clear that the global minimum tax (top-up tax, Pillar Two tax) is covered by the accounting standard. However, the effect of this tax on deferred tax does not yet have to be recognised or disclosed. Although this is a mandatory exception, it must be stated that the exception has been applied. Tax payable has to be accrued in the same way as other tax payable and the amount disclosed separately. In the period from the time the tax is adopted until it is actually imposed, there are separate disclosure requirements.

Top-up tax has been introduced in Norway from the fiscal year 2024. The regulations are complex, and it is unclear whether KLP is covered by the rules. Work is in hand to clarify this. It is therefore impossible to give an estimate of the effects the top–up tax will have on the financial statements.

There are no other new or amended IFRS standards or IFRIC interpretations that have come into effect for the 2023 financial year which materially affect the Group’s financial statements

There are certain changes in standards and interpretations which take effect for annual accounts beginning on 1 January 2024 or later and which have not been adopted in these accounts. These are not expected to have a significant impact on the accounts.

The Group issues the following contracts that are accounted for in line with IFRS 17 Insurance Contracts:

• Life insurance – direct-participation contracts where the policyholder is entitled to net assets.
  • These are contracts that include life insurance cover and an investment component. Policyholders are entitled to net assets in the business.
  • The Group accounts for these contracts in line with the variable fee method with the adjustments resulting from KLP’s status as a mutual insurance company.
• Issued contracts in the non-life insurance area:
  • These contracts include comprehensive and liability cover within personal injury and material damage insurance with a coverage period of up to one year.
  • The Group accounts for these contracts in line with the premium allocation method.
• Purchased reinsurance contracts:
  • The Group has purchased reinsurance contracts to reduce its risk exposure within non-life insurance.
  • The Group accounts for these contracts in line with the premium allocation method.

Products sold by the Group are classified as insurance contracts when the Group accepts significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. This assessment is made at the contract level on the contract issue date. In this assessment, the Group considers all of its material rights and obligations, whether they are contractual, legal or regulatory.

The Group determines whether a contract contains significant insurance risk by assessing whether:

• an insured event could mean significant additional amounts would be payable in any scenario that has commercial substance, even if the insured event is extremely unlikely, or
• the expected present value of the contingent cash flows is a small proportion of the expected present value of the remaining cash flows from the insurance contract.

An insurance contract may contain components such as derivatives or deposits/investments, and obligations to provide goods and non-insurance services. If such components are distinct from the insurance components in the contract, the standard requires the different components in the contract to be separated from the insurance contract itself, for measurement and recognition under other accounting standards than IFRS 17, generally IFRS 9 (Financial Instruments) or IFRS 15 (Revenue from Contracts with Customers).

If the cash flow and the risks associated with the components are mutually dependent on the cash flow and risk in the insurance contract, and cannot be measured separately, the components are not separated from the insurance contracts.

The insurance contracts issued by the Group do not contain any additional components to be separated from the contracts and measured separately.

Under IFRS 17, the insurance contracts have to be measured at an aggregated level, and divided into portfolios. A portfolio consists of a set of contracts subject to the same type of insurance risk and managed together.

This means that a product may be split into multiple portfolios based on an assessment of the risk profile of the insured population and how the business is monitored. However, the Group has split the portfolios in such a way that a portfolio cannot contain elements from two different industries. However, one and the same portfolio may contain two or more homogenous risk groups, provided that they belong to the same industry. Insurance contracts issued from different entities in the Group are considered to be managed at the issuing entity level. This is because solvency capital management, which supports the issuance of these contracts, is bounded by these entities.

Each portfolio is divided into groups of insurance contracts which are recognised and measured according to the requirements in IFRS 17. On initial recognition, the Group groups contracts according to when they were issued. A group will contain all contracts issued within a 12-month period. Within the EU/EEA, an exception has been introduced to the rule that insurance contracts issued more than 12 months apart cannot be included in the same group. This exception is subject to certain conditions, and it can only be applied to issued insurance contracts with direct-participation characteristics, and the contracts must be equalised over time. The Group has determined that issued insurance contracts for public-sector occupational pensions meet these requirements, and has therefore made use of the exception. These contracts are therefore grouped into the same portfolio even if they have been issued more than 12 months apart.

In accordance with the standard, the Group divides the portfolios into three groups:

• a group of contracts that are onerous (loss-making) on initial recognition, if any such exist;

• a group of contracts that have no significant possibility on initial recognition of becoming onerous subsequently, if any such exist; and

• a group of the remaining contracts in the portfolio, if any such exist

A contract is considered to be onerous if the sum of the present values of the cash flows, including risk adjustment, associated with the contract is a net cash outflow from the enterprise. The determination of whether a contract or a group of contracts is onerous is based on expectations at the date of initial recognition. If, during the coverage period, a group of contracts is judged to be onerous, the negative difference between unearned premium income and expected claims costs is recognised in the income statement and added to the liability for remaining coverage.

The composition of groups established at initial recognition is not subsequently reassessed.

For non-life insurance contracts that are reported by the premium allocation method, the Group determines that these contracts are not onerous on initial recognition, unless there are facts and circumstances that indicate otherwise.

Where insurance contracts within a portfolio only fall into different groups because of specific restrictions imposed by law or regulation on the Group’s practical ability to set a different price or level of benefits for male and female policyholders, the Group still includes those contracts in the same group.

The Group has not identified any issued insurance contracts that are onerous on recognition, and has no groups with onerous contracts.

The Group recognises its groups of insurance contracts from the earliest of the following dates:

• The start of the coverage period for the group of contracts

• The date on which the first payment from a Group policyholder is due (in the absence of a contractual due date, this is taken to be when the first payment is received)

• The date when a group of contracts becomes onerous

The measurement of a group of insurance contracts includes all future cash flows expected to arise under each contract in the Group.

In determining which cash flows fall within a contract boundary, the Group considers its substantive rights and obligations arising from the terms of the Contract, and from applicable laws, regulations and customary business practice. The Group determines that cash flows are within the scope of a contract if they arise from substantive rights and obligations existing during the reporting period in which the Group can compel the policyholder to pay the premiums or in which the Group has a substantive obligation to provide the policyholder with insurance contract services.

A substantive obligation to provide insurance contract services ends when the has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks. If the boundary assessment is carried out at portfolio level rather than individual contract level, the Group must have the practical ability to reprice the portfolio to fully reflect risk from all policyholders. The Group’s pricing does not consider any risks beyond the next reassessment date.

In determining whether all risks have been reflected either in the premium or in the level of benefits, the Group considers all the risks that policyholders would have transferred if the Group had issued the contracts (or the portfolio of contracts) on the renewal date. Similarly, the Group determines its practical ability to set a price that fully reflects the risks in the contract or portfolio on a renewal date by assessing all of the risks it would consider when underwriting equivalent contracts on the renewal date for the remaining service. The assessment of the Group’s practical ability to reprice existing contracts takes account of all contractual, legal and regulatory restrictions. In doing so, the Group disregards restrictions that have no commercial substance. The Group also considers the impact of market competitiveness and commercial considerations on its practical ability to price new contracts and reprice existing contracts. The Group exercises discretion to determine whether such commercial considerations are relevant to deciding whether it has the practical ability at the reporting date.

By estimating expected future cash flows for a group of contracts, the Group applies discretion to assessing future policyholders’ behaviour in exercising the options available to them, e.g. relating to a policyholder’s right to move its insurance contract for public-sector occupational pensions

The Group assesses the contract boundary on initial recognition and at each subsequent reporting date to include the effect of changes in circumstances on the Group’s substantive rights and obligations.

The insurance contracts for public-sector occupational pensions entitle the policyholder to renew the contract each year. The Insurer cannot terminate the contract. When the contract is renewed, the insurer can freely determine the premium for new accruals and regulation of new and previous earnings, but the company cannot reprice previous accruals. So the life insurance business cannot reprice all risk, and the contracts are considered to have (infinitely) long contract boundaries.

With a few exceptions, the Group’s contracts within non-life insurance have a contractual term of 12 months with the option to extend. The Group has no obligation to renew the contracts, and may reprice all risk if they are renewed.

The Group derecognises the original insurance contract and recognises the amended contract as a new contract if the terms of the insurance contracts have been modified and the following conditions have been met:

• If the modified terms had been included at contract inception, the Group would have determined that the modified contract:

– was outside the scope of IFRS 17;

– resulted in a different insurance contract because components were separated from the host contract;

– resulted in a significantly different contract boundary;

– would be included in a different group of contracts;

• If the original contact met the definition of an insurance contract with direct participation features, but the modified contract no longer meets this definition

• The Group applied the premium allocation approach to the original contract, but the modifications mean that the contract no longer meets the eligibility criteria for that approach.

If the contract modification meets any of these conditions, the Group performs all assessments that apply at initial recognition, derecognises the original contract and recognises the new modified contract as if it has been entered into for the first time.

If the contract modification meets none of these conditions, the Group treats the effect of the change as changes in estimates of fulfilment cash flows.

For insurance contracts that are recognised with a right to a share in net assets, a change in the estimates of fulfilment cash flows will result in a revised residual value.

For insurance contracts that are accounted for by the premium distribution period, the Group adjusts insurance income forward from the date of the contract amendment.

The Group derecognises an insurance contract when, and only when, the contract is:

• Extinguished (i.e. when the obligation specified in the insurance contract expires or is discharged or cancelled)

• Modified so that the derecognition criteria are met

When the Group derecognises an insurance contract from within a group of contracts, it will:

• Adjust the fulfilment cash flows allocated to the group to eliminate the present value of future cash flows and risk adjustment for non-financial risk related to the rights and obligations that have been derecognised from the group.

When the Group transfers an insurance contract to a third party and this results in derecognition, the Group adjusts the residual value of the group from which the contract has been derecognised for the difference between the change in the carrying amount to the Group caused by the derecognised fulfilment cash flows and the premium charged by the third party for the transfer.

When the Group derecognises an insurance contract due to modification, it derecognises the original insurance contract and recognises a new one.

The Group has presented the carrying amount of portfolios of insurance contracts as liabilities. Reinsurance contracts are presented as assets.

The Group disaggregates the amounts included in the consolidated income statement and other comprehensive income into a subtotal for the insurance service result comprising insurance revenue and insurance service expenses and a separate subtotal for net insurance finance income or expenses. The Group has voluntarily included net insurance finance income or expenses in another subtotal: net insurance and investment result, which also includes income from all assets used to cover the Group’s insurance obligations. Risk adjustment for non-financial risk is part of the profit/loss from insurance services.

The most important accounting policies relating to financial instruments and used from 1 January 2023 (IFRS 9) are described below.

The most important accounting policies relating to financial instruments and used from 1 January 2023 are described below.

1. Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are recognised in the balance sheet either as “Lending to local government, enterprises and retail customers at fair value through profit/ loss”, “Debt instruments at fair value through profit or loss” or “Equity instruments at fair value through profit or loss”. Interest income and dividends are included in “Net return from investments measured at fair value with changes in value through profit/loss”.

1. Financial assets at amortised cost

Financial assets measured at amortised cost are presented in the balance sheet either as “Interest-bearing securities and other debt instruments at amortised cost”, “Lending to local government, enterprises and retail customers at amortised cost”, “Receivables” or “Cash and bank deposits”. Interest income and write-downs are included in “Net return on investments not measured at fair value with changes in value through profit/loss”. For the banking business, interest income is included in the line “Net interest income banking”. Changes in value that can be linked to objective indications of impairment as well as foreign exchange changes are included in the line “Net return on financial assets”.

1. Financial liabilities measured at amortised cost Debt to and deposits from customers

Issued financial liabilities measured at amortised cost are presented in the balance sheet under the following items:

Hybrid Tier 1 perpetual capital
Subordinated loans
Covered bonds issued
Liabilities to credit institutions
Liabilities to and deposits from customers

Liabilities to and deposits from customers are recognised at fair value in the financial position statement when the deposit is recorded as transferred to the customer’s account. In subsequent periods, liabilities to and deposits from customers are recognised at amortised cost in accordance with the effective interest rate method. The interest costs are included in the line “Net interest income banking”.

Subordinated loans issued are recognised at fair value when they are taken out, adjusted for purchase costs. On subsequent measurement, subordinated loans are recognised at amortised cost using the effective interest rate method. The method is used to allocate the interest costs over a relevant period and is recognised through profit/loss under “Net costs subordinated loans and hybrid Tier 1 securities”. Subordinated loans in foreign currency are translated to NOK on the balance sheet date. Changes in value from changing exchange rates are is recognised through profit/loss under “Net costs subordinated loans and hybrid Tier 1 securities”.

Hybrid Tier 1 securities are recognised at their nominal value on the date of issue and valued subsequently at amortised cost. For hybrid Tier 1 securities hedged against exchange and interest rate changes (fair value hedging), the carrying amount is adjusted by the change in value of the hedged risk. The change in value is recognised through profit/loss under “Net costs subordinated loans and hybrid Tier 1 securities”.

Covered bond loans are initially recognised at fair value adjusted for purchase costs, i.e. nominal value adjusted for any premium/discount on issue. On subsequent measurement the bond loans are valued at amortised cost by the effective interest method. The costs of interest are included in the line “Net interest income banking” in the income statement. Bond loans issued with fixed interest are recognised in accordance with the rules on fair value hedging inasmuch as they are hedged against change in interest rate level.

1. Financial liabilities measured at fair value with changes in value through profit/loss

Financial liabilities measured at fair value with changes in value through profit/loss are presented in the balance sheet under the following items:

Liabilities to credit institutions
Financial derivatives

Liabilities to credit institutions are capitalised at market value on take -up. On subsequent measurement fair value is used when this eliminates or reduces accounting inconsistency. The interest costs are included in the line “Net interest income banking”.

Financial derivatives are recognised at fair value at the time they are contracted. On subsequent measurement the derivatives are recognised at fair value and presented as an asset under “Financial derivatives” if the value is positive and as a liability under “Financial derivatives” if the value is negative.  For derivatives that are not part of any hedging relationship, any gains and losses are recognised as they arise under “Net income from investments measured at fair value through profit or loss”.

1. Hedge accounting

The Group has used hedge accounting in three cases. In one case, hedge accounting is used to hedge hybrid Tier 1 securities issued (the hedged object) against value changes resulting from changes in interest and exchange rates (fair value hedging). The hedging instrument is a combined interest rate and currency swap. The hedging relationship is documented and the effectiveness of the hedge is measured continuously. The other two cases relate to fair value hedging of fixed-rate lending and borrowing hedged with interest rate swaps. The hedging relationship is documented and its effectiveness is measured on a regular basis.

Changes in the fair value of the hedging instrument are included in the income statement under “Net income from investments measured at fair value with changes in value through profit/loss”. Value changes in the hedging object that can be attributed to the hedge risk are booked as a correction to the carrying amount of the hedged object and included in the income statement at the line for “Net costs subordinated loan and hybrid Tier 1 securities” and “Net interest income banking”. In those instances in which a security has inbuilt derivatives that are not separated out, the value of the derivative will be included in the security’s value as a whole.

Investment property is recognised in the balance sheet when it is likely that future economic benefits arising from the property will accrue to the Group, and when the cost of the investment property can be reliably measured. Investment property is recognised at cost including transaction costs. Costs of an investment property under construction are measured at cost until it is completed.

An investment property is derecognised upon disposal, or when it is taken out of use with final effect and the Group does not expect any further financial gain from disposing of the property. The date of disposal of an investment property that is sold is the date when the recipient gains control over the investment property in accordance with the provisions on fulfilment of an obligation in IFRS 15 Revenue from Contracts with Customers.

Investment property must be measured either at cost or at fair value with changes in value through profit/loss. The Group has chosen to use fair value with changes in value through profit/loss. Fair value is measured in accordance with IFRS 13 Fair Value Measurement..

The Group uses a valuation model to estimate market value. The valuation method is based on discounting the expected net cash flow from the property by the market’s return requirements.

In the first instance, the market rent on currently applicable terms is used in calculating net cash flow, whereas for periods after the expiry of contracts an estimated market rent is used. An income deduction is also taken into account for expected vacancy, expected maintenance/improvement costs and normal operating costs.

The expected cash flow is discounted by a return requirement determined on the basis of the risk-free interest rate (10-year Norwegian Government Bond interest rate) adjusted by a supplement for estimate on a 20-year risk-free interest rate. The estimate for the 20-year interest rate corresponds to the slope of the swap curve between 10 and 20 years. The risk-free rate then has a general property risk applied to find the return requirement for prime properties. Finally a risk premium is added which is determined from the willingness of the investors in the property market to accept risk taking account of matters specific to the property such as geography, property type, contracts, tenants and technical state of the property.

A selection from the Group’s property stock is valued quarterly by external, independent and qualified valuers. In the event of significant deviation from our own assessment of fair value, the differences are analysed and the valuation model’s parameters are adjusted if this proves necessary.

Changes in fair value are recognised in the period during which the gain or loss occurs.

Investment property is presented on a separate line in the balance sheet.

Changes in fair value and net rental income are presented in the income statement under “Fair value adjustment of investment properties and rental income”. Any change in the fair value of properties due to exchange rate changes is shown in other comprehensive income under “Currency translation foreign properties”.

• Assessment of significance of insurance risk: The Group applies its judgement in assessing whether a contract transfers to the issuer significant insurance risk. A contract transfers significant insurance risk only if an insured event could cause the Group to pay additional amounts that are significant in any single scenario.
• Contracts issued that provide policyholders with a residual interest in the business: KLP is mutually owned, where the customers on public occupational pensions are also owners of the business. IFRS 17 has defined criteria for what is considered mutual insurance business, where the policyholder is entitled to the net assets of the business. Determining whether an insurance contract provides the policyholder with a residual interest in the mutual entity, requires consideration of all substantive rights and obligations, whether they arise from a contract, law or regulation. A mutual entity accepts risks from each policyholder and pools that risk. The policyholders with a residual interest in the mutual entity bear the pooled risk collectively in their capacity as owners. The insurance contracts affect or are affected by the cash flows to policyholders of other contracts by requiring the policyholder to share with policyholders of other contracts the returns on the same specified pool of underlying items. This would be either:
  • If the policyholder bear a reduction in their share of the returns on the underlying items because of payments to policyholders of other contracts that share in that pool, including payments arising from under guarantees made to policyholders of those other contracts, or
  • If the policyholders of other contracts bears a reduction in their share of returns on the underlying items because of payments to the policyholder, including payments arising from guarantees made to the policyholder.

The Group consider that the insurance contracts issued on public occupational pension provide the policyholders with a residual interest in the Group.

Definition of policyholder: The policyholder is the part of det insurance contract entitled to compensation when an insured event occurs. Some of the insurance contracts issued by the Group, have three related parties, where typically the employer insures its employees. The employer pays the premium, but the employee receives the compensation if an insurance event occurs. The Group has used its judgement to assess who is the policyholder.

• Combination of insurance contracts: Determining whether it is necessary to treat a set or series of insurance contracts as a single contract involves significant judgement and careful consideration. In assessing whether a set or series of insurance contracts achieve, or are designed to achieve, an overall commercial effect, the Group determines whether the rights and obligations are different when looked at together compared to when looked at individually and whether the Group is unable to measure one contract without considering the other.
• Consideration whether there are investment components: The Group considers all terms of contracts it issues to determine whether there are amounts payable to the policyholder inn all circumstances, regardless of contract cancellation, maturity, and the occurrence or non-occurrence of an insured event. Some amounts, once paid by the policyholder, are repayable to the policyholder in all circumstances. The Group considers such payments to meet the definition of an investment component, irrespective of whether the amount repayable varies over the term of the contract as the amount is repayable only after it has first been paid by the policyholder.
• Separation of insurance components of an insurance contract: The Group issues some insurance contracts that combine protection for the policyholder against different types of insurance risks in a single contract. IFRS 17 does not require or permit separating insurance components of an insurance contract unless the legal form of a single contract does not reflect the substance of its contractual rights and obligations. In such cases, separate insurance elements must be recognised. Overriding the ‘single contract’ unit of account presumption involves judgement and is not an accounting policy choice. When determining whether a legal contract reflects its substance or not, the Group considers the interdependency between different risks covered, the ability of all components to lapse independently, and the ability to price and sell the components separately.
• Determination of the contract boundary: The measurement of a group of insurance contracts includes all the future cash flows arising within the contract boundary. In determining which cash flows fall within a contract boundary, the Group considers its substantive rights and obligations arising form the terms of the contract, from applicable law, regulation and customary business practices. Cash flows are considered to be outside of the contract boundary if the Group has the practical ability to reprice existing contracts to reflect their reassessed risks, and if the contract’s pricing for coverage up to the date of reassessment only considers the risks until the next reassessment date. The Group applies its judgement in assessing whether it has the practical ability to set a price that fully reflects all the risks in the contract or portfolio. The Group considers contractual, legal and regulatory restrictions when making its assessment and applies judgement to decide whether these restrictions have commercial substance.
• Identification of portfolios: The Group defines a portfolio as insurance contracts subject to similar risks and managed together. Contracts within the same product and industry line are expected to be in the same portfolio as they are similar risks and are managed together. This assessment of which risks are similar and how contracts are manged requires the exercise of judgement.
• Level of aggregation: The Group applies judgement when distinguishing between contracts that have no significant possibility of becoming onerous and other profitable contracts
• Assessment of directly attributable cash flows: The Group uses judgement in assessing whether cash flows are directly attributable to a specific portfolio of insurance contracts. When estimating fulfilment cash flows, the Group allocates fixed and variable overheads fulfilment cash flows directly attributable to the fulfilment of insurance contracts.
• Level of aggregation for determining the risk adjustment for non-financial risk: IFRS 17 does not define the level at which the risk adjustment for non-financial risk should be determined. The level of aggregation for determining the risk adjustment for non-financial risk is not an accounting policy choice and requires judgement. The Group considers that the benefits of diversification occur at an issuing entity level and therefore determines the risk adjustment for non-financial risk at that level. The diversification benefit is then allocated to all groups of insurance contracts for which it has been considered in aggregate. The Group considers that the risk adjustment for non-financial risk allocated to any individual group, as the cost of uncertainty, cannot be negative. Accordingly, when determining the allocation, correlations of non-financial risk between groups are ignored. This is because they have already been considered as part of the diversification benefits in determining the overall entity-level risk adjustment. The Group allocates the total entity-level risk adjustment to groups bases on the percentage of the group’s expected fulfilment cash flows to the total expected fulfilment cash flows.

• Determination of when there is a significant increase in credit risk on financial instruments valued at amortised cost: The Group has defined trigger points for what is defined as a significant change in credit risk reflecting a change in the calculation of expected credit losses. Loss given default and probability of default are calculated using considerable judgement based on internal and external observable market data.
• Determination of what constitutes an active market for financial instruments: The Group has established requirements for daily turnover as a criterion for whether a market is considered active. The determination is based on discretion.

By applying IFRS 17 to measurement of insurance contracts issued and reinsurance contracts held, the Group has made estimations in the following key areas:

• Future cash flows
• Discount rates
• Risk adjustments for non-financial risk

Every area, including the Group’s estimation methods and assumptions used and other sources of estimation uncertainty are discussed below.

A sensitivity analysis of exposure to insurance risk and its impact on residual value is included in Note 4.

By applying IFRS 13 Fair Value Measurement on investment properties, the Group has made estimations in following areas:

• Future cash flows
• Discount rates

The insurance risk for longevity is the risk of the insured living longer than expected (retirement pensions). Life expectancy has steadily increased over the last decade. Major factors behind this have been developments in medical science, and changes in diet and lifestyle.

The Group uses analyses of its own insurance data and analyses from Statistics Norway (SSB) of population data to look at changes in life expectancy and annual variations in it. In particular, expected future improvements in mortality (increasing life expectancy) are based on estimates from Statistics Norway. The analyses are used to determine the best estimate for future mortality used to calculate expected future cash flows. Data for recent years may be affected by Covid, so it is not clear that insights from recent history can be used to predict the normal situation going forward.

As the retirement pension is lifelong, increased life expectancy will entail payment over a longer period. Public-sector occupational pensions have a built-in longevity adjustment which reduces this effect by reducing the annual benefit as life expectancy increases and vice versa. The longevity adjustment to pensions is calculated by Statistics Norway based on the improvement in life expectancy across the Norwegian population (regardless of gender) and may be different from the improvement in life expectancy in KLP’s membership.

Insurance risk relating to mortality is a risk associated with survivors’ pensions, where the assumptions used differ from our actual experience. This risk is correlated with longevity risk, but has far less impact on KLP’s overall finances.

For disability pensions, the insurance risk is related to whether the trend in disability differs from the assumptions used. Social factors such as business restructuring, changes in the physical and psychological work environment, changes in official regulations and technological development can affect disability. Recent historical data for disability is also affected by the pandemic. So, here again, it is unclear whether this data can be used to predict the normal situation going forward.

In calculating expected future cash flows in the consolidated accounts, the assumptions on disability risk are based on experience from KLP's insured population.

The Board has established a framework for insurance risk and guidelines for follow-up.

The Director of the Actuarial and Product department bears the operational responsibility for managing, measuring and monitoring insurance risk on public-sector occupational pensions. The department analyses the trend in risk on an ongoing basis and prepares regular reports and analyses. The department determines the expected cash flows on the insurance contracts partly on the basis of these analyses.

If the analyses show changes in mortality or disability over time in one or more portfolios of contracts, Actuarial and Product draws up proposals for a new calculation base which is then reviewed by the Group entity's risk management committee chaired by the managing director. The managing director bears the overall responsibility for managing and pricing insurance risk and decides on changes in the basis for calculation. The changes are taken into account in determining future cash flows related to the insurance contracts. The Board is kept informed of the changes.

The Group has an independent actuarial function which checks that the Group’s insurance risk is measured and handled in a satisfactory manner.

The table below shows the effect on the Group’s residual value from changes in the default assumptions used in the best estimates at 31.12.2023 and 31.12.2022. Sensitivity related to costs and transfers out is also included in the overview. The residual value is the part of the insurance obligation that is not included in the best estimate or the risk adjustment. This amount represents a liability of NOK 355 979 million at 31 December 2023, (NOK 337 305 million at 31 December 2022).

Guidelines have been prepared for the types of risks the entity accepts in its portfolio. Risks are generally accepted from customers from within the entity’s primary target groups, provided that the scope of the cover falls within the standard products that the entity offers. Premiums are differentiated on the basis of the individual customer’s risk. In borderline cases, special decision-making procedures are followed before the risk can be taken on. Where there are special risks, limitations in the conditions and scope of coverage will be considered.

The entity reduces its insurance risk, including concentration risk, with reinsurance cover that limits the company's retention per claim.

The entity’s Board of Directors has established a framework for insurance risk and drawn up guidelines for managing this risk. Risk management is handled on a daily basis by the entity’s Finance department. The entity has also established a separate risk management committee comprising the senior management group and three other key employees as permanent participants. The Group has established an independent actuarial function which takes the role of an impartial risk management unit.

The table shows the change in the profit/loss to the entity and the Group’s residual value in the event of changes in key assumptions and parameters used to calculate best estimates.