2019 Integrated Report

GROUP ACCOUNTING POLICIES (CONTINUED) 108 | PPS INTEGRATED REPORT 2019 The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. 3.5 Financial Instruments, owner occupied property (accounting policy note 8) and insurance and investment contract (accounting policy note 4) analysis IFRS 13 indicates a three tier hierarchy for fair value measurement disclosures: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. These are the readily available in the market and are normally obtainable from multiple sources. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: Inputs for the asset or liability that is not based on observable market data (unobservable inputs). 4. INSURANCE AND INVESTMENT CONTRACTS 4.1 Classification of contracts An insurance contract is a contract under which the insurer accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Such contracts may also transfer financial risk. The Group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event that is significantly more than the benefits payable if the insured event did not occur. Insurance contracts are classified in three main categories, depending on the type of insurance risk exposure, namely long-term insurance, short-term insurance and investments. Investment contracts are those contracts that transfer financial risk with no significant insurance risk. These are contracts where the Group does not actively manage the investments of the policyholder over the lifetime of each policy contract. Benefits are linked to the performance of a designated pool of assets, selected based on the policyholder risk appetite. Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. The Group issues long-term insurance contracts that contain a discretionary participation feature (‘DPF’). This feature entitles the contract holder to receive, as a supplement to guaranteed benefits, additional benefits: • that are likely to be a significant portion of the total contractual benefits; • whose amount or timing is contractually at the discretion of the insurer; and • that are contractually based on: i. the performance of a specified pool of contracts or a specified type of contract; ii. realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or iii. the profit or loss of the company, fund or other entity that issues the contract. The classification of contracts is performed at the inception of each contract. The classification of the contract at inception remains the classification of the contract for the remainder of its lifetime, unless the terms of the contract change to such an extent that it is treated as an extinguishment of the existing contract and the issuance of a new contract. 3. FINANCIAL INSTRUMENTS (continued) 3.4 Derecognition of financial assets and financial liabilities (continued)