Scor expects to lose 30% premiums under IFRS 17
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Scor has predicted premiums will be lower by 30% due to the way commissions are reported under IFRS 17, the new accounting standard for insurance contracts taking effect in 2023.
Gross written premiums are an important metric for many insurers to measure the volume of business, but GWP will not be presented in the income statement under IFRS 17, since, as a cash-based measure, it is inconsistent with the concept of ‘revenue’ in IFRS standards. Instead, a new metric – insurance revenue – will be used.
Scor’s chief financial officer Ian Kelly said insurance revenues will be represented in the top line in the income statement.
Under the current standard IFRS 4, the French reinsurer expects to receive GWP of €19bn (£16.6bn) for the full year of 2022. However, the new metric - insurance revenue - is expected to be cut by around 30% under IFRS 17 “due to the netting of commissions”, said Kelly.
Breaking it down to types of business, the figure is expected to be lower by 40% for the firm’s property and casualty business and by 25% for the life and health business.
Other factors affecting insurance revenue include changes in unearned premiums and, for the firm’s life and health business, the difference in timing of profit recognition, according to Scor’s presentation slides to investors.
Kelly argued the new metric will better represent the risk premium associated with the business.
Speaking at Scor’s investor day on Wednesday, Kelly added: “There could be a similar variation seen across other groups outside of Scor, but obviously the extent of changes is going to vary depending on the business mix of that individual group.”
Combined ratio remains but measured differently
For the non-life sector, an important key metric is the combined ratio, which measures the profitability of a firm. A ratio above 100% means a company is paying out more money in claims than it is receiving from premiums. Therefore, the lower the figure, the better it is for an insurer.
Some experts believe non-life firms will continue to disclose a combined ratio even after IFRS 17 is implemented, but it is unclear whether adjustments will be made.
As Scor transitions to IFRS 17, Kelly said there will be an IFRS combined ratio for P&C, which will appear “slightly better” than under IFRS 4.
He told investors on the numerator (comprising expected claims, expected expenses and experience variance), claims and expenses will be lower due to the discounting effects and exclusion of certain items such as commission and non-attributable expenses.
The denominator, which is the insurance revenue, will also be lower compared to the current basis following the exclusion of commissions, he added.
“However in aggregate, we expect the effects on the numerator to be higher than the denominator and overall, the P&C combined ratio to reduce as a result under IFRS 17.”
IFRS 17 to be closely aligned with Solvency II
Kelly said a new core IFRS 17 metric, the ‘economic value’, will be similar to the Solvency II framework.
The metric is measured as the sum of shareholders’ equity (which accounts for around 50-60% of the economic value) plus the contractual service margin (accounting for around 40-50%).
According to the firm, this metric is closely aligned with Solvency II because future cashflows are recognised using a best estimate basis, the measure is consistent with key best estimate assumptions and the calculation approach for risk adjustment and risk margin is broadly consistent and based on the internal model.
“There’s a convergence between Solvency II and IFRS 17 which allows for more consistent management of the business under regulatory capital and accounting perspective,” Kelly said.
“Scor is a capital driven company, which means our business decisions are based upon our on internal model. Under IFRS 17, our accounting view will be much more closely aligned with the Solvency II view. This results in our real economic value to be better reflected into IFRS 17 than in IFRS 4.”
Scor expects to generate an economic value at the transition to IFRS 17 of more than €9bn.
The CSM “represents the expected future earnings on business that we’ve written, which flows to equity as we provide the service to the business”, said Kelly.
The CFO added 90% of the stock of CSM is related to Scor’s life business and will be the main driver of the life earnings going forward.
“We do expect to see a strong new business CSM generation from both engines, life and P&C. The stock of CSM is principally represented by the life future profits but a strong generation of CSM that we see coming from both life and P&C will unwind into equity, with that P&C CSM unwinding much quicker.”
Profit recognition changes but underlying business does not change
Kelly told investors the company is well prepared for the transition to IFRS 17 and is working through the finalisation of 2022 comparative figures. More guidance on key IFRS 17 indicators will be provided during the full year results of March 2023.
“It’s important to mention this is a new transition to a new accounting standard but the underlying business does not change, nor does our strategy, nor the way we do business. What we’ll see is the change in the recognition of rhythm of future life profits and the amortisation of CSM,” he said.
“We expect IFRS 17 to add more transparency in the disclosure of financial accounts but also more volatility, but overall to better reflect the true economic value of our business. So overall we believe it’s good news to the industry and good news to Scor.”
Are your firm’s IFRS 17 KPIs similar to Scor’s?
