Munich Re: IFRS 17 insurance revenues ‘significantly lower’ than GWP for reinsurance
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The chief financial officer of Munich Re has had to spend some time explaining to investors and analysts why its insurance revenues – a new metric from IFRS 17 – will be much lower than premiums written for its reinsurance division.
This is because certain commissions have to be deducted with the accounting change, according to CFO Christoph Jurecka, and also due to the firm’s “conservative accounting assumptions” and the granularity of the company’s interpretation.
Premiums will no longer be presented under IFRS 17. “Insurance revenues” will be used instead and are expected to reach €58bn for 2023, of which €39bn will originate from reinsurance and €19bn from ERGO, the firm’s primary insurance group.
However, the €58bn figure is €12bn lower than what would have been an expected €70bn gross written premiums.
Jurecka told investors the impact was relatively stable for ERGO, as insurance revenues will only be €1bn lower than the expected €20bn GWP. The impact is much bigger in the group’s reinsurance business, as revenues in this division are expected to be €11bn lower than the expected €50bn GWP.
“Insurance revenue will be significantly lower, particularly in reinsurance… This is also something just different for reinsurance compared to primary insurance,” Jurecka said during Munich Re’s Investor Day yesterday.
He said this was due to commissions being netted off from the turnover.
“The reason [for the revenues being lower than premiums) is that we have to exclude fixed commissions, which go back to the client, not to brokers,” Jurecka said.
“In simple terms, every cash flow, which would flow back to the client under all circumstances, has to be deducted from the turnover to reduce it to a comparable level. This is what's happening here. Therefore, this insurance revenue number is so much smaller.”
He added another component being deducted from insurance revenues are profit commissions which, in accounting language, are called ‘non-distinct investment component’.
Under IFRS 17, insurers are required to identify any investment component within an insurance contract and exclude it from insurance revenue and insurance service expenses in profit or loss.
Towards the end of the presentation, Jurecka said the translation of company figures to IFRS 17 has been “a little bit conservative” given the uncertainties in the methodologies being used and the fact that the team has no experience with the standard, which is due to roll out next month.
Are re/insurers generally conservative enough in their IFRS 17 implementation?
