Financial reporting, valuation of liabilities and performance analysis
This domain covers how liabilities are valued and how performance is reported - IFRS 17 for published accounts, Solvency UK for regulatory capital, and the ratio analysis that judges whether the book is profitable.
Valuation frameworks
- IFRS 17 (effective 1 January 2023): groups of contracts; the general model is a best estimate of future cash flows plus a risk adjustment for non-financial risk plus a contractual service margin released over the cover period. The premium allocation approach is a permitted simplification for short-duration business; the liability for incurred claims is discounted.
- Onerous contracts at inception create a loss component, not a CSM. Acquisition cash flows are recognised with the related group.
- Solvency UK: best estimate plus risk margin, with a matching adjustment where eligible.
Performance
- Accident, underwriting and calendar year bases differ: underwriting year results move as reserves develop, so releases flatter calendar year results.
- Combined ratio = loss ratio + expense ratio + commission ratio; quote it ex-catastrophe and split out prior-year releases; compare with investment return on the float.
Worked example
Earned premium 100, incurred claims 62, expenses 18, commission 12: combined ratio = 92%, an underwriting profit of 8. With investment income of 4, the operating ratio is 88%. If 6 of the claims figure came from prior-year releases, the accident-year combined ratio is 98% - the figure that tests current pricing adequacy. Showing both, plus the IFRS 17 service result, is what earns marks.
Traps
Calling a sub-100 combined ratio profitable without capital cost; confusing CSM release with cash; mixing discounted and undiscounted figures.