South African insurers are generally well capitalised, with significant volumes of discretionary margins in their IFRS reserves and very healthy regulatory solvency ratios. However, given the new balance sheet measurement approach under IFRS17, buffers in reserves will flow through to their IFRS equity upon transition. This will have significant implications for how insurance companies’ performance is viewed by investors from a return on equity (RoE) perspective. In order to avoid a significant reduction in future RoE and consequently in shareholder value, insurers may need to consider a capital optimisation journey leading up to IFRS17, in order to move to a lean but resilient capital base.
To do so, we as an insurance industry will not only have to reconsider how we manage margins in IFRS reserves, but also how we build up resilience in our insurance business in order to ensure that solvency ratios do not constrain release of equity post IFRS17. This will require the use of appropriate decision criteria in order to enable an optimal balance between returns and equity/capital once IFRS17 applies, to ensure that RoE can be managed and maximised now and in the future.
Strategic balance sheet optimisation can enable this, however, it is not something that can be implemented in a short period of time. It requires the development of metrics that are fit for purpose, to get buy-in from all stakeholders who will use these, to setup reporting and monitoring processes and to amend how we measure performance internally. These are required in order to embed capital optimisation into all areas of the business, like product development and pricing, investment decision-making, capital management, business planning and M&As.
In this session, we will outline a range of outcomes by means of a case study of a life insurer under two scenarios:
1) It does not start making changes in its capital management approach under IFRS4 leading up to IFRS17, and
2) It implements strategic balance sheet optimisation techniques, covering assets and liabilities, throughout its IFRS17 implementation journey.
1) How will IFRS17 impact insurers’ RoE if they do not start implementing changes in capital management now?
2) What does strategic balance sheet optimisation entail, what techniques can be applied and what could the impact of these be following the implementation of IFRS17?
3) How can insurers ensure they maintain a credible investor story post IFRS17?