This raises an important question: Should developing markets, including South Africa, adopt SFCR-style public disclosures? How do weigh the costs and benefits, and is this calculus different than in Europe?

The Case for Public SFCR Reporting

Enhancing Industry-Wide Risk Management

• Public disclosures let insurers benchmark themselves against their peers, highlighting best practices and exposing weaknesses.
• Insurers gain valuable insights into what “good” looks like, thus driving overall improvements in industry risk management standards.
• To my own interests, having more detailed information to understand the insurance sector and perform benchmarking would be invaluable. Hopefully my work has some value for individual insurers and maybe even the industry as a whole, but I recognise this point may have less weight for others.

Transparency and Trust

• Detailed reports provide analysts and policyholders with greater clarity into insurers’ operations, solvency, and risk strategies.
• It becomes significantly more challenging for insurers to differently represent (a range from gentle positioning to heavy spin to outright misrepresentation) their financial or risk positions to different stakeholders such as management, control functions, boards, analysts, and regulators when comprehensive information is publicly available.

Better Stakeholder Discipline

• Enhanced transparency makes it more difficult for insurers to conceal emerging solvency or risk issues, thus prompting earlier and more effective regulatory or market intervention.
• Analysts and rating agencies benefit from having direct access to consistent, detailed data, promoting market discipline and investor confidence.

The Downsides and Challenges

Cost and Complexity

• Producing detailed SFCR-style reports is resource-intensive, requiring substantial actuarial expertise, time, and money—resources that are often scarce in developing markets. This is not generally true in South Africa, but is absolutely true across the rest of the continent. Anyway, just because there are resources in South Africa doesn’t automatically mean this is the best use of their time, or that additional demands on these resources won’t impact the supply-demand equating level of salaries and therefore costs for insurers.
• Many insurers in developing markets face significant skills shortages, making it challenging to produce consistently high-quality reports. The level of current internal reporting could benefit from additional resources and time as it is.

Competitive Sensitivities

• Public disclosures risk exposing sensitive strategic insights to competitors, potentially placing companies at a disadvantage in competitive markets. This is often mentioned by insurers – it came out with the original IFRS4 disclosure requirements and again with the IFRS17 disclosure requirements.
• The thing is – I don’t know how many people trawl through competitor financial disclosures to uncover secret strategic source. I’m not dismissing the point, but I am questioning how much of an issue this is. With staff turnover and rotation through industry, there are plenty of mechanisms for more crucial practices to disperse across insurers.

Quality and Utility Concerns

• My experience across large numbers of South African insurers suggests that many insurers already go through the motions, incurring costs without value, in producing ORSA (Own Risk and Solvency Assessment) reports that are not used internally for anything other than compliance.
• Without careful oversight, SFCR-style reports risk becoming tick-box exercises—costly documents that serve regulatory compliance rather than genuine risk management.

Finding the Right Balance

Considering these points, adopting SFCR-style public reporting in South Africa and other developing markets should be approached cautiously:

• Incremental Implementation: Gradually introduce public disclosures, starting with key sections but with a clear roadmap so that insurers know now what they are building towards. There is merit in starting and producing something rather than having endless projects to produce some grand opus in 5 years’ time.
• Proportionality Principle: Ensure reporting requirements align with the insurer’s size and complexity – but this can’t mean that small insurers do nothing. The relevance of risks to each insurers must be considered.
• Standardisation with Flexibility: Provide clear reporting templates to minimise redundancy, enabling insurers to leverage internal reports such as ORSAs, thereby enhancing ongoing risk management practices. There is value in allowing insurers to customise their approach, especially for an ORSA, so that it is most useful for their internal purposes. However, the SFCR is an external document. There is arguably greater merit in standardisation for the reader (ease of navigation, ease of comparability) and for the producer (less time spent changing structure and content and wondering what is expected). Sometimes paint by numbers can great bang for buck.

Final Thoughts

Public SFCR reporting undeniably offers valuable transparency, improves risk management practices, and strengthens market discipline. However, the real challenge is striking a balance—achieving meaningful disclosures without imposing excessive burdens. If implemented thoughtfully, tailored to market realities, and aligned with insurers’ practical capacities, SFCR-style reports could become an essential part of strengthening insurance markets in South Africa and beyond.

In a world where even detailed internal reports like the ORSA are often unread compliance artefacts, is it naïve to think public SFCRs will be any better? Maybe. But transparency has a strange way of forcing people to care. It may be that the SFCR, being publicly available to analysts, regulators, academic researchers, students, and consultants (!) will find more traction and more use than most ORSAs.

The act of writing for an external audience can clean up fuzzy thinking and force clearer articulation of risk positions—something that internal-only reports often fail to achieve. It’s one thing to desire diverse views on a Board, but group-think and anchoring are all too common. I’ve lost track of the number of times the discipline of writing things down has made me realise the ideas in my head weren’t quite as brilliant or even consistent as I’d thought.

Perhaps SFCRs can do that at scale.

Risk Appetite Measures and Limits

Risk appetite articulates the level of risk an organisation is willing to accept in pursuit of its goals. This encompasses various metrics and limits that inform decision-making, balancing the pursuit of opportunities with sound risk management. Clear and transparent risk measures empower organisations to evaluate their risk exposure and make informed decisions.

Common measures might include SCR cover, Earnings at Risk, Maximum Single Loss, Maximum and Minimum claims ratios, among others.

Good vs. Bad Reasons to Change Risk Appetite Measures

Organisations frequently confront pressures to adjust their risk measures. Understanding the motivations behind these changes is crucial for effective governance.

Bad Reasons to Change Risk Measures

1. Risk Normalisation: Organisations can become desensitised to risk, gradually accepting higher levels as “normal.” This often surfaces when:
   • Risk indicators linger in amber or red for extended periods without corrective action.
   • Erosion of margins is attributed to market conditions rather than acknowledged underlying issues.
   • Management pressures lead to subjective adjustments of risk ratings to green, creating a façade of control.
   This normalisation breeds complacency, masking potential crises that may arise when unaddressed risks materialise.
2. Strategic Helplessness: When organisations cite perceived limitations—such as outdated systems or legacy portfolios—as reasons for inaction, they fall into a trap of strategic helplessness. Research by Power, Ashby, and Palermo indicates that this can lead to:
   • Ignoring legacy challenges until they escalate to critical levels.
   • Cultivating a culture that discourages acknowledging risks, perpetuating a cycle of poor decision-making.
3. Cultural Complacency: When risk management becomes an afterthought, adjustments to risk measures may reflect organisational inertia rather than genuine risk appetite. This can result in:
   • Diminished engagement from risk teams who feel sidelined in decision-making.
   • A growing disconnect between stated risk appetites and actual practices.

Good Reasons to Change Risk Measures

In contrast, there are valid motivations for revisiting risk appetite measures:

1. Regulatory Changes: New regulations can necessitate adjustments in risk management practices. The introduction of IFRS 17, for example, represents a significant shift in how insurers recognise earnings and assess risk, prompting a thorough reassessment of existing measures.
2. Evolving Market Conditions: Shifts in the external environment, such as economic fluctuations or emerging risks, may require organisations to recalibrate their risk appetite to remain competitive and responsive.
3. New Data and Insights: Advances in data analytics and innovative thinking can enhance calibration processes, enabling organisations to refine their risk measures more accurately. Incorporating new methodologies allows for a more nuanced understanding of risk exposure and leads to more informed decision-making.
4. Strategic Objectives: As organisations evolve and pursue new goals, reassessing risk appetite becomes essential to ensure alignment with broader business strategies.

Example: IFRS 17

The implementation of IFRS 17 demands changes in limits relating to profit, presenting an opportunity for a broader overhaul of risk management frameworks.

Changes to Earnings Recognition and Volatility

IFRS 17 alters earnings recognition by replacing compulsory margins, zeroisation, and discretionary margins—with potentially dramatic impacts on investment guarantee reserves and related insurance contracts—with the Contractual Service Margin (CSM). Key implications include:

• The CSM applies only to profitable contracts and offsets non-economic assumption changes, potentially increasing overall volatility.
• Insurers with minimal prior margins may experience a decrease in volatility as a result of these changes.
• Different choices regarding risk adjustment levels and classifications of directly attributable expenses will impact the size of the CSM, affecting the assessment of onerous contracts and the degree to which severe stresses can deplete the CSM.

IFRS 17 introduces significant complexities related to risks arising from the CSM:

• Matching the CSM is particularly challenging, especially with how it accrues interest based on forward rates locked in over prior decades.
• Insurers now face more intricate decisions regarding whether to hedge Embedded Value (EV), solvency, or IFRS earnings, necessitating a reevaluation of existing risk management strategies.

These changes may require risk limits to adjust with a new subjective acceptance of risk or could place greater pressure to manage risk elsewhere to offset this new volatility.

By recognising these shifts, organisations can make informed decisions about adjusting their risk appetite measures and limits in a manner that reinforces governance and accountability.

Conclusion

Effective risk management in insurance requires a sophisticated understanding of risk appetite measures and the motivations behind changes to these frameworks. By distinguishing between detrimental reasons for adjustment—such as the pitfalls of risk normalisation and strategic helplessness—versus constructive motivations like regulatory changes, shifts in the market, and additional data for calibration, risk functions can seize the opportunity to enhance their risk management systems.

If you zoom our far enough, all the differences disappear. But up close, the departures are key.

I have been pondering whether IFRS17 makes life interesting for microinsurers given the wording of FSM2 “Valuation of Assets, Liabilities and Eligible Own Funds” for microinsurers (issued by the PA). The interpretation and application challenges actually predate IFRS17. FSM2 makes some silent and unlikely assumptions around treatment of premium debtors for typical microinsurance business. More on that in a future article.

IFRS17 does make life interesting (in the worst meaning of the word) for microinsurers, in that they must all apply IFRS17 to their insurance contracts. There’s no reason not to apply the Premium Allocation Approach given restrictions on policy term – and this simplifies many of the calculations significantly. Whether the audit firms looking at microinsurers understand IFRS17 or the required disclosures is an important quite separate topic, but one which must be resolved independent of the prudential reporting basis itself.

So here’s a wild idea. Why not drop FSM2 altogether and align the prudential balance sheet with the IFRS one?

I don’t remember looking at this, but the blog entry was actually about insider trading and the information content of directors’ dealings. Here is a quote showing some wisdom and a near miss:

Am I going to invest in Steinhoff? Well, no, not yet, not until I have actually done some proper research into the fundamentals of the company. And also not until I have understood the reasons for the decline in price over the last year properly. If the market thinks they are worth less, I had better know why the market thinks so before I disagree too strongly.

Having said that, I pay careful attention to knowledgeable insiders when they put their money where there collective mouths are and vote with their personal wealth and risk appetites that a company is a good bet.

I never sufficiently understood the fundamentals of the business and how it related to their accounts and valuation. Score one for then not investing.

However, I was also saying that I saw value in following directors’ dealing and possible positives from directors investing in their own stock. In the case of Steinhoff, it’s hard to separate out:

• true belief in their business;
• attempts to demonstrate confidence in the shares (whether or not the confidence was actually held); from
• artificial attempts to prop up the share price

I have less time for fundamental analysis these days so low cost trackers is more my flavour. Given my mixed success in the past, perhaps that’s just as well.

Take ancillary capital as an example. To my mind, the basic principle is clear. I’ve validated this principle in discussions with Capital Requirements Task Group members, SAM Pillar 1 Subcommittee members, multiple actuaries familiar with the Solvency II principles and delegated acts on which we have based on South African rules. Here is the practical definition of “Ancillary Own Funds†

Ancillary own funds are sources of capital that are not on the balance sheet, but could become Basic Own Funds in certain circumstances. As such, they can still sometimes be used to demonstrate solvency.

Basic Own Funds then are on balance sheet items that contribute capital. These are the excess of assets of total liabilities, with very specific types of subordinated liabilities “added back† because they can absorb losses and meet other criteria. There are a few specific rules about other regulatory deductions form Own Funds, but generally, that is it.

(As an aside, the tiering of capital has almost nothing to do with how your assets are invested, and almost everything to do with the sources of capital. This is another recurring puzzle I find myself explaining a couple of times a month for some reason.)

Here’s one odd thing. Since the Solvency Capital Requirement (SCR) is determined as the change in Basic Own Funds in various adverse scenarios, the possible change in creditworthiness or even outright default of a provider of a letter of credit or guarantee or undrawn loan facility has no impact on the SCR. This is part of the reason the use of Ancillary Own Funds requires explicit approval from the Prudential Authority.

If I were to change the formula, I would add change in Ancillary Own Funds to the SCR. I have yet to see a compelling reason to exclude it.

A recent example relates to the common non-life practice of not discounting claims reserves.  Solvency II, SAM and IFRS17 moves to require discounting aside, it is still more a common GAAP approach to not discount than to discount claims reserves.

Discounting or fiddling with inflation has some obvious implications for analysing actual vs expected analysis, reserve run offs, and reserve adequacy analysis. That some non-life reserving actuaries trip over because it’s more natural in the life space.

But, first, why are non-life reserves so often not discounted? There are several reasons typically given:

• (1) Claim cash flows are too uncertain, therefore it’s not possible to know what term discount rate to apply.

This is mostly a weak reason. In insurance, all cash flows are uncertain to some or other extent. We are discounted expected values with an implied or explicit assumed probability distribution and will usually have some sense of the timing of cash flows. Large claims will cause noise in the analysis of timing and investment returns, but large claims will always cause more noise in the underlying underwriting performance anyway.

There is a link to point #5, which has merit in my mind.

• (2) Claim payment periods are usually short, so it doesn’t make a material difference to the result, while increasing complexity.

I’ll consider this combined with #3 below as they are closely related.

• (3) Interest rates are low, so it doesn’t make much difference.

Yes, discounting increases complexity. And where the claim development periods are truly short and interest rates are moderate or low, it might not be worth it.

Accounting has “materiality”, Solvency II and SAM have “proportionality” and most actuaries would apply some level of judgement around “significance”. Interestingly, none of these terms is usually well defined or, maybe more concerningly, consistently applied.

However, operating in a range of developing markets with inflation and discount rates anywhere from 3% to 25% means that even fairly short development periods can have a significant impact. The answer surely has to be “perform some quick testing to demonstrate the potential magnitude of the difference to inform a decision” rather than always just ignore it as a rule?

• (4) We want to be conservative and this introduces an element of conservatism.

This is an argument I have accepted before, but still isn’t the best way to handle this. If conservatism or profit deferral or market value margins are required, then the magnitude and run-off of these margins should be deliberate rather than arbitrary.

I’ve also seen versions of “We haven’t allowed for ULAE so these two offset, another version where the end result might not be that different but reflects a weak methodology subject to producing materially incorrect results if discounting and ULAE allowances begin to diverge.

• (5) Our actual investments need to be extremely liquid given the need to pay out large claims at short notice. Therefore we aren’t able to earn the yield implied by the yield curve. We don’t want to incur strains in future as our assets earn less than the unwind of the liabilities.

As I highlighted in #1 above, this is a real issue.  The operational and risk management necessity of maintaining sufficient liquidity, particularly in markets where the instruments used to derive the “risk free yield curve” are not necessarily liquid at all, causes a departure between the rates that theoretically (and naively) should be used to discount and what can actually be reasonably earned on backing assets.

How this issue is dealt with practically is a matter of applicable regulation and standards, professional guidance, past practice and documented policies, the purpose for which the results are being produced, and a good dose of judgement.

• (6) A related point to (5) is that insurers don’t want to show interest rate sensitive liabilities, especially when assets are not well matched.

Assets may not be well matched due to bad reasons, but also the need for liquidity, which in certain markets means duration = 0.

In part 2, how discounting and inflation adjusting interact. Part 3 will finally address the AvE, reserve adequacy analysis and impact on P&L.

Check out part 2

Check out part 3 (not yet available)