Insurance Service Result

Study guide: Exam 6C

The Insurance Service Result is IFRS 17's measure of underwriting performance: Insurance Revenue less Insurance Service Expenses, less the net expense from reinsurance contracts held. It excludes all investment return and all interest-rate effects, which are reported separately as Insurance Finance Income or Expenses.

\text{ISR} = \text{Insurance revenue} - \text{Insurance service expenses} - \text{Net reinsurance expense}

• The point of the separation. Under previous presentations, investment income and the unwinding of discount were mixed into an insurer's results, so a fall in interest rates could flatter or damage a figure meant to describe underwriting. The ISR isolates the question "did we price and select the business well?"
• The IFRS 17 income statement structure, in order: insurance revenue, insurance service expenses, net expense from reinsurance held → insurance service result; then insurance finance income or expenses and investment income → net financial result; the two summing to profit before tax.
• Reinsurance appears as a single net line in the ISR, so a heavily reinsured insurer shows large gross revenue and expenses and a large negative reinsurance line, rather than netted figures.
• Relation to the combined ratio. The ISR is close to an underwriting result, but the two are not identical: revenue excludes deposit components and loss-component amounts, expenses exclude discount unwind, and reinsurance is presented net. An insurer's disclosed combined ratio and its ISR should be reconcilable but will not match line for line.
• What can distort it: a large onerous group charge lands entirely in one period; a change in the Coverage Units driver changes CSM release; and a risk adjustment release pattern that differs from claim emergence shifts profit between periods.

Building the Income Statement For the year: insurance revenue \$480 million; claims and expenses incurred \$390 million; acquisition amortisation \$62 million; a loss on an onerous group \$9 million; ceded premium relating to coverage received \$70 million; amounts recoverable from reinsurers on incurred claims \$48 million; unwinding of discount on liabilities \$16 million; investment income \$95 million.

Present the result.

Answer Insurance service expenses:

\begin{align*}
&= \$390\text{M} + \$62\text{M} + \$9\text{M} \\
&= \$461\text{M}
\end{align*}

Net expense from reinsurance held:

\$70\text{M} - \$48\text{M} = \$22\text{M}

Insurance service result:

\begin{align*}
\text{ISR} &= \$480\text{M} - \$461\text{M} - \$22\text{M} \\
&= -\$3\text{M}
\end{align*}

Net financial result:

\$95\text{M} - \$16\text{M} = \$79\text{M}

Profit before tax:

-\$3\text{M} + \$79\text{M} = \$76\text{M}

What the presentation reveals. The insurer reports a healthy \$76 million profit — and an underwriting result of negative \$3 million. Every dollar of profit came from investment return.

That is precisely the information the old presentation obscured, and it is the reason the ISR exists. An insurer running at a small underwriting loss funded by investment income is viable while rates hold, and exposed the moment they do not. A reader of the pre-IFRS-17 income statement would have seen only the \$76 million.