PwC sees insurers increasingly capture Net Capital Generation next to IFRS in their main multi-year financial performance targets. However, consistent measurement and definition of the target is lacking. Through a widely accepted and applied standard insurers can guide their performance year-on-year and shareholders can rely on a consistent measure of performance compared to other market participants.
Insurers disclose their financial performance of the fiscal year via several key performance indicators (“KPI”), within the IFRS framework as well as the Solvency II framework. Over the last years we observed an increasing need for insight in the development of the solvency position and the creation of free or distributable capital, as opposed to the IFRS result. The Solvency II framework benefitting from the insight in new business vs portfolio effects, which is lacking in the current IFRS4 framework. Insurers - from a strategic decision making and dividend paying perspective - as well as shareholders and analysts - from an investing and rating perspective - have aimed to measure and disclose “profit”, “value creation” and/or “return on equity” within the Solvency II framework. Focus on the solvency position, own funds development, required capital and resulting creation of free capital plays an important role in optimizing the balance between immediate capital relief by improving the Solvency II ratio (“stock effect”) and improving future capital generation (“flow effect”). In absence of a standard, insurers have started several initiatives to develop a metric.
The initiatives relate to terminology as well as to definition. Nowadays, multiple terminologies are used: Operating Capital Generation, Normalized Capital Generation, Organic Capital Creation (further referred to as “Operating Net Capital Generation” or “ONCG”), and so forth. The Operating/Normalized/Organic terminology is usually defined as the change in Own Funds excluding one-off events, economic variances and capital flows. The word Net in Operating Net Capital Generation usually refers to the inclusion of the changes in Solvency Capital Requirement (“SCR”). One-off events and their interpretation are a grey area and subject to change. This creates noise regarding transparency and comparability between insurance companies and demands for a naming convention and applicable Standard.
A Net Capital Generation Standard guides insurers on their core goal of improved current performance and stable future profit generation while simultaneously fulfilling the wish of financial analysts and shareholders for consistent, transparent, and comparable disclosure of the financial strength, performance, and stability of insurers. Furthermore, it is beneficial to the credibility of the insurance sector as a whole. Finally, it becomes more and more important to compare and bridge different KPIs, e.g. Solvency II O(N)CG and IFRS Operating Result. This will become even more important once IFRS 17 will be implemented. That is why we argue for a Net Capital Generation standard in the near future.
PwC can provide guidance, advisory services, impact assessments, market analysis for any insurer looking to adopt, adjust or improve their Net Capital Generation and/or the bridge with IFRS (operating) results in their financial reporting. This includes questions about how to organize and project your data.