Hello and welcome to Gjensidige IFRS 17 webinar. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero, and you'll be connected to an operator. I will now hand over to your host, Mitra Negård, to begin today's conference. Thank you.
Thank you. Good morning, everyone, and welcome to our education session on IFRS 9 and 17. My name is Mitra Negård, and I'm head of IR. With me here today are our two speakers, our Chief Financial Officer, Jostein Amdal, and Chief Accountant, Karen-Elise Berg Christoffersen. The presentations will take approximately 30 minutes. We will open up for questions after the presentations. Our Chief Actuary, Simen Gaarder , will join us in this session together with the speakers. This webcast is being recorded and will be posted on our website later today. The slide deck and a transition guide on this topic were made available on our website this morning. So, without further ado, I hand the word over to Jostein.
Thank you, Mitra, and good morning, everyone. My name is Jostein Amdal, and I'm CFO in Gjensidige. In today's session, we will run through the key impacts from adopting IFRS 9 and 17 based on the best of our knowledge. However, it's important to emphasize that the figures are preliminary and may be subject to change up until the audited financial statement of 2023 is finalized. We have been preparing for the transition for quite some time, and we're ready to report according to the new standards from the first quarter of next year. Turning over to page four, let's look into the key implications of the new standards. The most important message is that the fundamentals of our business remain unchanged. The new accounting standards do not change underlying cash flows or our dividend capacity.
The adoption of the new accounting standards will impact where, when, and how specific items are recognized in our financial statements. Our strategy, risk appetite, and operations are not affected by this. Earnings will be very little affected, and our dividend policy will be the same. Accounting changes do not affect the solvency situation, which is the basis for dividend assessments. We will see a few changes in our reporting. The 2022 opening balance of equity will be lower than under the current accounting standard, IFRS 4. This is mainly a consequence of risk adjustment and delayed profit recognition for our pension business. There will only be a minor impact on our general insurance result. You'll see some changes in the way we calculate certain KPIs for our general insurance business, without this changing the way we gauge our performance.
The most significant impact of the new standards will be on our pension business, with results being more volatile as a consequence of applying a market-based interest rate for discounting purposes and fair value on financial assets. The company accounts of the pension business will still be prepared according to IFRS 4, but in the group accounts, pension will be included according to IFRS 9 and 17, and we might see some tax effects, although it is too early to conclude as the industry is waiting for regulatory decision on this matter. Turning over to page five, we have reviewed our annual financial targets starting from 2023 on the basis of the new accounting standards. We have also looked into the expected effects on our results from the current interest rates, which are materially different from where they were when we set our targets one year ago.
Our revised combined ratio target is brought down to below 84%. The change of one percentage point is a technical adjustment, primarily reflecting the effect of discounting all reserves under IFRS 17, as opposed to approximately 20% of reserves today under IFRS 4. There will also be a small effect from a larger premium base in the denominator, as insurance revenue is a gross figure before ceding premiums to reinsurance. IFRS 17 will have a positive impact on the cost ratio as well, although not material, which is the reason why we've left this target unchanged. This stems from a reallocation of some costs to other expenses, as well as the denominator being insurance revenue, which again is a gross number. We'll continue to deliver a cost ratio below 14%.
We have taken the opportunity to adjust our return on equity target as well, raising the bar by one percentage point to above 20% to reflect higher interest rates. The contraction of the opening balance of equity also contributes positively, although to a much smaller extent. I would describe these changes as mainly technical. The outlook for our business is good and no different from our recent communication. Thus, we do not see any reason to make any further adjustments to our financial targets at this point. Turning over to page six, and a few words about the measurement approaches we will be applying. With most insurance contracts having a duration of 12 months, our general insurance business is eligible for applying the Premium Allocation Approach, also called the simplified approach. The main difference from IFRS 4 is the discounting of all reserves and the introduction of risk adjustment.
For our pension business, as a main rule, all the insurance contracts will be accounted for according to the building block approach. As this part of our business accounts for a very small share of group revenues, the simplified approach will be the main model for our accounts. The investment contracts in our pension business are based on unit-linked products, both occupational and private. As there are no insurance elements embedded in these contracts, they will be measured according to IFRS 9, resulting in the value of liabilities mirroring the value of the investments measured at fair value and changes recorded through the P&L. Let's have a brief look at the key elements in the new standards on page seven. As mentioned under IFRS 4, we have discounted approximately 20% of our reserves. IFRS 17 will call for discounting of all claims irrelevant to the payment period.
A few new elements will be introduced in our accounts. Risk adjustment is a new liability under IFRS 17, reflecting the compensation required for uncertainty in cash flows. Contractual Service Margin is a second one. This is also a new liability and applies under the Building Block Approach. The liability is related to our pension business and will reflect the earned profit for providing future insurance coverage. According to IFRS 9, which applies to both our general insurance and pension business, all financial assets will be recognized at fair value through profit or loss. Today, we use amortized cost for a significant part of the fixed income instruments in the match portfolio. With these changes, both technical reserves and the match portfolio are measured on the same basis in the accounts.
We will also see changes in the presentation of selected lines in our financial accounts, with the most important changes being the introduction of insurance service result, which is similar to the current underwriting result for general insurance. Insurance revenues will be reported on a gross basis before deducting reinsurance premiums. There are two new terms for the insurance liabilities: liability for incurred claims, replacing the claims provision, and liability for remaining coverage, replacing the premium reserves and provision for unearned premiums. Over to page eight. As mentioned, the equity in the 2022 opening balance for the group is lower under IFRS 17. You can see the difference of approximately NOK 700 million kroner explained on the chart here.
One of the largest drivers behind this is the exclusion of identified excess reserves, one billion as of the 1st of January this year, and new models for calculating insurance liabilities for our pension business. According to IFRS 17, it is not possible to retain excess reserves on the balance sheet, and the reserves we will be accounting for, according to our best estimate. Discounting all claims reserves for our general insurance business has a positive effect of approximately 700 million. This is partly offset by the effect of replacing guaranteed interest rates with market interest rates for our pension business when discounting the insurance liabilities. The addition of risk adjustment to our general insurance and pension reserves reduces equity by 2.5 billion, and the contractual service margin on our pension business deducts another 800 million.
Changing the valuation of financial assets recognized at amortized cost to fair value through profit or loss increases equity by NOK 500 million. Over to page nine. IFRS 17 discount rates may be based on either a top-down or a bottom-up approach. We have chosen the latter for both general insurance and pension. For general insurance, we apply swap rates for the different relevant currencies. These are liquid, well-known, and easily available. Our liabilities in general insurance have mainly short to medium-term duration. For pension, our liabilities have a much longer duration, some up to 50 years. We have chosen to discount these with EIOPA rates without volatility adjustments. EIOPA rates are considered risk-free with a well-known ultimate forward rate, reflecting the long duration of the liabilities. The choice of interest rates is important when adopting IFRS 17.
Our choices are based on what we believe will be market practice and will result in a good hedge between liabilities and assets for both segments. As mentioned, risk adjustment reflects the compensation required for bearing the uncertainty about the amount and timing of the cash flow that arise related to the insurance contracts. There are two main principles for calculating risk adjustment: the cost of equity and the percentile approach. We have decided to use the percentile approach, which will provide more stability in the results. We have chosen a percentile level of 85%, which is aligned with the insurer's own cost of equity. Further, we have chosen to calculate the risk adjustment based on ultimate risk, that is, all cash flows until the contracts are fulfilled as the liabilities are shown until final runoff in the accounts. 85% is chosen as confidence level per legal entity.
85% corresponds to a level of approximately 95% when a one-year approach is used instead of basing it on ultimate risk. Looking into the figures, for general insurance, the risk adjustment constitutes approximately 7% of liabilities for incurred claims. For pension, the risk adjustment constitutes approximately 6% of liabilities for remaining coverage. Let's turn to page 10. The new standards do not have any impact on our solvency position. The difference between equity and eligible own funds will be less under IFRS 17, primarily as a consequence of discounting all claims reserves, introducing risk adjustment, and applying the same principles for valuation of financial assets. Apart from that, as you can see from the chart on the right-hand side, the main differences between the IFRS equity and eligible own funds are, broadly speaking, the same as under the current regime. Turning to page 11.
Also, for pension, a key point to make is that the fundamentals of the business remain unchanged. But contrary to general insurance, the pension business will have more significant changes in the accounts with IFRS 9 and 17, and the results will be more volatile. The portfolio will be split into cohorts and groups, reducing risk diversification. For onerous contracts, losses will be recorded upon recognition. For the rest of the portfolio, profits will be distributed over the whole coverage period, rather than upon recognition of the contracts. The contractual service margin will be released according to the payment of pensions. The difference in duration between insurance liabilities and financial assets will have a large impact with the new standards. Currently, our pension insurance liabilities have a duration of approximately 13 years, while the matching assets have a duration of approximately six years.
In the Norwegian market, it is somewhat difficult to have a perfect match due to lack of insurance with very long duration. With the asset side being fully recognized at fair value, changes in interest rates will have a larger impact on the results than today, where assets held to maturity are recognized at amortized cost. Under IFRS 4, liabilities are discounted with guaranteed interest rates, while market-based interest rates will be applied under IFRS 17. This will impact the measurement of the liabilities significantly. In other words, the interest rate sensitivity becomes much more visible with the new accounting standards. I will then leave the word to Karen-Elise to explain the changes in the accounts and KPIs in further detail.
Thank you, Jostein. Good morning, everyone. My name is Karen-Elise Berg Christoffersen, and I am Chief Accountant in Gjensidige.
I will spend a few minutes to share with you some further details on the implications of the new standards on our accounts. Over to page 13. We have been preparing for the new standards ever since they were introduced back in 2017. We have used only internal resources in order to build necessary in-house competence going forward. The project has required extensive cooperation across the group between the actuaries, accounting, and technology disciplines, and with our auditors, ensuring good progress in this complex project. We have run monthly parallel figures through this year, and we are well prepared to report according to the new standards from the first quarter 2023. On page 14, we see the current structure under IFRS 4 on the left-hand side and the new structure based on IFRS 17 on the right-hand side. I will go through the changes on the next few slides.
For the sake of simplicity, I will only show the relevant items in the P&L statement. Let's move on to page 15. As you can see on the left-hand side here, earned premiums from general insurance and pension are presented net of reinsurance under the current standard. Under IFRS 17, these items will be added together and presented as one item called insurance revenue. This item will be a gross figure before ceding premiums to reinsurance. The reinsurance premiums are deducted further down in the statement. On page 16, you can see that claims incurred from general insurance and pension are added together in the new item called insurance service claims expenses. This item is also gross, similar to insurance revenue, with amounts recovered from reinsurance further down in the statement. Moving over to page 17.
As you can see here, operating expenses in general insurance and pension will be split into two lines under IFRS 17. The majority of operating expenses will be recorded as insurance service operating expenses. Some indirect costs related to training on newly hired personnel in sales and distribution and certain costs related to new products will, under IFRS 17, be recorded as other expenses. Let us have a look at the new items related to investments on page 18. Discounting will reduce claims expenses and increase insurance finance expenses. Total net income from investments will, under IFRS 17, be split into two items. The effects of unwinding and interest rate movements from discounting of insurance liabilities will be recorded under the new item insurance finance income or expenses. The remaining results from our investments will be recorded as total net income from investments.
The line reinsurance finance income or expense will contain the effects of unwinding and interest rate movements on the reinsurance assets. On page 19, we have illustrated the changes in the statement of financial position. I will now go through the main changes the same way as I did with the income statement. Turn over to page 20. Receivables related to direct operations and reinsurance will, under IFRS 17, be deducted from liability for remaining coverage. The rest of the receivables will remain on the asset side, as these are not directly related to payments from customers on insurance contracts. The vehicle insurance tax, Trafikkforsikringsavgift, which we collect on behalf of the authorities, is the largest item here. On page 21, you can see that the four items related to liabilities under IFRS 4 are replaced with the items liabilities for incurred claims and liabilities for remaining coverage.
Over to page 22. Liabilities related to direct insurance and reinsurance, seen on the left side, are under IFRS 17 replaced by the different items, as you can see on the right-hand side here. Liabilities related to reinsurance are under IFRS 17 deducted from reinsurance contract assets. Reinstatement premiums will be recorded as reinsurance contract liabilities, and there are some minor items which will be recorded as other financial liabilities. Let us turn to page 23. There will be only minor changes in the KPIs for general insurance and the group. Our loss and cost ratios will, as a starting point, be based on gross figures. We will introduce a new KPI, net reinsurance ratio, to include the effect of reinsurance on the loss ratio. The loss ratio will improve under IFRS 17 mainly because reserves will be discounted and because the denominator increases.
The positive effect will be partly reduced due to the risk adjustment. The cost ratio improves because indirect costs as training on newly hired personnel in sales and distribution and certain costs related to new products are classified as other expenses in addition to the increased denominator. This leads to an improved improvement also in combined ratio. The return on equity for group will continue as a KPI and will improve somewhat due to lower equity after IFRS 17. KPIs for pension are not finalized yet, pending an overview of market practice. Given the pension business representing a limited share of our business, this is not significant for group figures and KPIs. Over to page 24. Here we see the general insurance KPIs under IFRS 17 compared to the KPIs under the current IFRS 4 reporting.
For comparability, the excess reserves, the planned reserve releases recognized as income in 2022, have been deducted from the published KPIs. The IFRS 17 line is below the IFRS 4 line, showing the improvement commented in the previous slide. The improvement is due to discounting of the reserves, using insurance revenue as a denominator, and reclassifying certain costs to the line other expenses. The differences shown here give a good approximation of the effect from the accounting changes on the results in general insurance going forward. Let us turn to page 25. The investment portfolio in general insurance consists of a match and a free portfolio. The purpose of the match portfolio is to hedge the insurance liabilities, while the purpose of the free portfolio is to contribute to returns.
With the liabilities being discounted with market-based interest rates, the best match accounting-wise will be to recognize the investments at fair value through profit or loss. The free portfolio is already measured at fair value and recognized through the profit and loss statement. There will be no change to this with IFRS 9. The group policy portfolio in pension is intended to match the pension insurance liabilities. As Jostein explained, this is more difficult than for general insurance. However, we believe the match is sufficient for the group results, and we have chosen to use the fair value through profit or loss also for pension. As you can see on this slide, the switch to the new method will increase the carrying amounts compared to the current regime, here illustrated with the 2022 opening balance figures.
Consequently, we can expect some increased volatility in the financial results, particularly from the pension business. That brings me to the end of my presentation. I will now hand the words over to Jostein for our concluding remarks.
Thank you, Karen-Elise.
So, to summarize on page 26, the transition to IFRS 9 and 17 will not change the fundamentals of our business, neither general insurance nor pension. There will be no major impact on our earnings, and our solvency position and dividend policy will remain unchanged. You will see a lower 2022 opening balance of group equity, and there will be some changes in the definitions of a few KPIs, as well as a few changes in the financial statements. The outlook for our business is good and unchanged.
We have revised our annual financial targets from 2023 for technical reasons, being related to the new accounting standards and considering the current interest rate environment. I'll now hand the word over to Mitra.
Thank you, Jostein. We will now open up for questions to our panel. You can ask your questions via the phone or type your questions on our website. We will start with the questions over the phone. Operator, can you please open the lines?
As a reminder, if you'd like to ask a question on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. The first question comes from the line of Blair Stewart from Bank of America. Please go ahead.
Thank you very much. Good morning, and thanks very much for the presentation.
I wondered if you could just clarify what the income from investments would look like under the new regime. At the moment, we've got fairly stable results from the match portfolio and then more volatile results through the P&L from the other portfolio. So what should we expect to see going forwards? I think you've said that there'll be one item, which is the unwinding of the discount rate, and then another item, which is everything else. And I'm just wondering what that everything else looks like. It seems from slide 26 or 25, I think we were one slide out with the printed version, but slide 25 that you will still have some bonds amortized cost. And I'm wondering whether will there be an offset in the mark-to-market volatility from the fact that you're also moving the value of your liabilities?
Sorry, a very long and complicated question, but I'm just trying to get a feeling for what the new standard will look like for that investment income line. Thank you.
Yes, I will try to answer. We will have no more positions at amortized cost. Everything will be valued at fair value through profit or loss in our statements going forward. And there is a new line, insurance finance. This will include both the unwinding and the interest rate effects or the discounting of the liabilities. The rest of the results from investments will be on the net investment line. I hope that clarifies.
Yes, thank you.
Would you generally expect there to be more or less volatility given the new structure where it seems like the unwind of the discount rate and interest rate effects on liability is one aspect and then everything else goes into the other line? Is that expected to introduce more volatility versus the current system or less? Well, it's. I'm guessing more.
It is difficult to have a perfect match. So some more volatility we would see in our accounts, yes.
Yeah. If I may add, Blair, also because there is both interest rate risk and credit risk in the match portfolio, you'll now get the credit spread part as mark-to-market, which used to be an amortized cost portfolio. So that part will introduce some more volatility in the kind of net of all the financial items.
Okay.
Can I just ask on slide 26, the figures that you're showing for bonds amortized cost, is that under the existing regime? Because it does say IFRS 9, so I'm slightly confused by the bonds amortized cost element within that slide.
We are here trying to show that the bonds at amortized cost will increase in value when we record after fair value through profit and loss. And this is a statement in the opening balance as of the 1st January of 2022. So this will be a different picture as of today because the values have decreased through 2022.
Yeah. Yeah. Okay. That's great. Thank you for clarifying.
The next question comes from the line of Håkon Astrup of DNB Markets. Please go ahead.
Good morning. Thank you for the presentation. One question for me. Can you help us with some sensitivities?
I'm just wondering how will one percentage point increase or decrease in interest rates will impact the combined ratio and also the net profit? Is that possible at this stage? Can I have a go at that one?
Yes, I can answer that question. For general insurance, the 1% increase in the interest rates will reduce the combined ratio with 1%.
Perfect. And just because you will have some or a large part of that effect will be a one-off effect, and that some of that will maybe also be run rates going forward as well, just given that interest rates are at that level going forward. Can you split those two impacts, or is it just from one of these effects?
I'm not sure I actually understood the questions. Could you please repeat?
Yeah, okay. Sorry. Yeah, absolutely. So just say that interest rate jumps with one percentage point.
Would that mean that every year going forward, we will have one percentage point lower combined ratio, or is it a larger one-off effect the first year and a smaller run rate effect going forward?
I think that's a one-off effect in the first year unless the interest rates continue to decrease.
Okay. So if we have a scenario where interest rates increase by one percentage point in year one, that will have a 1% lower effect on the combined ratio, and in the next year, the combined ratio will not be changed compared with year zero. Was that correct?
Yeah, yeah, that's right.
Perfect. Very clear. Thank you.
The next question comes from the line of Tryfonas Spyrou of Berenberg. Please go ahead.
Oh, hi. Good morning, and thank you for the lovely presentation. I've got two questions.
So one is on the combined ratio improvement of one point you gave us. How can you perhaps help us reconcile that with the fact that your Q3 pro forma combined ratio seems to be better, lower by 2.2 points? So that's my first question. And the second one is on the risk adjustment. My understanding is that the release of that will be the sort of equivalent of reserve releases under the current regime. And I guess I'm just trying to understand how the percentile method you adopted, how the conservatism of that, how does that relate to your current sort of reserving approach of assessment, and how should we think about the two upon the transition? Thank you.
Answer that?
Yes, please. Yeah.
I think starting with the risk adjustment, the question was about how that will influence from the reserving policy. Was that the question?
Yes, yes.
Yeah.
The risk adjustment is calculated from the internal model, actually. But it will be actually linked to the reserves level. But going forward, we will not have any excess margins. So I think that the risk adjustment will be quite stable compared to the liability for incurred claims going forward. Was that clarifying, or?
Yes, it's just yes, that's perfect. Thank you.
And then the other part, Simen.
The next question.
Percentage points change on the combined ratio in the pro forma figures, rather than the 1% that you but the difference is that you gave 1 percentage point change in interest rates, gave a 1 percentage point change in combined ratio, and the actual interest rate change is more than 1%. That's the answer. Yeah. And also, there is a couple of secondary effects on the costs and on the denominator being gross numbers instead of net.
The 1% change was actually comparing only the effect of the change in interest rate.
Yeah.
The next question comes from the line of Vinit Malhotra of Mediobanca. Please go ahead.
Yes, good morning. Thank you very much. So just one or two quick clarifications, and pardon my ignorance here, please. Just on the volatility you mentioned that could come in P&L from pension insurance. Now, it could be that it's not too material also, I think you stated. But I'm just curious, why, I mean, is there not an OCI option that you could have chosen? Obviously, that would probably move the interest rate effect to the balance sheet. But just curious, is this something you could not or whether we can choose the OCI option.
And second thing, again, pardon again if I missed it, but I understood that one of the key things about IFRS 9 was the expected credit loss, the ECL. And I'm not sure I heard your opinion on that, whether it's not material or any comments on the ECL, please. Thank you very much.
Yes. I will answer on the OCI question. We did discuss this, whether we wanted to use this on the pension business, but we wanted to have transparent methods. And we think that going through the P&L is a better position for us. Also, we see that the increased volatility in pension is handled in the group figures. The pension business is, as you saw in one of the first slides, small for the group. So we think, therefore, that the fair value through profit and loss is a good presentation. Thank you.
Operator, can we take a few questions from the web? All right. I believe we can. Okay. We have the first question here from Ulrik Züllke. How will you recognize potential run-off losses or gains changing under IFRS 17 compared to IFRS 4? For example, would the timing of the current motor TPL run-off gains recognition have changed?
I'll try that one, Ulrich. There is, as we talked about during a couple of presentations now under IFRS 4, we have this planned reserve releases, which is partly related to motor TPL, which are now coming to an end at the fourth quarter of 2022. Going forward, reserves will be booked at best estimate. So there will be run-off gains or losses going forward as well, but this will not be of this planned kind that we have had over a number of years now.
Yes. Okay.
The next question, this is for you, Simen. Regarding the CSM, I was wondering if you could say anything about the duration of it. Alternatively, how much of the CSM is expected to be released in year one, for example? And this is from Roy Tilley in Arctic.
Yeah. The release of CSM will follow how we actually do the services regarding the insurance contracts. And that's due to the payment pattern of the pension liabilities. You've answered that liabilities have an average duration of approximately 13 years. So the proportion that will be released the first year is quite limited.
Thank you. Another question for you, Simen. How do you see the positive discounting effect versus a negative risk adjustment margin effect? This is from Jan Erik Gjerland in ABG Sundal Collier.
The positive discounting effects versus a negative risk adjustment margin effect.
At the transition that we had 1st of January 2022, the interest rates were quite low. The effect of discounting was much lower than the effect of establishing the new liability risk adjustment. If you look into the figures at the end of the third quarter, the interest rates have increased a lot. Now we can see that the difference is much lower between the effect of discounting and the opposite, the effect of introducing the risk adjustment.
Thank you. We'll send a question for you from Faizan Lakhani, HSBC. Although the excess reserve releases will end this year, is there a likelihood that a release or a true-up is needed before you move to IFRS 9?
I'm not sure what the true-up is here, but in terms of reserve releases in general, the planned reserve releases will end now at the fourth quarter.
And we talked a bit also in the capital markets back in November 2021 of what can you expect in the future. And we didn't guide for any reserve releases at all. But if you look at the history, there has on average been a positive reserve release of, say, one to two percentage points of the premiums for many, many years. So no guiding. I'll just ask you to look at what's historically been the fact.
All right. Let's go back to the questions via the phone line. Operator, can you open?
Sure. The next question comes from the line of Vegard Toverud of Pareto. Please go ahead.
Thank you. I have a couple of questions here. First, will you provide us with more historical data for comparison purposes, or is the data you provided on page 19 in the other documents the information that we will receive?
Secondly, I am wondering why you have opted to use the EIOPA curves without volatility adjustments. And then thirdly, I would like to come back to the previous question about the change in combined ratio. On page 25, you show in two out of three quarters a drop of more than 2 percentage points with IFRS 17, but you have updated your target with 1 percentage point. So if you could just discuss that, that would be nice. Thank you.
Yes. Can we please take the first one, Simen, the second, and now answer the third one?
Yeah. When it comes to historical data, we will only show one year. The comparable figures for 2022, they will be in detail in the notes, the disclosures to the accounts. But we have not been able to go further back because this is complex calculations.
We have therefore not changed the figures going more years back.
Okay.
Sorry. Is it possible for me to interrupt just there? Yes. Is it possible to get the same data quarter by quarter for the three first quarters?
We are planning to present that in the quarterly interim reports in 2023. Then you will have the comparable figures. We have not planned to distribute that earlie r.
Okay. If you were to change your mind, I would be happy.
Okay. That's noted.
Okay. Regarding the EIOPA rates without volatility adjustment, yes, there are several options for EIOPA for choosing the interest rates under IFRS 17. We looked through all the options, and we decided actually to go without volatility adjustment due to that the volatility adjustment is quite a small part of the interest rates curves.
And also that for our solvency purposes for the group, we are doing the calculations without the volatility adjustment. And Gjensidige , pension is not that sensitive to the interest rates at all.
Okay. On the third question, Vegard, why we kind of only changed it one percentage points down, I think the important part is that the target is below 84% without stating exactly how much below it is. We have a history of delivering well below, well better than the stated targets, and expect to continue that. But this is maybe a conservative or long-term approach to what this will be the effects from moving from one regime to the other. Should that be kind of proven to be lasting at a high level, of course, consider the targets again.
Excellent.
So just for clarification, there's nothing special with Q2 or Q3 this year that distorts the presentation on page 25?
There will be nothing more special than it's beat every other typical quarter. There is something special with every quarter, but yeah. Nothing that kind of systematically that is affecting those quarters.
Okay. Thank you very much. Okay. Thank you. That was very clear.
Before moving to the next question, as a reminder, if you'd like to ask a question, please press star one. We have another question from Blair Stewart of Bank of America. Please go ahead.
Thanks. Thanks again. Just a couple of follow-ups. On the reconciliation of equity under IFRS 4 to IFRS 9, you've obviously based that on 1/1/2022. I think you've touched on this earlier, but presumably the figures will be much different now.
Is it your expectation that your equity would not be lower on a mark-to-market basis given the higher interest rates will have reduced the risk adjustment? That's my first question. The second question is just on volatility in the P&L. And I know the answer to this question, but just to clarify, presumably if you do get undue levels of volatility in the P&L, the fact that in any one year your dividend might not be covered by the accounting earnings, presumably that just wouldn't be relevant. You just look through that given it's not cash. And thirdly, just interested in the pension's profits recognition, you suggested that that will be much more gradual than it was before. I don't know if you can comment on how quickly profits were previously recognized in pensions.
It's difficult from the outside to see how quickly the overall profits are recognized in any one year. So just if you can add any color on how aggressive or otherwise you were with your recognition of profits in pensions previously. Thank you.
Thanks, Vegard. I'll answer the second one, and then I guess Simen will help me with the first and the third one. On the volatility versus dividends, you're absolutely right. The dividends are basically more dependent on the solvency calculations, and they do not change based on the change of accounting regime. So the movement from IFRS 4 to 17, if it had been updated to Q3, it's even?
Yes. During this year, the interest rates have changed significantly.
As I said, the impact from discounting, all the products for the general insurance business would have increased approximately almost NOK one billion, actually. And also there will be another effect from the discounting of the pension because now the interest rates are more or less above the guaranteed interest rates. And so the negative effect from discounting from the pension business would have disappeared. But on the other hand, the effect on the asset side would have been different due to the increased interest rates. So I don't actually have the complete figure here, but you will see that there are some differences.
Is the risk adjustment materially lower as well?
No. No. That would be lower, but not so much effect as the discounting effect now.
Okay. Great. Thank you.
And the third one, Simen, on that. And then on the yeah.
The question about the timing of the revenue for the pension, those were the questions. Yeah, about yeah.
Just previously, how quickly did profits recognition occur?
Yeah. During the existing regime, they occur almost at recognition of the contracts. So it's recognized immediately. And also we have seen that since during the existing regimes, we are using the guaranteed interest rates for discounting, the actual market interest rates didn't have any effect on the accounts. And also since we are using amortized cost on the asset side, there was a delay in the valuation of the assets. So the existing results for the pension business was very stable this year, even though the interest rates have changed so much.
What was the reason that profits were? I mean, if the overall profit number was the ultimate profit or discounted value, the profit number was 100, how much of that 100 would you recognize in year one previously?
During IFRS 17 or?
No. Under the existing regime.
Existing regime.
Yeah. So I think at the moment you're saying if the profit number is 100, you'll recognize 1/13 of that every year, roughly speaking. I just wondered what the policy looked like today.
We recognized the profit immediately, so according to the insurance revenue.
Okay. So the full expected discounted value of the profit from the contract gets recognized on day one today?
Yeah. That's right.
Yeah. But this is the insurance part of the contracts. So it's not the savings part of the contract, which is under IFRS 9 going forward. But just to make clear for that.
Yeah.
That's the insurance part. So that's just the risk part comes through early. And then the savings part, the kind of fee-based earnings would come through more gradually over time. Yes. As you earn the basis points on the assets under management.
And to clarify, on the company accounts of Gjensidige Pensjon, this will still be the case because they will still be according to IFRS 4.
Yes.
Understood. Thank you.
We have another question from the line of Vinit Malhotra of Mediobanca. Please go ahead.
Oh, hi. Thank you. Just to clarify, when Karen answered my question, I don't know if she addressed the ECL topic that in IFRS 9 we are seeing. I was expecting to see some commentary about the credit losses and expected credit losses.
Also very relevant given there might be a recession next year. So just curious how you think about ECL in IFRS 9? I didn't quite catch ECL. I mean,
What are you talking about there? I'm sorry for my ignorance.
Oh, no, no. So from other insurers, I've heard that there is an expected credit loss which is to be taken under IFRS 9 on various corporate debt and other investments. So the expected default rate is assumed now rather than waiting for it. That's my understanding as well. It might be wrong, but that's what I've heard from others. So I'm just curious. If you haven't, I mean, I'm happy to take it offline and read more about it.
I'm sure you have a point, Vinit, but I think basically our assets will be marked to market.
So in a sense, that is including the effect of an expected credit loss there. There is no specific recognition of that we calculate based on expected credit losses. We read the market values of our investments.
Okay. Okay. Lovely. Thanks. Thank you.
There are no further questions. I will hand back to your host to conclude today's conference.
Thank you, operator. Thank you all for your attention. We hope you found this session useful. If you have any further questions, please don't hesitate to contact us at IR. As mentioned earlier, we published a transition guide on our website today, which will give you further details on the topics we have discussed. So with that, we will conclude this session. Have a nice day.