Looking beyond the financial statements: understanding insurer resilience

The implementation of TFRS 17 has understandably focused attention on insurers' financial statements. Boards, management teams and investors have spent considerable time understanding new performance measures, disclosures and the drivers of reported results. With the first full year of TFRS 17 reporting now completed, financial statements provide a clearer and more comparable view of insurers' performance and financial position.

However, financial statements are only part of the story. Insurers also produce a significant amount of regulatory and risk information that can provide valuable insight into the resilience of the business under changing conditions.

The question for boards and management is therefore broader than whether the insurer made a profit or remained above the regulatory capital requirement. Financial reporting, regulatory information and risk analysis should be considered together to determine whether the insurer can withstand adverse events and continue meeting its obligations to policyholders.

1. Financial Performance and Resilience Are Different Concepts

Financial statements show an insurer's financial performance during the reporting period and its financial position at the reporting date. Regulatory information focuses more directly on solvency, capital adequacy, risk exposure and the insurer's ability to meet its obligations over time.

These two perspectives are related, but they do not always tell the same story. An insurer may report strong profits while its capital position weakens because of changes in investments, business mix or risk exposure. Equally, lower earnings do not necessarily mean that solvency has deteriorated.

Understanding this distinction is important when assessing long-term sustainability. Financial statements help explain past performance, while regulatory measures provide insight into an insurer's ability to absorb shocks and navigate future uncertainty.

2. The headline RBC ratio does not tell the full story

Insurers closely monitor risk-based capital because it is a core regulatory requirement. However, the headline ratio brings several elements together in a single percentage. Two insurers with similar ratios may have very different risk profiles, levels of capital headroom and exposure to adverse events.

Management and boards should therefore look beyond the reported ratio and understand:

• what is driving the change from one period to the next;
• which risks are consuming the most capital;
• how the capital position would change under an adverse but plausible scenario; and
• whether recent business decisions have increased capital requirements.

Viewed in this way, RBC becomes more than a compliance measure. It provides a valuable framework for understanding how risk and capital interact across the business and supports more effective capital management decisions.

Question for the board: Which risks consume most of our capital today, and how has that changed over the past two years? 

3. Early warning indicators are more useful when viewed as trends

Early warning indicators are intended to identify potential concerns before they become more serious. They can highlight changes in capital, profitability, liquidity, claims experience and other key areas.

A single result may not indicate a significant problem. The trend over several periods can be more useful, particularly where an indicator remains within an acceptable range but is gradually weakening.

Regular review allows management and boards to investigate the reasons for a change and decide whether any response is needed. The indicators are therefore more useful when considered as part of ongoing monitoring rather than as isolated results.

Question for the board: Are we reviewing how our early warning indicators are changing over time, or only considering each result on its own? 

4. Valuation assumptions are not solely technical matters

Valuation methodologies and assumptions are often viewed as technical matters best left to actuarial and finance specialists. While the calculations require specialist knowledge, the assumptions and judgements can have wider business consequences.

Changes in discount rates, claims development assumptions and other significant estimates may affect reported results, capital adequacy assessments, solvency and management decision-making. These effects may move in the same direction or in opposite directions. For example, a change that improves reported results could weaken the capital position, while the reverse could also occur.

Boards do not need to understand every detail behind the calculations. They should, however, understand which assumptions have the greatest effect and how the results could change under different scenarios. This helps the board assess how sensitive the insurer's financial position may be to changes in key assumptions.

5. Stress testing provides a forward-looking perspective

RBC, early warning indicators and valuation measures describe the insurer’s current position and developing trends. Stress testing asks a different question: what happens if the insurer faces a severe but plausible event? 

This is particularly relevant when considering catastrophe exposure, climate-related risks, market volatility and other events that could affect several parts of the business at the same time. 

The value of a stress test is not limited to the estimated loss. It should also show how the insurer’s capital position, liquidity, reinsurance programme and available management actions could be affected. 

Timing can be critical. An insurer may need to pay significant claims before collecting the related reinsurance recoveries. The resulting gap can create liquidity pressure even if the insurer remains solvent and its reinsurance programme responds as intended. 

Effective stress testing should help management understand: 

• how far capital adequacy could fall and how quickly it might recover; 
• whether sufficient liquidity would be available while claims are being paid; 
• when reinsurance recoveries are expected and how much may be collected; and 
• which management actions would realistically be available under stress.

Question for the board: Under our main catastrophe scenario, how long is the expected gap between paying claims and collecting reinsurance recoveries, and how would that gap be funded?

Bringing the information together

No single measure gives management the full answer. Read together, financial results, capital information, early warning indicators, valuation sensitivities and stress tests give a broader view of the insurer’s position.

They can also help finance; actuarial and risk teams discuss the business using the same information. This matters because each function approaches the insurer’s position from a different starting point. Bringing those views together makes it easier to understand where risks are developing and how decisions may affect capital and financial strength.

Managing a difficult period takes more than sophisticated models. Management also needs to consider difficult scenarios in advance, while finance, actuarial and risk need to work from the same information.

Conclusion

Financial statements tell an important part of the story, but they cannot answer every question about an insurer's financial strength.

A more complete assessment combines financial reporting, regulatory information and risk analysis. Together, these perspectives help management and boards understand not only how the insurer has performed, but also where vulnerabilities may exist and how the business can respond when conditions change.

The RBC Market Test 2026 is expected to provide further insight into the future direction of the capital framework and its potential implications for insurers. We look forward to discussing the emerging themes, practical considerations and current industry challenges at our upcoming insurance insurance industry seminar.