Sensitivity analysis to market risk

Companies are required to report both qualitatively and quantitatively on their risk management strategies and the internal metrics they use for the calculation and management of risk arising from financial instruments.

IFRS 7 breaks down the risk arising from financial instruments into three broad categories: market risk, credit risk and liquidity risk.

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the company’s income or the value of its financial instruments. Example disclosures are as follows:

IFRS Link

Explanation Sensitivity analysis to market risk

IFRS 17 128

Entities are required to disclose a sensitivity analysis to demonstrate the impact of reasonably possible changes in risk variables at the end of the reporting period on profit or loss and equity. For each type of market risk, entities shall demonstrate the impact of changes in risk variables on profit or loss and equity in a way that explains the relationships between the sensitivities arising from contracts in the scope of IFRS 17 to those from investment assets held by entities.

The requirement to disclose a sensitivity analysis to market risk variables is not new compared to IFRS 4. However, IFRS 17 specifically requires explaining the relationship between the sensitivities to changes in risk variables arising from insurance contracts and those arising from investment assets held by the entity.

Interest rate risk sensitivity

The following table [IFRS 7 40, IFRS 17 128] presents analysis of how a possible shift in market interest rates might impact the balances of contracts within the scope of IFRS 17, investment contracts without DPF balances and investment assets, as well as the net impact on profit or loss and equity. The insurer’s other financial assets and liabilities are not significantly sensitive to interest rates.


IFRS Link

Explanation Sensitivity analysis to market risk

IFRS 17 128 (b)-(c)

IFRS 7 40 (b)-(c)

The analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. No changes were made by the insurer in the methods and assumptions used in preparing the above analysis.

Equity price risk sensitivity

The following table [IFRS 7 40, IFRS 17 128] presents analysis of how a possible shift in market equity prices might impact insurance and investment contract balances and the respective underlying assets held for Savings and Participating contracts and other investment assets, as well as the net impact on profit or loss and equity.

IFRS Link

Explanation Sensitivity analysis to market risk

IFRS 17 128 (b)-(c)

IFRS 7 40 (b)-(c)

The analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. No changes were made by the insurer in the methods and assumptions used in preparing the above analysis.

Currency risk sensitivity

The following table [IFRS 7 40, IFRS 17 128] presents analysis of how a possible shift in market currency exchange rates might impact the investment contract balances and the respective underlying assets, as well as the net impact on profit or loss and equity. Transactions or balances not within the scope of IFRS 17 are not subject to currency risk.

For investment contracts with DPF, the impact of a +/-5% possible change in the foreign currency exchange rate is not symmetrical primarily due to guarantees protecting the amounts invested by policyholders.

IFRS Link

Explanation Sensitivity analysis to market risk

IFRS 17 128 (b)-(c)

IFRS 7 40 (b)-(c)

The analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. No changes were made by the insurer in the methods and assumptions used in preparing the above analysis.

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