4.4 Legal risk - Scor

4.1.16 SCOR IS EXPOSED TO AN INCREASE IN THE RATE OF GENERAL INFLATION AND TO INCREASED
INFLATIONARY EXPECTATIONS
The Group’s liabilities are exposed to an increase in the rate of general inflation (prices and salaries) which would
require an increase in the value of non-life reserves, in particular in respect of long-tail business, e.g., general liability
(medical among others) and motor bodily injury claims. In addition, SCOR is exposed to claims inflation over and above
general inflation and in particular to the inflation of court awards in respect of general liability and bodily injury claims.
SCOR’s assets are exposed to increased inflation or inflationary expectations, which would be accompanied by a rise in
the yield curve with a consequent reduction in the market value of the fixed income portfolios. A further impact of
increased inflation could be on the solvency of bond issuers; a widening of credit spreads would lead to a loss of value
for the issuers’ bonds. Finally, depending on the macroeconomic environment, an increase in inflation could also reduce
the value of its equities portfolio. Any negative fluctuations in equity values would lead to a similar decrease in the
shareholders’ equity.
In conclusion, inflation would have a significant negative impact on SCOR’s business, present and future revenues, net
income, cash flows, financial position, and potentially, on the price of its securities.
See “Section 20 – Note 26, Insurance and financial risk – Market risk” for further information on risk mitigation actions.
4.2 Market risk
4.2.1 SCOR FACES RISKS RELATED TO ITS FIXED INCOME INVESTMENT PORTFOLIO
A. SCOR is exposed to interest rate risks
Interest rate fluctuations have direct consequences on the market value of SCOR’s fixed income investments and
therefore on the level of unrealized capital gains or losses of the fixed-income securities held in its portfolio. The return
on the securities held also depends on changes in interest rates. Interest rates are very sensitive to a number of external
factors, including monetary and budgetary policies, the national and international economic and political environment,
and the risk aversion of economic agents.
During periods of declining interest rates, income from investments is likely to fall due to investment of net cash flows at
rates lower than those of the existing portfolio (dilutive effect of new investments). During such periods, there is therefore
a risk that SCOR’s return on equity objectives are not met. In addition, in these periods of declining interest rates, fixedincome
securities are more likely to be redeemed early in cases where bond issuers benefit from an early redemption
option and can borrow at lower interest rates. Consequently the probability of needing to reinvest the proceeds at lower
interest rates is increased.
On the other hand, an increase in interest rates and/or fluctuations in the capital markets could lead to a fall in the
market value of fixed income securities that SCOR holds. In the case of a need for cash, SCOR may be obliged to sell
fixed income securities, possibly resulting in capital losses to the Group.
The Group analyses the impact of a major change in interest rates on each of its investment portfolios and at the global
level. Here, it identifies the unrealized capital loss that would result from a rise in interest rates. The instantaneous
unrealized capital loss is measured for a uniform increase of 100 basis points in rates or in the event of a distortion of
the structure of the yield curve. Portfolio sensitivity analysis to interest rate changes is an important risk measurement
and management tool which may lead to decisions for reallocation or hedging.
However, there can be no assurance that its risk management measures and sensitivity analysis will be sufficient to
protect the Group against all the risks related to variations in interest rates.
For information on the maturities of financial assets and liabilities, related interest rates and sensitivities to interest rate
fluctuations as well as the allocation of the fixed income securities portfolio by rating of the issuer, see “Section 20.1.6 –
Notes to the financial statements, Note 26 – Insurance and Financial Risk.”
B. Credit spread risk
Credit spread variations have a direct impact on the market value of the fixed-income securities, and as a consequence,
on the unrealized capital gains or losses of the fixed-income securities held in portfolio.
Credit spreads vary notably due to changes in the counterparty risk of an issuer and in the liquidity of the securities.
Some securities’s valuations, like corporate bonds or structured products, rely on assumptions and estimations which
can fluctuate from one period to another due to market conditions.
See “Section 4.1.14 – SCOR is exposed to losses due to counterparty default risks or credit risks – A. Fixed income
portfolios.”
See “Section 20 – Note 26, Insurance and financial risk – Market risk” for further information on risk mitigation actions.
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