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