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Andreas Rauter, UNIQA REPARIS Workshop, Vienna March 15, 2006

Adoption of IFRS in the Insurance Sector. Andreas Rauter, UNIQA REPARIS Workshop, Vienna March 15, 2006. AGENDA. Starting Point – Local GAAP Current IFRS Practice IFRS 4 (Phase I) Agreed Consensus on Accounting Principles Open Issues / Hot Topics IFRS & Solvency II.

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Andreas Rauter, UNIQA REPARIS Workshop, Vienna March 15, 2006

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  1. Adoption of IFRS in the Insurance Sector Andreas Rauter, UNIQA REPARIS Workshop, Vienna March 15, 2006

  2. AGENDA • Starting Point – Local GAAP • Current IFRS Practice IFRS 4 (Phase I) • Agreed Consensus on Accounting Principles • Open Issues / Hot Topics • IFRS & Solvency II

  3. StartingPoint – Local GAAP • 25 different EU-Countries / 25 different valuation techniques for insurance liabilities • different models and calibration for valuation • different portion of prudence included in valuation

  4. statutory books & local filings • Single accounts still “exclusively” local GAAP • regulators • customers (as contracting legal entity) • tax authorities & the public • Filings with regulators are based on single accounts following statutory/local GAAP • Solvency Regime based on book values

  5. Burdens in existing reporting • to much focus on prudence • Focus still on book values for Solvency I • e.g. Securities at book value • Real Estate at book value • Solvency on Group Level can be IFRS based but • less guidance • different treatment of IFRS positions for Solvency across Europe

  6. Current IFRS Practise IFRS 4 (Phase I) • Different local techniques for valuation of insurance liabilities during Phase I will: • produce uncomparable IFRS-Financial Statements for first time preparers • postpone the conversion projects on a harmonized valuation • force existing IFRS-preparers to follow US-GAAP

  7. Agreed Consensus on Accounting Principles • CFO Forum published Principles for an IFRS Phase II Insurance Model • Insurance Industry broadly agrees on these Principles • Principles are addressed to the IASB-Insurance Working Group

  8. Agreed Consensus on Accounting Principles • Model for Insurance Measurement • no gain at inception / periodical review of underlying assumptions and unlocking if appropriate • profit realization according to release from risk • initial investment in contracts as intangible assets • best estimate on present value of future cash flows (? level of prudence/risk margin for uncertainty)

  9. Agreed Consensus on Accounting Principles • Unit of Account – measurement on a portfolio basis • Reflection of expected policyholder behavior in measurement techniques • Valuation of options and guarantees as part of the insurance liability

  10. Agreed Consensus on Accounting Principles • asset/liability measurement reflecting product mechanics (e.g. discretionary participation features) and management rules • Value-based reporting only as supplementary information in the notes to financial statements • Determination of risk margins not guided in detail, management has to meet the principles outlined.

  11. Agreed Consensus on Accounting Principles • Issues not fully resolved so far: • Fair value measurement for participating contracts • Accounting principles foe participating principles • How to quantify the release from risk?

  12. Status IASB so far • tentative Board Decisions: • Principles, not detailed guidance • Non-life claims liabilities to be approached with Discounting & Risk adjustments • two approaches for non-life ‘pre-claims’ period: • Unearned premium approach (Deferral of acquisition costs, Liability adequacy test with discounting and risk adjustment) or • Future cash flows approach (with discounting and risk margins)

  13. Status IASB so far • ad Life Insurance: • Board has started to discuss in early 2006 • Working group – most favour either: • Current entry value, or • Current exit value

  14. Open Issues / Hot Topics • unlocking of assumptions • when to unlock • entity-specific or consistent interpretation • risk adjustment • based on valuation for a concideration for bearing risk • or • risk margin as “shock absorber” for unexpected changes in assumptions • measurement of participation features • P/L based • performance based

  15. Open Issues / Hot Topics • if no profit at inception how to justify embedded value • how binding are management rules (investments held to maturity)

  16. IFRS & Solvency II • Solvency II Project will not “wait” for IFRS 4 valuation input on fair value of insurance contracts • Independent guidance on valuation techniques • Quantitative Impact Studies • Calls for Advice

  17. Basic Principles for Solvency II Basic principles: • Economic value based approach • Capital requirement over a 1-year time horizon, however includes impact on all future liabilities and therefore represents “fair value” • Capital calculated to a confidence interval of 99.5% (i.e. 1 in 200 year event)* • Accounts for diversification effects across risks and risk mitigation

  18. Overview of the Economic Balance Sheet ASSETS LIABILITIES Excess capital Available for Solvency Capital Requirement /Minimum Capital Requirement Solvency Capital Requirement (SCR) Min. Capital Requirement (MCR) Market value margin (MVM) Market value of total assets (MVA) Market- consistent value of liabilities (MVL) Best estimate Valuation of MVL - focus of this paper Source: Comité Européen des Assurances (CEA)

  19. Thank you for listening!

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