Andreas Rauter, UNIQA

REPARIS Workshop, Vienna March 15, 2006

Adoption of IFRS Adoption of IFRS in the in the

Insurance SectorInsurance Sector

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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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Starting Point – 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

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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

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Burdens in existing reporting

to much focus on prudence

Focus still on book values for Solvency Ie.g. Securities at book valueReal Estate at book value

Solvency on Group Level can be IFRS based but less guidancedifferent treatment of IFRS positions for Solvency across Europe

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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

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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

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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)

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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

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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.

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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?

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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)

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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

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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

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Open Issues / Hot Topics

if no profit at inception how to justify embedded value

how binding are management rules (investments held to maturity)

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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

IFRS & Solvency II

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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

Basic Principles for Solvency II

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Overview of the Economic Balance Sheet

Valuation of MVL - focus of this paper

Available for

Solvency Capital Requirement

/Minimum Capital Requirement

Market value of total assets (MVA)

Best estimate

Market value margin (MVM)

Min. Capital Requirement(MCR)

Solvency CapitalRequirement (SCR)

Excess capital

Market- consistent value of liabilities(MVL)

ASSETS LIABILITIES

Source: Comité Européen des Assurances (CEA)

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Thank you for listening!