© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 1

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 2 Joachim Kölschbach, 9th IAIS Annual Conference, Santiago de Chile, 10th October 2002 IFRS for Insurance Contracts Current status of the project

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 3 Agenda Milestones of the insurance project Scope of an IFRS insurance and implication for financial statements Current status Timetable for phase I: components which should be realised by 2005 Timetable for phase II

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 4 Originally estimated timetable for an IFRS Insurance Contracts th quarter Issues paper 2002 Draft statement of principles 2002 Exposure draft 2003 Final IFRS 3rd quarter 4th quarter 1st quarter

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 5 Scope of insurance project Accounting for insurance contracts, NOT for all aspects of accounting by insurance companies but including presentation and disclosure issues Accounting for general purpose financial statements, NOT regulatory requirements Accounting by (re)insurers AND policyholders

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 6 Scope of Insurance Standard IFRS No. XXX Insurance accounting Other assets/ liabilities Other IAS Insurance assets/ liabilities All insurance contracts Other financial instruments (e.g. investments) Fixed/intangible assests Technical provisions Presentation/ Disclosure APPLICABLE TO ALL ENTITIES DAC

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 7 Implication for financial statements - Recognition Deferral & Matching Traditional approach Emphasis on income statement Expenses are deferred to match future income Asset & Liability IAS Framework Emphasis on balance sheet valuation Profit or loss results from changes in value of assets and liabilities Possible gain on sale Proposed approach for financial instruments Consistent with asset & liability approach Fair Value

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 8 Implication for financial statements - Recognition Deferred acquisition costs Does not qualify as an asset Unearned premiums Does not represent a liability Incurred claims Present value of future claim payments Provisions for unexpired risks Present value of future claim payments under existing contracts Cat & Equalisation Provisions Does not represent a liability

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 9 Implication for financial statements Investments: IAS 39, Financial Instruments: recognition and measurement Scope: all financial instruments in all industries Exceptions: rights and obligations under insurance contracts Measurement: Fair value Exceptions: - held-to-maturity investments - loans and receivables originated by the enterprise - financial asset whose fair value cannot be reliably measured

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 10 Implication for financial statements - Measurement Two possible measurement approaches within asset & liability approach of the DSOP: Entity-Specific Value - if IAS 39 is still in force Fair Value - if IAS 39 is replaced by a standard which requires “full fair value”

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 11 Implication for financial statements - Measurement Assumption: Actual best estimate of all future events has impact on value and time of future cash flows Entity-Specific ValueFair Value Whose assumptions: Insurance company, based on the characteristics of the actual portfolio Market, based on the characteristics of the actual portfolio In practice, utilisation of insurance company’s assumptions, if they do not contradict the market assumptions No underlying of unrealistic assumptions.

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 12 Current Status Criticism by insurance industry and Insurance Associations: discount rates reliability high volatility of results Adoption / Application of a compehensive IFRS Insurance before 2005 has become unrealistic

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 13 Current Status EU (regulation 1606/2002/EG): implementing IFRS is mandatory for consolidated financial statements of all listed companies by 2005 Similar developments in other countries Difficulties might occur, if the IFRS for insurance contracts is not implemented and fully recognised by 2005 IASB: Investigation, whether some components of the project can be put in place by 2005

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 14 Current Status Division of the insurance project into two phases: Phase I: components which can be realised by 2005 Interim Solution Phase II: components which have to be realised after 2005 DSOP Proposals

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 15 Possible timetable for phase I th quarter Board Deliberations on phase I to be completed nd quarter Exposure Draft th quarter Board to complete redeliberations for final IFRS nd quarter Final IFRS

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 16 Objectives of phase I Accelerate some pieces of the project that will be needed anyway for phase II Avoid requiring insurers to make major changes Eliminate some existing practices incompatible with the framework Avoid creating an interim IFRS on recognition and measurement Avoid delaying phase II

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 17 Components which may be realised phase I Presentation and Disclosure Confirm definitions and scope exemptions in other IFRS Application of IAS 39 to those contracts that do not qualify as insurance contracts  Guidance on „Participating“ falling into IAS 39  Guidance on embedded derivatives included in a host insurance contract Elimination of catastrophe and equalisation provisions Review of the implications for entities issuing insurance contracts in the absence of an IFRS for insurance contracts

© 2002 KPMG – Dr. Kölschbach – IFRS for Insurance Contracts – 18 Possible timetable for phase II 2002 Board to conclude on Measurement objectives rd quarter Exposure Draft rd quarter Field Test nd quarter Board to complete redeliberations for final IFRS

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