INSURANCE Adoption of IFRS in the Insurance Sector: Local (“Prudential) GAAP versus IFRS and Solvency II Georg Weinberger, KPMG REPARIS Workshop Vienna, March 15, 2006

Agenda Background Adopting IFRS for insurance companies Before 2005 IFRS 4 – phase I Main Differences between Local GAAP and IFRS (US-GAAP) IFRS 4 Phase II / Solvency II

Why IFRS? Domination of US-GAAP EU-decision to support IFRS Efforts of IASB to further develop Standards Acceptance of IFRS also outside EU Influence on Local GAAP in various countries Memorandum of understanding between FASB and IASB for convergance (February 27, 2006)

History of Insurance Project 1997 Start 1999 2002 2003 4th Quarter 1st Quarter 1st. Quarter 2 Phases DSOP Issues Paper

Insurance Project, Phase I 2003 July, 31 ED 5 2004 IFRS 4 March, 31 December ? 2006 20?? Draft Standard Interim solution Limited improvement by increase of transparancy

Adopting IFRS for Insurance Companies before 2005 IFRS for all items except for insurance contracts US-GAAP for insurance contracts Deferral of Acquisition expenses (DAC) Calculation of claims provisions based on statistics (chain ladder) Elimination of equalization and catastrophe provisions Deposit accounting for contracts without significant insurance risks Calculation of actuarial provisions for short duration contracts based on best estimate Applying concept of deferred tax on profit participation

Adopting IFRS for Insurance Companies in 2005 IFRS for all items except for insurance contracts IFRS 4 for insurance contracts Continuation of existing practice Additional disclosures

IFRS 4 on Insurance - Phase I IFRS 4 (phase I) to be applied at December 31, 2005 for listed companies (EU, Russia, etc) Continuation of existing practice except for equalization or catastrophe provisions Minimum requirements for Liability Adequacy Testing No offsetting with reinsurance Impairment test for reinsurance assets No implementation but continued practice allowed Excessive prudence Using non-uniform accounting policies for insurance contracts

IFRS 4 on Insurance – Phase I (cont.) Additional topics Classification of contracts Unbundling of deposit components Seperation of embedded derivatives Shadow Accounting Discretionary Participation Features

Main differences between Local GAAP and IFRS (US-GAAP) Basic Principle PRUDENCE Objective, unbiased INFORMATION Goal Protection of Creditors (policyholders) Decision of investors

Main differences between Local GAAP and IFRS (US-GAAP), cont. 1. Financial Instruments The lower of cost and fair value Fair value Amortised cost Impairment 2. Property Component Approach 3. Intangible Assets No recognition of internally generated items Recognition of internally generated items under certain conditions

Main differences between Local GAAP and IFRS (US-GAAP), cont. 4. Employee benefits Typically rather high discount rates Detailled approach (low discount rates) 5. Other Non-technical Provisions Prudence More likely than not 6. Goodwill Depreciation over a certain period Reduction of equity Impairment only

Main differences between Local GAAP and IFRS (US-GAAP), cont. 7.1. Deferral of Acquisition expense Zillmerization and reduction of UPR Spread over duration of contracts 7.2. Claims Provision (Excessive) Prudence usually on case by case base Statistical Calculation (Chain ladder) 7.3. Equalization and Catastrophe provision Different Calculation schemes in different EU-countries No Liability (also IFRS 4)

Main differences between Local GAAP and IFRS (US-GAAP), cont. 7.4. Insurance Contracts All contracts under insurance supervision Significant risk (IFRS 4: lower level of risk is sufficient) 7.5. Actuarial Provisions Use of prudent assumptions according to premium calculation Best estimate assumptions (short duration) 7.6. Liability Adequacy No special regulation; out-of-date assumptions are updated Discounted future cashflows (adverse assumptions might offset)

IFRS 4 Phase II / Solvency II Project for the development of a new EU-supervisory system 3-Pillar Approach 1. Solvency requirements 2. Supervision: Risk management 3. Market: Disclosure and Transparancy Time-frame Framework Directive (Mid of 2006) Framework Directive (Mid of 2007) CEIOPS will still work on technical measures 2007 - ? Implementation: „Not before 2010“

IFRS 4 Phase II / Solvency II (cont.) Compilation of all directives for insurance companies into one directive Calls For Advise (CFA) Quantitative Impact Studies (QIS) Draft QIS1 summary report (March, 2 2006)

IFRS 4 Phase II / Solvency II (cont.) Principles of CFO-Forum and GNAIE, f.e. Accounting profit in line with release from risk Valuation method for assets should have an impact on discount rates Portfolio as unit of accounting EU: 75% confidence level (/2505/05-EN) Definition of equity Intangible assets Equalization provision Groups

IFRS 4 Phase II / Solvency II (cont.) Hopefully no difference between definition and measurement of net assets = equity between IASB and EU Risk that techniques used for stochastic calculation of risk capital („internal models“) will be used for future calculation of insurance liabilities Use of „simple“ standard models for solvency requirements versus implementation of „complicated“ IFRS for all insurance companies to be able to calculate equity

Georg Weinberger Partner +43 (0) 1 31332 - 393 georgweinberger@kpmg.at www.kpmg.at The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2004 KPMG, a member firm of KPMG International, a Swiss cooperative. All rights reserved.