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

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 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

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 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

17 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

18 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 Capital Requirement (SCR) Excess capital Market- consistent value of liabilities (MVL) ASSETS LIABILITIES Source: Comité Européen des Assurances (CEA)

19 Thank you for listening!