1. 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

2. 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

3. 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)

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

5. 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

6. 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

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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)

14. 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)

15. 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 ?
Implementation: „Not before 2010“

16. 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, )

17. 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

18. 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

19. Georg Weinberger Partner +43 (0) 1 31332 - 393 georgweinberger@kpmg.at
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