Implementation of IFRS in the insurance sector Austrian Case Study

1
Implementation of IFRS in the insurance
sectorAustrian Case Study

• Mag. Karin Harreither, CPA
• REPARIS Vienna Ministerial Conference 2006,
• March 2006

2
Background Financial Supervision in Austria

• 3 Pillars of Financial Supervision
• Prudence in technical provisions
• Assets covering technical provisions
• Solvency (solo and group level)

Solo Financial Accounts
Asset rules
Supervisory Measures Solo-Level
Technical Provisions
Solo-Solvency
Consolidated Financial Accounts
Supervisory Measures Group Level
Group Solvency
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Accounting Framework

• Legal Framework has changed
• European Legal Framework
• IAS-Regulation 1606/2002 covers 3 Austrian
  insurance companies
• Austrian Legal Framework
• IFRS mandatory/permitted for consolidated
  accounts
• IFRS prohibited - solo financial statements
  (taxation, profit distribution etc.)
• Supervisory Directives mainly unchanged

4
Background Supervision

• Austrian Legal Framework
• Companies may calculate group solvency on basis
  of
• Consolidated accounts or
• Individual accounts
• Solvency Requirement may be calculated on basis
  of IFRS accounts
• Change to IFRS ? New rules for group solvency
  required

IFRS
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Legal Framework for insurance companies till 2005

• In the consolidated accounts the following
  companies were to be fully consolidated
• insurance companies
• companies which are engaged in activities
  directly related to the insurance business or
• companies performing ancillary activities
• All other companies
• valuation at equity
• Reasoning No mix of activities in the
  consolidated accounts

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Legal Framework for insurance companies till 2005

• Group solvency on basis of these consolidated
  accounts
• All companies consolidated in the accounts were
  to be included in the group solvency,
• But There were companies which are part of the
  insurance group (e.g.. participations of 20) but
  were not consolidated
• ? Theses companies were to be additionally
  included on basis of their solo-accounts.

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Legal Framework for insurance companies as of
2005

• Change of companies to be consolidated (national
  GAAP)
• All subsidiaries (irrespective of their activity)
  have to be consolidated
• Different activities
• Group solvency
• New Problem
• ? Now there are companies consolidated in the
  accounts which are not part of the insurance group

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Legal Framework for insurance companies as of
2005

• Solution ISeparation of different activities in
  the balance sheet and profit and loss account
• Assets and Liabilities (A / L) of companies of
  different sectors are shown separately
• insurance sector
• banking sector
• other sectors with sector-specific balance sheet
  regulations
• other sectors
• Same for profit and loss account

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Legal Framework for insurance companies as of 2005

• Solution II
• Solvency Elements stemming from supervised
  companies of other sectors with solvency
  requirements may only be considered if their
  solvency requirements are also added to the group
  requirement
• FMA possibility for a regulation for the
  purpose of determining the adjusted solvency

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Impact of implementing IFRS on equity in Austria
Equity (IAS/IFRS)
Other Changes (/-)
DAC
Fair value (assets)
On average 1/3 when first implementing IFRS
Equalisation and CAT Provision
Requalification of equity instruments
Equity (Austrian GAAP)
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IFRS Equity ? Solvency Margin

• Difference in the quality of equity shown in the
  IFRS balance sheet and shown in the balance sheet
  according to national GAAP
• ? prudential filters for calculating the solvency

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Possible Filters for solvency margin

• Discussion points (some examples)
• Deduction of equalisation provisions
• Exclusion of certain balance sheet items that are
  not explicitly classified as intangibles but have
  the character of intangibles
• Exclusion of the amount of DPF classified as
  equity
• Special treatment for unrealised capital gains
  and losses related to financial instruments and
  property valuation
• Exclusion of cumulative gains and losses on cash
  flow hedges
• .

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Other implications

• Actuary for non-life
• Solvency II does not wait for IFRS
• IFRS gives not much guidance for valuation of
  technical provisions
• Prudence in technical provisions is different
  throughout Europe
• Valuation principles for technical provisions are
  discussed and tested for Solvency II purposes by
  CEIOPS
• ? Results may also be relevant for future IFRS