Implementation of IFRS in the insurance sector Austrian Case Study Mag. Karin Harreither, CPA REPARIS Vienna Ministerial Conference 2006, March 2006

Background Financial Supervision in Austria 3 Pillars of Financial Supervision Prudence in technical provisions Assets covering technical provisions Solvency (solo and group level) Asset rules Solo Financial Accounts Supervisory Measures Solo-Level Technical Provisions Solo- Solvency Consolidated Financial Accounts Supervisory Measures Group Level Group Solvency Harreither Vienna, March 14 and 15, 2006

Legal Framework has changed European Legal Framework 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 Harreither Vienna, March 14 and 15, 2006

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 Harreither Vienna, March 14 and 15, 2006

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 Harreither Vienna, March 14 and 15, 2006

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. Harreither Vienna, March 14 and 15, 2006

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 Harreither Vienna, March 14 and 15, 2006

Legal Framework for insurance companies as of 2005: Solution I: Separation 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 Harreither Vienna, March 14 and 15, 2006

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 Harreither Vienna, March 14 and 15, 2006

Impact of implementing IFRS on equity in Austria Other Changes (+/-) Equity (IAS/IFRS) DAC Fair value (assets) On average + 1/3 when first implementing IFRS Equalisation and CAT Provision Requalification of equity instruments Equity (Austrian GAAP) Harreither Vienna, March 14 and 15, 2006

“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 Harreither Vienna, March 14 and 15, 2006

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 ……. Harreither Vienna, March 14 and 15, 2006

Solvency II does not wait for IFRS 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 Harreither Vienna, March 14 and 15, 2006