Contracts under which a consolidated company assumes a significant insurance risk from another party (the policyholder), by stipulating that the policyholder receives compensation if a specified uncertain future event (the insured event) negatively affects the policyholder are treated as insurance policies for the purposes of IFRS. A distinction is made between insurance risk and financial risk. Financial risk is the risk of a possible future change in specific interest rates, securities prices, price indices, interest rate indices, credit ratings, or credit indices, or another variable, provided that, in the case of a nonfinancial variable, the variable is not specific to one contracting party. In many cases, in the life insurance area in particular, insurance policies as defined under IFRS also transfer financial risk.
Contracts under which only an insignificant insurance risk is transferred from the policyholder to the consolidated company are treated as financial instruments (“financial insurance contracts”) for the purposes of IFRS. Such contracts exist only to a minor extent in the personal insurance area.
Both insurance contracts and financial insurance contracts can have contract terms that qualify as profit-dependent participation in net income (“profit participation”, “profit-dependent premium refund”). Contractual rights under which, in addition to guaranteed benefits, the policyholder also receives additional payments which are likely to represent a significant portion of the total payment under the contract, and are contractually based on:
a) the profit from a certain portfolio of contracts or a certain type of contract, or
b) the realised and/or unrealised investment income from a certain portfolio of assets held by the insurance company, or
c) the profit or loss of the company, investment fund, or business unit (e.g. balance sheet unit), holding the contract are considered profit-dependent participations in net income.
Contracts with profit-dependent participation in net income exist in all markets in the Vienna Insurance Group, primarily in the life insurance area, and to a secondary extent also in the property and casualty, and health insurance areas, and are treated as insurance policies in accordance with IFRS 4. The net income participation in life insurance exists essentially in the form of participation in the adjusted net income of the balance sheet unit in question calculated according to national accounting requirements. Net income or profit participation amounts that have already been allocated or committed to policyholders are reported in the mathematical reserve. Amounts reported in the local annual financial statements which have been committed or allocated to policyholders in the form of future net income participation are reported on the balance sheet in the reserve for profit-dependent premium refunds. In addition, by analogy to the treatment of deferred taxes under IAS 12, the profit-dependent portion resulting from application of IFRS versus local valuation requirements (“deferred profit participation”) is reported in the reserve for profit-dependent premium refunds. The rate used in Austria for calculating deferred profit participation is 80% of the difference between the value recognised in the local financial statements and the value recognised in the IFRS financial statements. The funding of the reserve for deferred profit participations is also presented by analogy to IAS 12, with the “shadow accounting” rules of IFRS 4 being applied. As a result, amounts for deferred profit participation relating to transactions that are recognized directly in equity, are also recognized directly in equity.
Recognition and accounting methods for insurance contracts
WIENER STÄDTISCHE Versicherung AG VIENNA INSURANCE GROUP fully applies the rules of IFRS 4 relating to the valuation of insurance contracts. Accordingly, the values recognised in the consolidated financial statements prepared in accordance with applicable national code were carried over to the IFRS consolidated financial statements. Equalisation and catastrophe provisions are not recognised. There were no changes in accounting rules as compared to the corresponding national accounting requirements. In individual cases, the reserves formed locally by an insurance company for outstanding insurance claims are increased in the consolidated financial statements based on appropriate analysis.
Detailed information on the valuation of underwriting items is available in the remarks for each item.
Adequacy test for liabilities arising from insurance contracts
Liabilities from insurance contracts and financial insurance contracts are tested at each reporting date for adequacy of the insurance liabilities recognised in the financial statements. During this process, up-to-date estimates of current valuation parameters are examined, taking into account all future cash flows associated with the insurance contracts, to determine whether the recognised liabilities are adequate. If these tests determine that the book value of the insurance liabilities is negative, taking into account capitalised acquisition costs and/or capitalised values of contract holdings, the entire shortfall is immediately recognised in profit or loss.
