36. Changes in major accounting policies as well as new and amended standards

With the exception of the following changes, the outlined accounting policies were consistently applied to all periods presented in these consolidated financial statements.

Amendments and standards to be applied for the first time

The Group applied the following amendments to standards with the initial application date of 1 January 2019. None of the new regulations arising from this have any essential impact on UNIQA’s assets, liabilities, financial position and profit or loss.

New and amended standards to be applied in the future

The IASB has also published a range of new standards that will be applicable in the future. UNIQA does not intend to adopt these standards early.

The following standards to be applied in future are expected to have a significant impact on reporting at UNIQA:

IFRS 9 – Financial Instruments

Since UNIQA’s business is predominantly insurance-related and UNIQA has not yet adopted IFRS 9 in any other version, a deferral to apply IFRS 9 for the first time is permitted until 1 January 2022 (see Footnote 1 to the table above). The use of UNIQA’s deferral approach requires the publication of additional information in the notes for the period up to the initial application of IFRS 9.

Classification and measurement

The future classification and measurement of financial assets under IFRS 9 is derived from the business model criterion and the SPPI criterion (solely payments of principal and interest). Depending on the principle-based classification rules, IFRS 9 requires that subsequent measurement be carried out at amortised cost or at fair value.

UNIQA has already completed the technical development and implementation of an IT-system-based assessment of the SPPI criterion for the entire portfolio of relevant assets.

Fixed-income securities make up a large portion of the investment portfolio. Given that these securities tend to follow the principal/interest payment structure in most cases, they largely fulfil the criteria of the SPPI test. If an instrument meets the requirements of the SPPI test, there are two options: it can then be measured at amortised cost, or it can be measured at fair value through other comprehensive income. The portion of the UNIQA portfolio that does not fulfil the SPPI criteria will in future be measured at fair value through profit or loss.

In addition, the logic for the business models in accordance with IFRS 9 was prepared for sub-areas, and they were also subject to a validation of their plausibility. As expected, on the basis of current indications, the “hold-and-sell” business model accounts for a large part of UNIQA’s business. This may result in changes due to the interactions with IFRS 17 that cannot yet be fully assessed at the time the financial statements are being prepared.

Impairment

The new provisions of IFRS 9 concerning impairment must be applied in future to financial assets measured at amortised cost or at fair value through other comprehensive income. Under IFRS 9, the impairment calculation to be applied is based on a forward-looking model for the recognition of expected credit losses.

The logic of the model according to which future credit losses will be determined and its implementation in the IT systems is, at the time the financial statements are being prepared, in a development and analysis phase. On the basis of simplified assumptions, initial simulations were carried out with regard to the assessment of the default risk on financial assets within the scope of the new impairment provisions in accordance with IFRS 9. For the purpose of assessing the default risk, recourse was made to the definition in IFRS 9 of financial instruments with a low default risk at the reporting date. An external investment grade rating can therefore be used to assess whether a financial instrument has a low default risk.

The fair value of the instruments which do not feature a low default risk (non-investment grade) amounts to €664 million.

UNIQA expects effects from the conversion to IFRS 9 both as a result of the new classification and measurement rules and due to the new impairment model. In a holistic view, interactions with IFRS 17 must also be taken into account in this context. For the further course of the project, the focus is on the parallel phase in order to analyse the financial effects of the differences between IAS 39 and IFRS 9.

IFRS 17 – Insurance Contracts

IFRS 17 establishes principles relating to recognition, measurement, presentation and disclosures of insurance contracts.

An essential element of the standard is a general measurement model, according to which all insurance contracts are to be valued on the basis of a prospective model. This involves combining current values (best estimate cash flows) plus a risk margin with a mode for distributing the future profit from the contracts (contractual service margin). According to the current state of analysis, the general measurement model will be applicable to approximately 15 per cent of the insurance business.

The contractual service margin is the equivalent of the expected future profit from contracts held in the respective portfolio and thus creates a high degree of transparency with regard to UNIQA’s future profitability. This margin is a residual figure and its amount depends significantly on the best estimate of future cash flows, the discount rate and the method used to determine the risk margin.

For short-term insurance contracts, there is an option to use a simplified measurement model. According to current estimates, 45 per cent of the entire UNIQA portfolio, mainly from the property and casualty insurance area, can be measured and accounted for using this premium allocation approach.

There is a mandatory special model (variable fee approach) for participating contracts and contracts of unit-linked and index-linked life insurance. The variable fee approach is expected to be applied at UNIQA in health insurance and in life insurance. The current assessment here is that the portfolios of life and health insurance will predominantly be measured using the variable fee approach, which corresponds to around 40 per cent of the total portfolio.

For both, the general measurement model and the variable fee approach, UNIQA assumes at the time of publication of the Group report that the so-called OCI option will be applied where the respective allocated financial instruments on the asset side are also measured through other comprehensive income. The objective behind the application of this option is to reduce volatility in the financial position and income statement.

Since IFRS 17 is expected to lead to significant changes in the accounting and measurement of UNIQA’s core business, a separate project team consisting of actuaries, accountants, controllers and IT experts has been appointed, and it reports to a central programme management. This organisation was set up concurrently in all affected UNIQA subsidiaries in order to provide support in defining the requirements of the respective local characteristics and the product features for the entire UNIQA Group.

In order to adequately reflect the complexity of the standard, UNIQA decided to implement an insurance subledger. In the course of its implementation, characteristic sample business transactions, so-called use cases, were developed for all existing product groups in the entire UNIQA portfolio. These sample business transactions reflect the technical interpretation of IFRS 17 from UNIQA’s point of view and illustrate the configuration plan for the insurance subledger. They are the core of the new software solution.

The sample business transactions were created in close cooperation with the actuaries, accountants and the technical implementation team and shared with the UNIQA Group subsidiaries in a two-stage feedback process. In the course of numerous workshops and feedback rounds, specific features of the product landscapes of the individual subsidiaries were updated and integrated in the pool of use cases. This meant that a large part of the professional and technical design for the core of the professional and technical reporting and process environment required by IFRS 17 was developed in the 2019 financial year.

In addition to the use cases, various IFRS 17 technical concepts in the actuarial and accounting areas were shared with the subsidiaries in 2019 and expanded to include their features and specifics. In the second half of 2019, UNIQA also began considering the various possible transition methods from IFRS 4 to IFRS 17 based on the available data granularity.

In the past financial year, the effects and interaction of IFRS 9 and IFRS 17 on the financial position and income statement of UNIQA Österreich Versicherungen AG were analysed. This analysis was based on several simplifications and assumptions. For example, in the health and life insurance segments, the future expected cash flows were based on the results of the market consistent embedded value (MCEV). Furthermore, a full cost approach was applied in the analysis. The risk adjustment was derived in accordance with the requirements of the Solvency II risk margin.

Despite simplifications and estimates, important lessons have been learned:

• The comparability of IFRS 4 and IFRS 17 is limited due to the fundamental differences between the two accounting standards.
• Despite certain similarities with the solvency regulations under Solvency II, the interpretation of the results according to IFRS 17 is a great challenge due to the significantly increased complexity. In addition, the parameters for measuring the success of the company will change and new indicators such as the contractual service margin or loss component will be added.
• In order to ensure that the measurement of insurance contracts is in accordance with the provisions of IFRS 17, much larger volumes of data need be processed and validated compared to IFRS 4.

In the course of the impact analysis, all three measurement models described above (general measurement model, variable fee approach and premium allocation approach) were applied specifically to the portfolio of UNIQA Österreich Versicherungen AG. Due to the limited scope of this impact analysis, no conclusions can be drawn about the impact of IFRS 17 on the Group as a whole.