Changes in significant 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 adopted the following adjustments to standards with the initial application date of 1 January 2022. None of the new regulations arising from this have a significant 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.

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 adopt IFRS 9 for the first time is permitted until 1 January 2023. Utilisation of UNIQA’s deferral approach requires the publication of additional information in the notes for the period up to initial application of IFRS 9.

The classification and measurement of financial assets under IFRS 9 results from the business model and the SPPI criterion (Solely Payments of Principal and Interest).

To assess the relevant business models, UNIQA focuses in particular on the strategic management of the investments. As an insurance company, UNIQA holds financial assets mainly to finance liabilities from insurance contracts.

Under other investments, UNIQA divides the business models into “hold and sell” and “hold”. Financial assets under other investments are mainly allocated to the “hold and sell” business model. Only other investments without the intention to sell, such as time deposits and loans, are allocated to the “hold” business model.

The unit-linked and index-linked life insurance investments are allocated to the “other” IFRS 9 business model.

When the SPPI criterion is reviewed, the characteristics of the contractual cash flows are analysed. To analyse the cash flows, UNIQA uses both the specific contracts (such as securities prospectuses) and (semi-)automated IT support from external information systems. The external information systems are usually relied upon for exchange-traded securities such as government bonds and corporate bonds because these exchanges record the characteristics of the contractual cash flows in standardised databases.

Of the other investments, in future UNIQA will measure fixed-income securities that meet the SPPI criterion at fair value through other comprehensive income (FVOCI). Variable-income securities, in particular fund certificates, will in future be measured at fair value through profit or loss because they normally do not satisfy the SPPI criterion.

UNIQA will use the FVOCI option to measure selected equity instruments.

All investments of unit-linked and index-linked life insurance investments will continue to be classified and measured at fair value through profit or loss, unchanged from the current accounting under IAS 39.

Impairment

In future, the calculation of expected credit losses according to the three-level model is to be carried out exclusively for financial assets measured at amortised cost or at fair value through other comprehensive income. Instruments with a low default risk (investment grade) are regularly allocated by UNIQA to Level 1 of the impairment model.

The fair value of the instruments which have an increased default risk (non-investment grade) amounts to € 671 million.

The model that UNIQA uses to determine expected credit losses aims to come up with an undistorted and scenario-weighted sum. It does this by taking into account the time value of money as well as data on current economic conditions and their future forecasts that are available at the measurement date without unreasonable time and cost. The probabilities of default take into account the macroeconomic development of the unemployment rate as well as the high-yield spreads.

The expected credit losses are determined as at each measurement date based on the difference between the discounted contractual and risk-weighted cash flows. The scenario-based risk weighting of the cash flows is carried out using the probability of default and the loss given default.

The probability of default is the probability that debtors will be unable to meet their payment obligations, either within the next twelve months or over the entire remaining term. The loss given default corresponds to the average expectation of how much the loss of a financial asset will be.

UNIQA obtains most of the data used to calculate the probability of default and the loss given default from external data sources. The probability of default is determined at issuer level and the loss given default is allocated on the basis of long-term averages of individual classes of financial instruments. In cases where specific input data is not completely available from external data sources (e.g. financial assets that are not externally rated), the risk parameters were allocated on the basis of benchmarks of comparable instruments and expert assessments.

The time value of money (which is needed to determine the expected credit losses) is the effective interest rate of the respective financial asset, determined at the time when the financial asset was acquired.

At each measurement date, all financial assets within the scope of the impairment model are assigned to one of three impairment levels. UNIQA regularly allocates instruments with a low default risk to Level 1 of the impairment model. If there is no indication of a low default risk at the measurement date, the level is assigned based on an assessment of a significant increase in credit risk.

UNIQA assesses a significant increase in credit risk mainly on the basis of a quantitative criterion. To make this quantitative assessment, the probability-of-default curve over the total maturity at the assessment date is compared with the forward-looking probability-of-default curve over the total maturity at the time of initial recognition. A significant increase in credit risk is normally assumed whenever there is a relative doubling of the probability of default since the time of purchase. If a significant increase in credit risk is determined on the measurement date, an allocation to “Level 2” is made. In individual cases, a qualitative assessment of the level allocation for Level 1 or Level 2 may be made based on external market indicators and subject matter experts. In the qualitative assessment, particular consideration is given to factors such as a significant change in contractual terms, a borrower’s ability to repay their other exposures, as well as external factors with a potentially significant influence on the borrower’s ability to repay.

An allocation to “Level 3” (credit-impaired financial assets) of the impairment model is made if one or more events with an adverse effect on the expected future cash flows of the financial asset occur. Among others, UNIQA considers the following events to be indicators:

• significant financial difficulties on the part of the issuer or borrower;
• default of or overdue contractual cash flows;
• financial concessions by lenders ;
• increased likelihood of insolvency or restructuring proceedings;
• disappearance of an active market due to the financial difficulties of the financial asset; and
• financial assets with a large discount that already reflects the credit losses incurred.

To assess whether a financial asset is credit-impaired, the indicators are considered both individually and collectively.

IFRS 17 – Insurance Contracts

On 25 June 2020, the IASB (International Accounting Standards Board) published the final accounting standard for insurance contracts – IFRS 17. The effective date of IFRS 17 was set for 1 January 2023. For insurance companies, the effective date of IFRS 9 is linked to that of IFRS 17. IFRS 17 was transposed into EU law through the adoption of Regulation (EU) No. 2021/2036 of 19 November 2021 by the European Commission.

IFRS 17 establishes principles relating to recognition, measurement and presentation, as well as the disclosures for insurance contracts – this includes primary insurance and reinsurance contracts the entity issues and holds as well as investment contracts with discretionary participation features. The general measurement model is applied for the long-term property and casualty insurance business as well as for life insurance contracts without profit participation. For short-term contracts – this is predominantly the case in the area of property and casualty insurance – UNIQA uses the premium allocation approach. The variable fee approach is applied for contracts in health insurance that involve profit participation and for contracts of unit-linked and index-linked life insurance.

The general measurement model is composed of the settlement cash flows and the contractual service margin.

Fulfilment cash flows comprise:

• estimates of future cash flows
• an adjustment to reflect the time value of money and the financial risks related to the future cash flows (discounting)
• a risk adjustment for non-financial risk

The objective of estimating future cash flows is to determine the expected value of a range of scenarios that reflect the full scope of all possible outcomes. The cash flows from each scenario are discounted and weighted, taking into account the estimated probability that this outcome will lead to an expected present value. UNIQA applies stochastic modelling if the cash flows are influenced by complex underlying factors and they therefore do not react linearly to changes in the economic environment. This is the case, for example, with participating contracts. If this is not the case, a deterministic calculation is used.

The estimates of future cash flows consist of unbiased use of all reasonable and supportable information available without undue cost or effort relating to the amount, timing and uncertainty of future cash flows. The information is based on company-specific data as long as the estimates do not contradict observable market data and the assumptions adequately consider future scenarios. When estimating the cash flows, UNIQA takes into account current expectations of future events that might affect those cash flows. Expectations of future changes in legislation that would change or discharge the present obligation or create new obligations under the existing insurance contract are not taken into account until the change in legislation is substantively enacted. Cash flows within the boundary of an existing insurance contract relate directly to the fulfilment of the contract, including those cash flows for which UNIQA can decide the amount or maturity at its own discretion. These cash flows include premiums, payments to (or on behalf of) a policyholder, insurance acquisition cash flows and other costs incurred to fulfil the contract.

Insurance acquisition cash flows result from the sale of insurance contracts and are directly attributable to the portfolio to which the contract belongs. Other costs recognised in the cash flows are:

• claims handling costs
• policy administration and maintenance costs, including recurring commissions
• asset management costs

Insurance acquisition cash flows and other costs also include fixed and variable overhead costs that are directly attributable to the settlement of insurance contracts. Such overheads are allocated to groups of contracts using methods that are systematic and rational, and are consistently applied to all costs that have similar characteristics.

Insurance contracts from one group can influence the cash flows to policyholders of another group or be influenced by them (mutualisation). This is the case, for example, when the policyholder shares with policyholders of other contracts the returns on the same specified pool of underlying items and the guarantee agreement of one group leads to a reduction in the returns of another group.

Mutualisation has an impact on the measurement of the fulfilment cash flows of the groups concerned. The fulfilment cash flows of a group include all payments to policyholders from other groups resulting from the terms of the contract, while all payments to policyholders of the group that have already been included in the settlement values of another group must not be taken into account.

The contract boundaries determine which future cash flows are to be included in the measurement of a group of insurance contracts. Cash flows are within the boundary of an insurance contract if they result from substantive rights and obligations that exist during a specific period in which the Group can compel the policyholder to pay the premium or in which the entity has a substantive obligation to provide the policyholder with insurance contract services.

A key component in determining the contractual service margin is discounting the future cash flows. This is an adjustment for the time value of money and the financial risks associated with the future cash flows. The calculation of the underlying interest rates is based on the methodology used under Solvency II (EIOPA’s technical documentation): UNIQA applies the bottom-up approach. The base yield curves in accordance with IFRS 17 correspond to the base yield curves in accordance with Solvency II, whereby these can be adjusted in the course of the annual ORSA process. To determine the illiquidity adjustments in accordance with IFRS 17, UNIQA applies a method that largely corresponds to the volatility adjustment under Solvency II, which also includes company-specific portfolio and market data.

Another component in determining the contractual service margin is the adjustment of future cash flows by a risk adjustment for non-financial risk. The risk adjustment is determined in life and health insurance using the cost of capital approach in accordance with the standard formula under Solvency II. In property and casualty insurance, the confidence level method from UNIQA’s partial internal model pursuant to Solvency II is applied.

The contractual service margin for a group of insurance contracts is released to profit or loss in each period to reflect the insurance contract services provided under the group of insurance contracts in that period.

The insurance contract services include:

• insurance coverage (coverage for an insured event);
• investment-related service (for insurance contracts with direct participation features): concerns the management of underlying items on behalf of the policy holder; and
• investment-return service (for insurance contracts without direct participation features).

The amount recognised in profit or loss is based on the number of coverage units in a group. This number is determined by considering for each contract the volume of benefits to be provided and its expected coverage period. The coverage units are reviewed and, if necessary, adjusted for each reporting period. The coverage units are determined at the product level and in life insurance these are essentially based on the sums insured, in property and casualty insurance on the premiums written and in health insurance on the number of insurance contracts. The time value of money is taken into account for life insurance. Inflation is taken into account in property and casualty insurance as well as in health insurance.

UNIQA holds both inward and outward reinsurance contracts. The carrying amount of the portfolios from inward reinsurance (assumed reinsurance) is shown together with the carrying amount of the portfolios of primary insurance contracts.

A variation of the general measurement model is the variable fee approach, which governs the treatment of insurance contracts with direct participation features. Insurance contracts with direct participation features are those for which

• the insurance provisions specify that the policyholder participates in a share of a clearly identified pool of underlying items;
• the entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and
• the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the changes in fair value of the underlying items.

For insurance contracts that fulfil the aforementioned criteria, the variable fee approach is mandatory. Whether the aforementioned criteria are satisfied is assessed at the inception of the contract. A reassessment at a later point in time is only permissible in the event of a change in the insurance contract. The variable fee approach is applied to long-term health insurance contracts, participating contracts and unit- and index-linked life insurance contracts.

All other insurance contracts and reinsurance contracts held are classified as insurance contracts without direct participation features and accordingly measured using the general measurement model or, if the conditions are met, the premium allocation approach. This is applied if the following criteria are satisfied:

• The coverage period of each contract in the group – taking the contract boundaries into account – is one year or less.
• It is reasonable to assume that the measurement of the liability for remaining coverage does not differ significantly from that which would have resulted from the application of the general measurement model.

The second criterion is not satisfied if, on the initial recognition of a group, an entity expects significant variability in the fulfilment cash flows that would affect the measurement of the liability for remaining coverage during the period before a claim is incurred. In order to prove the applicability of the premium allocation approach, a concept was created that addresses the contract term as well as the variability of the fulfilment cash flows in property and casualty insurance. Furthermore, materiality principles are taken into account that affect the applicability of the premium allocation approach. If the criteria defined in the concept are not satisfied, measurement is carried out using the general measurement model.

The liability for remaining coverage measured using the premium allocation approach is composed of the unearned premium, less any unamortised insurance acquisition cash flows. The provision for unsettled claims includes discounting and an adjustment for non-financial risks.

The grouping for the measurement hierarchy and accounting of contracts according to IFRS 17 is as follows:

• Portfolios: insurance contracts that are exposed to a similar risk and are managed together are combined into a portfolio. In life insurance, the corresponding contract currency is taken into account when forming portfolios.
• Contract groups: portfolios are divided into contract groups according to their profitability.
• Annual cohorts: contract groups are subdivided according to underwriting years (“annual cohorts”). For contracts in health and life insurance that involve profit participation, UNIQA will adopt the option to exempt the mandatory subdivision by underwriting year.

Use of judgements and estimates

Information on judgements that, when applying the accounting methods, have a material effect on the amounts reported in the Consolidated Financial Statements is provided below:

• Identification of insurance contracts, reinsurance contracts and investment contracts with participation features: assessment of whether a significant insurance risk is transferred, thus falling within the scope of IFRS 17, and whether there are any contracts with direct participation features.
• Determination of the level of aggregation: identification of portfolios of insurance contracts as well as determination of groups of contracts that are onerous at initial recognition and groups of contracts that at initial recognition have no significant possibility of becoming onerous subsequently.
• Measurement: determining the method for calculating the risk adjustment for non-financial risk and the coverage units provided.
• Transitional regulations: determining whether the necessary reasonable information is available to perform a full or modified retrospective application.

Information about uncertainties in assumptions and estimations that have a significant risk of causing a material adjustment to the net carrying amounts in the subsequent financial year:

Changes in the key assumptions listed below could materially affect the settlement amount. These changes would adjust the contractual service margin and not the net carrying amount of the insurance contracts, unless the changes result from onerous contracts or do not relate to future benefits.

• Property and casualty insurance contracts: assumptions related to claims development and claims frequency.
• Life and health insurance contracts: assumptions for estimates of future cash flows related to mortality, longevity, disability or morbidity, customer behaviour (lapse) and profit participation rate.

Exercise of options

For both the general measurement model and the variable fee approach, the OCI option in accordance with IFRS 17.88(b) is applied where the respective allocated financial instruments on the asset side are also measured through other comprehensive income.

When applying the premium allocation approach, UNIQA does not make use of the option in accordance with IFRS 17.59 (a) to recognise insurance acquisition cash flows as expenses for insurance contracts with a term of up to one year. When measuring the liability for incurred claims, UNIQA will also not make use of the option defined in IFRS 17.59 (b) of not adjusting the estimated values of future cash flows if those cash flows are expected to be paid or received in one year or less from the date the claims are incurred.

The entire change in the risk adjustment will be presented in the technical result (IFRS 17.81).

In respect of the obligation to form annual cohorts, which prevents contracts issued more than one year apart from each other from being included together in a group of insurance contracts, an option was established as part of the transposition of IFRS 17 into EU law. According to this option, the European Commission allows users in the EU to not apply the requirement under IFRS 17.22 for certain contracts. UNIQA will make use of this option and apply it in connection with participating contracts.

UNIQA uses derivatives to mitigate the financial risk arising from interest rate guarantees in retirement savings contracts with a subsidised premium. UNIQA recognises changes in the amount of the company’s share of the underlying items as well as changes in fulfilment cash flows arising from changes in the effect of the time value of money and financial risk in the income statement without adjusting the contractual service margin.

In addition, UNIQA will in principle measure at fair value those properties that are the underlying items in life and health insurance with participation features.

UNIQA makes use of the disclosure option in accordance with IFRS 17.86 for presenting income and expenses from the reinsurance contracts held and accordingly records a single amount in the income statement.

IFRS 9 and IFRS 17 – transition options

As at the transition date to IFRS 17, a large part of UNIQA’s insurance portfolio consists of contracts where the conclusion of the contract sometimes dates back decades. IFRS 17 basically stipulates that the standard must be applied fully retrospectively. This means that the items in the statement of financial position should be determined as if the new accounting policy had always been applied. Full retrospective application requires at least an annual roll-up of the contractual service margin over the entire term of the contract, since its inception.

Full retrospective application of IFRS 17 is not practicable for UNIQA for the following reasons:

• The required contract master data and data on transactions concerning the contracts are not available retrospectively with the necessary granularity.
• The determination of expected future cash flows and their adjustment in the event of non-economic changes in assumptions (e.g. mortality assumptions) is not possible retrospectively, as even in that case no better knowledge would be available (“without hindsight”).
• The same applies to the determination of the required allocation of costs attributable to the insurance portfolio.
• For contracts with participation features, economic assumptions and historical IFRS 17 specifics such as the financing component are not available for stochastic modelling prior to initial application.
• In the long-term property and casualty insurance business, the historical parameters for determining the technical provisions can only be determined with disproportionate effort and a subdivision into cohorts is not possible due to the lack of historical information for tacit renewals.

If the full retrospective application of IFRS 17 is not practicable, which is the case for UNIQA, there are two alternatives available:

• modified retrospective approach; and
• fair value approach.

The aim of the modified retrospective approach is to achieve the best possible approximation to a full retrospective application. Under the fair value approach, the contractual service margin of a group of insurance contracts at the transition date is determined as the difference between the fair value in accordance with IFRS 13 and the corresponding fulfilment cash flows determined under IFRS 17. UNIQA uses both approaches.

The choice of the appropriate approach for determining the IFRS 17 opening balance is made at the level of portfolios of insurance contracts. For all groups in a portfolio, a determination is made as to whether they are onerous contracts at initial recognition or whether there is no significant probability that they could become onerous.

In connection with the modified retrospective approach, IFRS 17 allows several modifications to the full retrospective application, of which the following are applied at UNIQA. These modifications can be applied if the required detailed information from prior periods is not available. Due to the lack of availability of contract information in the required granularity, UNIQA is applying the modification IFRS 17.C10 which allows the omission of a subdivision of contract groups by underwriting years.

Application of the modified retrospective approach for contracts without discretionary participation features:

• UNIQA applies the modifications IFRS 17.C12 – C14 for contracts without discretionary participation features. These deal with the determination of the expected future cash flows, their interest, the risk adjustment and the insurance acquisition cash flows for the initial recognition of groups of insurance contracts. Based on these modifications, a contractual service margin or loss component is determined at the date of initial recognition of groups of insurance contracts.
• The modifications IFRS 17.C15 and IFRS 17.C16 are applied to adjust the carrying amount of the contractual service margin or loss component from the date of initial recognition to the date of transition to IFRS 17.
• For portfolios containing contracts with different underwriting years, UNIQA applies the modification IFRS 17.C18(b). This results in the cumulative revaluation reserve being determined as nil at the transition date, provided the OCI option in accordance with IFRS 17.88(b) applies.

For contracts with discretionary participation features, the provisions of IFRS 17.C17 can be applied, which require the contractual service margin to be determined from the following portfolio information:

• the differences between the fair value of the underlying items and the fulfilment cash flows at the date of the transition to IFRS 17;
• an adjustment for amounts charged by the company to the policyholders before that date;
• adjustments for the changes in the risk adjustment before that date;
• adjustment of the carrying amount of the contractual service margin from the date of initial recognition to the date of transition to IFRS 17.

If this results in a loss component, this must be determined as nil in accordance with IFRS 17.C17(e).

For insurance contracts with direct participation features the cumulative amount from the underlying reference values recognised in other comprehensive income was recognised in other comprehensive income at the transition date in accordance with IFRS 17 C24(c) and C18(b)ii.

Central parameters in connection with the fair value approach are, on the one hand, the solvency capital requirement and, on the other hand, the selection of a suitable capitalisation interest rate. The solvency capital requirements correspond to those under Solvency II (for companies in EU countries) as well as the corresponding local regulations. The capitalisation interest rates correspond to those of the impairment test for goodwill as at 31 December 2021. Acquisition cash flows incurred before the transition date are not taken into account in the fair value approach and are therefore not recognised in subsequent periods under technical income or technical expenses.

For the presentation of adjusted comparative information for the period prior to the initial application of IFRS 9, UNIQA will apply IFRS 9 using classification overlay. Accordingly, IFRS 9 will also be applied to those financial assets disposed of in the course of 2022. Impairments for financial assets will be determined on the basis of the IFRS 9 impairment model for expected credit losses.

IFRS 9 and IFRS 17 – effects

Based on the analyses to date, the estimated increase in equity of the opening balance due to IFRS 9 as at 1 January 2022 amounts to € 11 million. This is due to the application of the new classification and measurement rules through the remeasurement of pensions accounted for at fair values in the future. Tax effects were not taken into account here.

The effects of initial application of the new classification and measurement rules as well as the new impairment rules predominantly result in a reclassification of the revaluation reserve to retained earnings in the amount of € 7 million.

There are significant effects on the Consolidated Income of Financial Position in the context of the opening balance determined in accordance with the requirements of IFRS 17. Regardless of the measurement technique, insurance receivables and deferred acquisition costs are no longer presented separately in the statement of financial position, but are reported as part of insurance liabilities. This change in presentation will lead to a contraction of the statement of financial position under IFRS 17. The presentation in the Consolidated Income Statement will also be fundamentally changed by the introduction of the standard. In this case, IFRS 17 distinguishes between the insurance service result, comprising insurance revenue and insurance service expenses, and insurance finance income and expenses.

The technical provisions (before reinsurance), which include a contractual service margin of € 4,363 million, increase by € 110 million. Further effects result from the derecognition of deferred acquisition costs in the amount of € 1,173 million as well as operating receivables in the amount of € 340 million, which are included in technical insurance provisions in accordance with IFRS 17. In addition, the conversion of owner-occupied and investment property accounted for at amortised acquisition cost to a fair value measurement leads to an appreciation in the amount of € 1,078 million in the opening balance in accordance with IFRS 17. This only concerns those properties that are the underlying items in life and health insurance with participation features.

Due to the ongoing parallel phase and the associated closing and analysis activities, a final quantification of the effects on the Consolidated Income of Financial Position and Consolidated Income Statement for the 2022 financial year as well as on key figures is not yet possible at this point in time.

The changes associated with the two accounting standards IFRS 9 and IFRS 17 result in a reduction in Group equity of € 747 million from € 3,323 million to € 2,576 million as at the transition date of 1 January 2022 and after taking deferred taxes into account.