5. Insurance contracts

Insurance and reinsurance contracts along with investment contracts with a discretionary participation feature are recognised in accordance with the accounting provisions for insurance contracts (IFRS 17). Transitional provisions, judgements and estimates as well as significant accounting policies in connection with this accounting standard, which came into force on 1 January 2023, are explained below.

Transitional provisions

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. To make this choice, it must be determined for all groups in the portfolio whether the contracts are onerous 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. Those 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 items recognised at fair value through 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 rate. The solvency capital requirements correspond to those under Solvency II (for companies in EU countries) as well as the corresponding local regulations. When determining the contractual service margin using the fair value approach, the appropriate profit margin to be realised is decisive. To determine this, the present value of the expected costs of holding sufficient capital to cover the own funds that the buyer must manage during the remaining term of the portfolio is calculated. For this purpose, the target own funds is defined for each future year.

The profit margin that the buyer requires is then defined as the present value of the future costs of holding the additional capital for the remaining life of the portfolio. To determine the present value, the capitalisation rates corresponding to those used in the impairment test for goodwill as at 31 December 2021 are applied. 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 insurance revenue or insurance service expenses.

Judgements and estimates

Judgements

Information on judgements that 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 discretionary participation features: assessment of whether a significant insurance risk is transferred and the contracts thus fall within the scope of IFRS 17, or 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.
• Variable fee approach: assessment of the applicability of the variable fee approach for contracts with direct participation features.
• Premium allocation approach: applicability of the premium allocation approach for long-term contracts.
• Estimates of future cash flows: estimates of expected cash flows in connection with the fulfilment of the contract.
• Insurance acquisition cash flows: determination of whether the insurance acquisition cash flows can be directly allocated.
• Interest rate assumptions: determination of the yield curves to be used for discounting.
• Measurement: determination of the method for calculating the risk adjustment for non-financial risk and the coverage units provided.
• Transitional provisions: determination whether sufficient reasonable and supportable information is available to perform a full or modified retrospective application.

Assumptions and estimates

Changes in the key assumptions listed below could materially change the fulfilment cash flows in the following financial year. However, these changes would lead to an adjustment of the contractual service margin and would not affect the 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.
• Health and life insurance contracts: assumptions for estimates of future cash flows related to mortality, longevity, disability or morbidity, customer behaviour (lapse) and profit participation rate.

The assumptions regarding discount rates and the development of costs have an influence on all the lines of insurance business.

Significant assumptions and estimates in connection with calculating the fulfilment cash flows, the contractual service margin and the investment component are explained below.

Fulfilment cash flows

Fulfilment cash flows comprise:

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

The objective of an estimate of future cash flows is to determine the expected value of a range of scenarios that reflects the full range of possible outcomes. The cash flows from each scenario are discounted and weighted by the estimated probability of that outcome to derive 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 contracts with participation features. If this is not the case, a deterministic calculation is used.

The estimates of future cash flows incorporate, in an un-biased way, all reasonable and supportable information available without undue cost or effort about the amount, timing and uncertainty of those future cash flows. The information is based on company-specific data provided that the estimates are consistent with 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, insurance benefits, 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; and
• asset management costs.

Insurance acquisition cash flows and other costs also include fixed and variable overheads directly attributable to fulfilling 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.

Acquisition cash flows and administrative costs are distributed using the premiums written to the respective group of insurance contracts. Claims handling costs are distributed using the actual claims for the respective group of insurance contracts.

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

Mutualisation affects the measurement of the fulfilment cash flows for the groups concerned. The fulfilment cash flows for a group include all payments arising from the terms of existing contracts to policyholders of contracts in other groups and exclude payments to policyholders in the group that have been included in the fulfilment cash flows of another group.

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 UNIQA has a substantive obligation to provide the policyholders with insurance contract services.

Significant assumptions incorporated into calculating future cash flows

Property and casualty insurance

Future cash flows from premiums are estimated using contract data taking future lapses by policyholders into account. The lapse rate is derived from experience in previous years at product group level.

Loss or cost ratios and associated payment patterns are derived from past experience to estimate future cash flows from future service and costs. Where necessary, judgements are also made as to the extent to which past trends can also be expected in the future, as well as whether new trends should be taken into account.

Reserves for incurred claims that have not yet been settled, including incurred claims that have not yet been reported, are usually estimated using generally accepted statistical triangular methods (such as chain ladder or Bornhuetter-Ferguson) on the basis of the years in which they occurred. These methods assume that past experience provides a sufficiently good indication of claims payments in the future. Other best practice methods (such as methods based on loss frequency and loss amount) are only used in exceptional cases. The selection of the appropriate method for the respective sub-portfolio is a significant judgement. From the claims payments determined in this way, the future cash flows are finally estimated using settlement patterns also derived from past experience.

Health insurance and life insurance

The best estimate assumptions described below are determined based on past, present and expected developments. These are reviewed and updated at least once a year.

Profit participation assumptions

The policyholder’s assumed profit participation for the corresponding life insurance business is derived for each economic scenario using the management rules. The profit participation is calculated in accordance with the profit participation regulations applicable by law.

Cost assumptions

Cost assumptions are based on the directly attributable actual costs incurred in the years prior to the measurement date. Future additional costs are taken into account in the cost allocation, whereas extraordinary costs are eliminated. The expected cost trend during the projection period is based on the portfolio development, taking into account differences in administrative expenses depending on relevant contract features, such as higher administrative expenses for contracts subject to premiums compared to premium-free contracts.

Lapse assumptions

The lapse rate is based on an analysis of previous lapse rates and the average of comparable financial years. The lapse rate for new products is based on similar products from the past.

Commission assumptions

The commission estimates are based on the applicable commission agreements.

Mortality and disability assumptions

Mortality and disability assumptions are based on the best estimate of future events. Past developments and external demographic forecasts are used here.

Interest rate assumptions

All cash flows are discounted using the adjusted risk-free yield curve, which reflects the characteristics of the cash flows and the liquidity characteristics of the insurance contracts. The risk-free base rates for all relevant currencies are calculated using swap and government bond market data. The underlying market data sources and the parameters required for the interpolation and extrapolation of the risk-free base curves are harmonised with those of EIOPA. The risk-free curve, including adjustments, is extrapolated to a final forward interest rate after the last liquid market data point. The ultimate forward rate reflects long-term real interest rate and inflation expectations and is updated in accordance with the EIOPA parameters.

The risk-free yield curve is adjusted by an illiquidity premium to reflect the liquidity characteristics of the insurance contracts. Illiquidity adjustments are determined by calculating risk-adjusted spreads on government and corporate bonds within the portfolio of the respective entity. Cash flows that fluctuate based on the yields of the underlying items are adjusted to account for the effects of this volatility using risk-neutral modelling techniques and discounted using the risk-free interest rates including the illiquidity adjustment.

Assumptions regarding cash flows to be paid to policyholders

Insurance contracts without direct participation features often give rise to cash flows to policyholders over which the entity has some discretion. To determine how to identify a change in discretionary cash flows, the basis on which commitments under the contract are to be determined shall be specified at inception of the contract. A change in the discretionary cash flows is regarded as relating to future service, and the carrying amount of the contractual service margin is adjusted accordingly.

Risk adjustment for non-financial risk

Risk adjustment is the amount that would be required as consideration for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk. This reflects the risk compensation effect of insurance contracts issued, which is in line with the consideration required and reflects the degree of risk aversion.

In property and casualty insurance, the risk adjustment is determined using the confidence level method. In health insurance and life insurance, the cost of capital method is applied.

For proportional reinsurance contracts in property and casualty insurance, the risk adjustment for non-financial risk is derived from that of the primary insurance. The basis for this is the ratio between gross and net liability for incurred claims.

Confidence level technique

The probability distribution of all expected future cash flows is estimated and the risk adjustment for non-financial risk is calculated as the difference between the median of the future cash flows and the value-at-risk, measured with a percentile of 75 per cent.

Cost of capital approach

The risk adjustment for non-financial risk is determined using a cost of capital rate applied to the required principal for all future years. The resulting capital requirements are discounted using a risk-free yield curve adjusted to include a premium for the illiquidity. The required principal is determined by estimating the probability distribution of all future present values of the cash flows and determining the capital required to meet the contractual obligations with a confidence level of 99.5 per cent over the term of the contracts. The cost of capital rate is the additional consideration that investors would demand for exposure to non-financial risk. The cost of capital rate is 6 per cent (2022: 6 per cent)

Contractual service margin

The contractual service margin is a component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit from a group of insurance contracts that UNIQA will recognise as it provides insurance contract services in the future.

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

Identifying the coverage units

The number of coverage units in a group of insurance contracts is the quantity of insurance contract services provided by the contracts in the group.

These services include:

• insurance coverage (coverage for an insured event);
• investment-related services (for insurance contracts with direct participation features): concerns the management of underlying items on behalf of the policyholder; and
• investment-return services (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 quantity of the benefits provided under the contract and its expected coverage period. The coverage units are reviewed once a year and adjusted if necessary.

For unit-linked and index-linked life insurance, the sum insured represents both insurance benefits and investment benefits – the risk portion is allocated to insurance benefits, while the liability for remaining coverage is allocated to investment benefits.

In life insurance, the time value of money is taken into account when identifying the coverage units.

UNIQA does not make use of the risk mitigation option provided for in IFRS 17.B115.

Investment component

For the identification of investment components, the amount is to be determined that an insurance contract requires UNIQA to repay to a policyholder in all circumstances, regardless of whether an insured event occurs. Investment components may not be recognised in insurance revenue or insurance service expenses.

In life insurance, the investment component during the coverage period results from the lower of the surrender value and the contractually determined amount of the insurance benefit. At the end of the coverage period, the investment component is calculated with the maturity benefit.

Applicable accounting policies

Insurance contracts are contracts through which a significant insurance risk is assumed. Investment contracts are contracts that do not transfer a significant insurance risk and that do not include discretionary participation features. They fall under the scope of IFRS 9 (Financial Instruments).

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

Insurance contracts can be divided into contracts with direct participation features and contracts without participation features. Insurance contracts with direct participation features are those for which, at inception:

• the contractual terms 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 meet the aforementioned criteria, the variable fee approach must be applied. Whether the aforementioned criteria are met is assessed at inception of the contract and may not be reassessed at a later date unless the contract is modified. In addition, the variable fee approach is applied in health insurance long-term business as well as in unit-linked and index-linked life insurance.

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

Level of aggregation and approach

Insurance contracts

For measurement purposes, insurance contracts are aggregated into groups. A group of insurance contracts is determined by identifying portfolios of insurance contracts subject to similar risks and managed together. The defined portfolios are subdivided as follows:

• a group of contracts that are onerous at initial recognition;
• a group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently; and
• a group of the remaining contracts in the portfolio.

The aforementioned groups are further subdivided by underwriting years, as only contracts sold within one year may be included in the same group.

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 makes use of this option and applies it in connection with participating contracts. For these contracts, new business is presented in the cohort of the transition date.

Primary insurance contracts and inward reinsurance contracts are recognised at the earliest of the following dates:

• the beginning of the coverage period of the group of contracts;
• the date when the first payment from a policyholder in the group becomes due; and
• for a group of onerous contracts, when the group becomes onerous.

The group of insurance contracts is established at initial recognition and no subsequent reassessment of the composition of the groups is permitted. If the recognition criteria are met, the contract is allocated to an existing group of insurance contracts or, if the contract may not be allocated to the existing groups, a new group is formed.

Reinsurance contracts held

The grouping of reinsurance contracts held (outward re-insurance) is based on the same principles as for primary insurance, with the exception that reinsurance contracts cannot be onerous.

A group of reinsurance contracts is recognised at the following dates:

• proportional reinsurance contracts: at initial recognition of any underlying insurance contract;
• non-proportional reinsurance contracts: at the beginning of the coverage period of the group. However, if a group of onerous underlying insurance contracts is recognised, recognition is at that date, provided the related reinsurance contract was in force at or before that date.

Reinsurance contracts in property and casualty insurance are mostly non-proportional contracts.

The separation between assets and liabilities from insurance and reinsurance contracts is carried out in accordance with IFRS 17.78, which stipulates that portfolios of insurance and reinsurance contracts that are assets must be presented separately from those that are liabilities.

Insurance acquisition cash flows

Insurance acquisition cash flows are allocated to the groups of insurance contracts using a systematic method, if direct allocation to the group is possible, otherwise at portfolio level. To take changes in assumptions into account, the inputs are reviewed for the allocation method applied at the end of each reporting period.

When applying the premium allocation approach, UNIQA does not make use of the option to recognise insurance acquisition cash flows as expenses for insurance contracts with a duration of up to one year.

Contract boundaries

All the future cash flows within the boundary of each contract in the group are included in the measurement of a group of insurance contracts. Whether the cash flows are within the contract boundary is determined as follows:

Insurance contracts (including assumed reinsurance)

Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the policyholder is compelled to pay the premiums or in which UNIQA has a substantive obligation to provide the policyholder with insurance contract services.

A substantive obligation to provide insurance contract services ends when:

• UNIQA has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks; or
• if these criteria are not met for an individual contract but are met for a portfolio and the pricing of the premiums for the coverage period to date does not take into account the risks that relate to future periods.

Reinsurance contracts

Cash flows are within the contract boundaries if they arise from substantive rights and obligations that exist during the reporting period in which UNIQA is compelled to make payments to the reinsurer or in which UNIQA has the right to receive services from the reinsurer.

The right to receive services from the reinsurer ends when:

• the reinsurer has the practical ability to reassess the assumed risks and, as a result, can set a price or level of benefits that fully reflects those risks; or
• has a substantive right to cancel the coverage.

The contract boundaries are reassessed at the end of each reporting period.

Measurement

Contracts that are not measured using the premium allocation approach

Insurance contracts – initial measurement

UNIQA measures a group of insurance contracts at initial recognition as the sum of the fulfilment cash flows and the contractual service margin. The fulfilment cash flows include estimates of future cash flows, an adjustment reflecting the time value of money and financial risks, and a risk adjustment for non-financial risk.

The risk adjustment for non-financial risk is derived separately from the other estimates and represents the compensation for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk.

The contractual service margin for a group of insurance contracts depicts the unearned profit that UNIQA will generate with the future provision of services. If there is a net cash inflow on initial recognition, a contractual service margin is recognised to avoid profit recognition. The fulfilment cash flows are compensated by the recognition of the contractual service margin and thus lead to a liability for remaining coverage of zero at initial recognition.

If there is a net outflow of funds, the contracts are onerous. This amount is recognised in profit or loss and shown as a loss component of the liability for remaining coverage. The reversal of the loss component is shown as an expense reduction in the “insurance service expenses” item.

The provisions relating to initial recognition also apply to the variable fee approach. The differences between the general measurement model and the variable fee approach only arise in subsequent measurement and concern the adjustment of the contractual service margin and determination of insurance finance income or expenses.

Insurance contracts – subsequent measurement

Since UNIQA also prepares interim financial statements applying IAS 34, the accounting option regarding the treatment of accounting estimates made in interim financial statements must be observed. An entity has an accounting option to change the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements and in the annual reporting period. UNIQA applies the year-to-date approach, i.e. the treatment of accounting estimates in previous interim financial statements is changed and thus the annual result is not affected by estimates in interim financial statements.

The measurement of the fulfilment cash flows is based on current estimates of future cash flows, current discount rates and current estimates of the risk adjustment for non-financial risk at each reporting date. The change in the fulfilment cash flows is recognised as follows:

• In the event of changes relating to future service, the contractual service margin is adjusted. If the fulfilment cash flows increase, the contractual service margin is reduced; if they decrease, the contractual service margin is increased. If an increase in the fulfilment cash flows exceeds the amount of the contractual service margin, this is reversed in full and the excess amount is recognised as a loss in the insurance service expenses. If, over time, there is a reduction in the fulfilment cash flows, this is recognised as income in the insurance service result until the accumulated losses have been made up. A contractual service margin is again created for the excess.
• In the event of a change relating to current and past service, the change is recognised in profit or loss under insurance service expenses.
• Effects of changes in connection with financial assumptions are recognised through profit or loss under insurance finance income or, in cases where the OCI option is applied, divided between insurance finance income and other comprehensive income.

The contractual service margin of a group of contracts measured using the general measurement model is calculated at the end of the financial year from the opening balance adjusted for:

• the contractual service margin of any new contracts;
• the interest accreted on the carrying amount of the contractual service margin during the reporting period (applying the discount rate determined at the date of initial recognition);
• the changes in fulfilment cash flows relating to future service;
• the effect of any currency exchange differences; and
• the amount recognised as insurance revenue because of the transfer of insurance contract services.

The aforementioned changes in fulfilment cash flows that relate to future service include:

experience adjustments arising from premiums received in the period that relate to future service, and related cash flows (such as insurance acquisition cash flows);

• changes in estimates of the present value of the future cash flows in the liability for remaining coverage, except for the effect of the time value of money and the effect of financial risk;
• differences between any investment component in life insurance expected to become payable in the period and the actual investment component that becomes payable in the period; and
• changes in the risk adjustment for non-financial risk that relate to future service.

Because a change in discretionary cash flows is considered as a future service, the carrying amount of the contractual service margin is changed.

For insurance contracts measured using the variable fee approach, there are differences in the adjustment of the contractual service margin with regard to subsequent measurement compared to the general measurement model.

A contract with direct participation features exists if UNIQA has the obligation to pay the policyholder an amount equal to the fair value of the underlying items as well as a variable fee that is retained in exchange for the future service provided by the insurance contract. The variable fee comprises the share to which UNIQA is entitled depending on the varying underlying items.

The contractual service margin of a group of contracts measured using the variable fee approach is calculated at the end of the financial year from the opening balance adjusted for:

• the contractual service margin of any new contracts;
• the change in the amount of UNIQA’s share of the fair value of the underlying items unless the decrease in the amount of the company’s share exceeds the carrying amount of the contractual service margin and a loss component would therefore have to be recognised or adjusted;
• the changes in the fulfilment cash flows relating to future service unless the increase in the fulfilment cash flows would exceed the carrying amount of the contractual service margin and therefore a loss component would have to be recognised or adjusted;
• the effect of any currency exchange differences; and
• the amount recognised as insurance revenue because of the transfer of insurance contract services.

The components to be considered in determining the changes in the fulfilment cash flows related to future service are the same as in the general measurement model, but are measured using current discount rates, and also include the change in the effect of the time value of money and financial risks not arising from the underlying items.

Loss component

After a loss has been recognised on onerous insurance contracts and a loss component of the liability for remaining coverage has been established, subsequent changes in fulfilment cash flows must be allocated on a systematic basis between the loss component of the liability for remaining coverage and the liability for remaining coverage, excluding the loss component.

Changes in the fulfilment cash flows to be taken into account in the systematic allocation include:

• estimates of the present value of future cash flows for claims and expenses released from the liability for remaining coverage because of incurred insurance service expenses;
• changes in the risk adjustment for non-financial risk recognised in profit or loss because of the release from risk; and
• insurance finance income or expenses.

The systematic allocation is calculated as the share of the loss component divided by the present value of future cash outflows plus the risk adjustment for non-financial risk. In addition, the variable fee approach takes into account the company’s share of the change in the fair values of the underlying items divided by the expected claims and expenses.

The systematic allocation shall result in the total amounts allocated to the loss component being equal to zero by the end of the coverage period of a group of contracts.

Any subsequent decreases in the fulfilment cash flows due to changes in the estimated future cash flows relating to future service as well as any subsequent increases in the company’s share of the fair value of the underlying items do not result in a split between the liability for remaining coverage with a loss component and the liability for remaining coverage without a loss component. An allocation to the loss component shall only be made until that component has been reduced to zero.

Reinsurance contracts held

For the measurement of the reinsurance cession, the general measurement model is applied, but with some modifications.

Initial measurement

The present value of estimated future cash flows for the group of reinsurance contracts held is measured using assumptions consistent with those of the underlying insurance contracts. In addition, the reinsurer’s default risk, including the effects of collateral and losses from disputes, is taken into account. The default risk is measured at every reporting date and any changes are recognised in profit or loss.

An amount corresponding to the amount of risk being transferred to the reinsurer is recognised as the risk adjustment for non-financial risk.

The requirements related to determining the contractual service margin on initial recognition are modified to reflect the fact that for a group of reinsurance contracts held there is no unearned profit but instead a net cost or net gain on purchasing the reinsurance.

On initial recognition, the contractual service margin therefore represents any net cost or net gain, measured as follows:

• the fulfilment cash flows;
• the amount derecognised at that date of any asset or liability previously recognised;
• any cash flows arising at the date of initial recognition; and
• any income from the recognition of a loss-recovery component.
• However, if the net cost relates to events that occurred before the purchase of the group of reinsurance contracts held, this cost is recognised immediately in profit or loss as an expense.

Subsequent measurement

The carrying amount of the contractual service margin at the end of the reporting period is measured as the carrying amount determined at the start of the reporting period, adjusted for:

• the effect of any new contracts added to the group;
• interest accreted on the carrying amount of the contractual service margin, measured at historical interest rates;
• recognition of revenue from the coverage of onerous primary insurance contracts (loss-recovery component);
• reversals of a loss-recovery component to the extent those reversals are not changes in the fulfilment cash flows of the group of reinsurance contracts held;
• changes in the fulfilment cash flows, measured at the discount rates applicable at initial recognition, to the extent that the change relates to future service unless the change results from a change in the fulfilment cash flows from onerous primary insurance contracts;
• the effect of any currency exchange differences arising on the contractual service margin; and
• reversal through profit or loss of the contractual service margin because of services received in the period.

A loss-recovery component can only be recognised if the reinsurance contract held is concluded at the same time as or before the recognition of the underlying onerous insurance contracts. The amount for the loss-recovery component, which adjusts the contractual service margin and is recognised in profit or loss, is determined as follows:

Multiplying the reported profit or loss from the underlying insurance contracts by the percentage of claims on the underlying insurance contracts that are expected to be reimbursed by the reinsurer.

Contracts measured using the premium allocation approach

The measurement is carried out using the premium allocation approach if the following criteria are met:

• if the coverage period of each contract in the group is one year or less (taking the specific contract boundaries into account); or
• if it can be expected that the measurement of the liability for remaining coverage would not differ materially from the one that would be produced applying the general measurement model. This criterion is not met if at the inception of the group significant variability in the fulfilment cash flows is expected that would affect the measurement of the liability for remaining coverage during the period before a claim is incurred.

These criteria are predominantly applicable in the area of property and casualty insurance. If the criteria are not met, the general measurement model is used.

For contracts with an average term of one to three years, the premium allocation approach is applied. This approach was developed through sensitivity analyses by comparing the amount of the liability for remaining coverage calculated using the general measurement model and the premium allocation approach.

For contracts with an average term of more than three years, an estimate must be made regarding the stability of the liability for remaining coverage. This estimate is made using a calculation model in which non-financial assumptions (risk adjustment for non-financial risk, cost, loss ratio and lapse rate) and financial assumptions (interest rate) are stressed after one year. The difference of the liability for remaining coverage in each stressed scenario as well as the basic scenario is compared to a defined threshold.

All reinsurance contracts in property and casualty insurance are measured using the premium allocation approach, for the following reasons:

• The majority of reinsurance contracts are based on claim years with a duration of one year; and
• for contracts based on the underwriting year, a concept was created that addresses the contract term and the variability of the fulfilment cash flows. All contracts have an average term of up to three years.

In health insurance, there are only one-year reinsurance contracts, which is why measurement using the premium allocation approach is permissible.

The reinsurance contracts in life insurance are measured using the premium allocation approach if the contracts have a contract boundary of up to one year and the coverage period is also a maximum of one year.

For the initial recognition of insurance and reinsurance contracts measured using the premium allocation approach, the carrying amount of the liability for remaining coverage corresponds to the premiums received minus the insurance acquisition cash flows.

In subsequent measurement of insurance and reinsurance contracts measured using the premium allocation approach, the carrying amount of the liability for remaining coverage is increased by the premiums received in the period plus any amounts relating to the amortisation of insurance acquisition cash flows. The carrying amount is reduced by the amount recognised as insurance revenue for services provided in the reporting period and for insurance acquisition cash flows in the reporting period. Discounting of the liability for remaining coverage is not carried out, as the contracts do not have a significant financing component.

The liability for remaining coverage is increased through profit or loss if it is determined during the coverage period that a group of contracts is onerous. The loss to be recognised is calculated as the difference between the carrying amount of the liability for remaining coverage determined using the premium allocation approach and the (discounted) fulfilment cash flows that relate to remaining coverage determined using the general measurement approach.

The liability for incurred claims is measured using the fulfilment cash flows relating to claims incurred. The estimates of future cash flows are discounted.

Reinsurance contracts held

In principle, the same accounting methods are used for the measurement of reinsurance contracts as for primary insurance contracts.

Where groups of onerous primary insurance contracts are covered by a reinsurance cession, a loss-recovery component is established and the carrying amount of the liability for remaining coverage from reinsurance is adjusted.

Derecognition of insurance contracts

Insurance contracts are derecognised when the obligation specified in the insurance contract expires or is discharged or cancelled. Derecognition also occurs in the event of modifications to the contract in the following cases:

• The modified contract terms would have meant that at initial recognition
  • the modified contract would not have fallen within the scope of IFRS 17;
  • various components would have had to be separated from the host insurance contract, resulting in a different insurance contract;
  • the modified contract would have had a substantially different contract boundary; or
  • the modified contract would have been included in a different group of contracts.
• There is a change in the contract category with or without direct participation features.
• Due to the contract modifications, the criteria for applying the premium allocation approach are no longer met.

For contract modifications that do not result in derecognition, the changes in cash flows are treated as changes in estimated fulfilment cash flows. Exercising a right included in the terms of a contract is not a modification.

Disclosure

Disclosures in the consolidated balance sheet are made at portfolio level. The carrying amounts of the portfolios, depending on whether they represent an asset or a liability, are added up and accordingly disclosed separately. These disclosure criteria must also be applied to the reinsurance contracts held, which must also be reported separately from primary insurance. The respective carrying amounts of inward reinsurance are included in the primary insurance.

The amounts presented in consolidated profit or loss and in other comprehensive income are to be disaggregated into an insurance service result, comprising insurance revenue and insurance service expenses, and insurance finance income or expenses. Investment components may not be presented in insurance revenue or insurance service expenses.

The balances of reinsurance held are also recognised in profit or loss and in other comprehensive income separately from the primary insurance amounts. In contrast to primary insurance, there is an option to report the insurance service result for the reinsurance as a single amount. UNIQA makes use of this option.

All the changes in the risk adjustment of non-financial risk can be shown in the insurance service result. Disaggregation of the changes into an insurance service result and insurance finance income or expenses is not required. UNIQA makes use of this option.

Insurance revenue: contracts that are not measured using the premium allocation approach

Insurance revenue represents the amount of consideration for the provision of services under insurance contracts and constitutes the change in the liability for remaining coverage. The expected consideration must cover the following items:

• The claims expected for the reporting period at the beginning of the year and expenses allocated to the contracts. Amounts allocated to the loss component of the liability for remaining coverage, repayments of investment components, insurance acquisition cash flows and transaction-based taxes collected on behalf of third parties (e.g. insurance tax) are excluded from this.
• Change in the risk adjustment for non-financial risk. This does not include changes that relate to future service (adjustments to the carrying amount of the contractual service margin) or amounts allocated to the loss component of the liability for remaining coverage.
• Amount of the contractual service margin recognised in profit or loss for the services provided in the period.
• Experience adjustments for premium receipts that relate to current and past service.
• The portion of the premium that relates to recovering insurance acquisition cash flows. The allocation is carried out pro rata temporis to the reporting period to be allocated. Assuming that insurance contracts are priced in such a way that the insurance acquisition cash flows are earned back, the same amount is also recognised as an insurance service expense.

Insurance revenue: contracts measured using the premium allocation approach

With the premium allocation approach, the insurance revenue of a period corresponds to the amount of the expected premium receipts in that period. To allocate the service provided under the insurance contract to the current period, the expected premium receipts are allocated on the basis of the passage of time.

Insurance service expenses

• Insurance service expenses are recognised in profit or loss as soon as they are incurred and include:
• incurred claims and other incurred insurance service expenses
• amortisation of insurance acquisition cash flows
• loss components as well as reversals of these loss components
• adjustments to the liability for incurred claims (except those adjustments arising from discounting)
• Insurance service expenses shall not include any investment components.

Insurance service result from reinsurance held

The insurance service result includes the amounts reimbursed by the reinsurer, the premiums allocated to the period, and any gains or losses from the change in the loss-recovery component.

Insurance finance income or expenses

Changes in the carrying amount resulting from the effect of changes in the time value of money and financial risk must be reported under insurance finance income or expenses.

Insurance finance income or expenses also includes changes in the underlying items.

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. This option is exercised at the level of the portfolio of insurance contracts. The amounts not recognised in other comprehensive income are determined by a systematic allocation over the duration of the group of insurance contracts and recognised in profit or loss.

For contracts measured using the general measurement model as well as the premium allocation approach, the discount rate determined at initial recognition (“locked-in yield curve”) is applied.

For contracts measured using the general measurement model and for which changes in the assumptions related to financial risks have a substantial effect on the amounts paid to policyholders, the allocation is made on the basis of a constant rate over the remaining duration of the group of contracts.

For contracts measured using the variable fee approach, the amounts recognised in in profit or loss correspond to the amount recognised in profit or loss for the underlying items.

The tables below show the changes in net assets and liabilities from insurance contracts. After the presentation of the change in the liability for remaining coverage and the provision for unsettled claims from primary insurance and reinsurance, the change in the measurement components of contracts that are not measured using the premium allocation approach is presented for primary insurance and reinsurance contracts.

The shares of profit/(loss) attributable to the discontinued operations are included in the tables below to enable a reconciliation with the level as at 31 December 2022. A reconciliation to consolidated profit/(loss) is not possible on an item-by-item basis because the shares attributable to the discontinued operations are not included in consolidated profit/(loss) for the comparative period in accordance with the provisions of IFRS 5.

Analysis of remaining coverage and incurred claims

Analysis of remaining coverage and incurred claims for reinsurance contracts

Analysis by measurement component – contracts not measured according to the premium allocation approach

Insurance revenue per business line

The following table shows the insurance revenue per business line, broken down into contracts that are measured in accordance with the premium allocation approach and those that are not measured in accordance with the premium allocation approach.

Effects on the measurement components of contracts recognised for the first time

The following tables summarise the effects on the measurement components of contracts recognised for the first time in the period that are not measured using the premium allocation approach.