From statutory to international accounting - Experiences of a German health insurance company IAAHS Colloqium Dresden 2004, Kai Spier Ein Unternehmen der ERGO Versicherungsgruppe
Table of contents • Timetable of past, present and future developements for the Victoria KV which affects accounting practise • The US-GAAP Solution • Special items of German health insurance • Change of interest rates • The risk of multiple statements and missing experience • ED5/IFRS 4: What will be? Ein Unternehmen der ERGO Versicherungsgruppe
Timetable • 1853: Victoria fire insurance founded • 1855: Leipziger Krankenkasse founded (Heym: constant premiums depending on age of entry). • 1921: Gilde health insurance AG established • 1929: Black Friday, big crash of stock exchange markets • 1930: Calculation with ageing reserves introduced (Tosberg..) • 1949-51: Official admission that ageing reserves can be set tax-free, order to treat health insurance mathematically like life insurance, headlines for technical business plans . • 1988: Gilde health insurance taken over by Victoria • 1998: ERGO Group established (DAS, DKV, HM & VICTORIA) with main shareholder Munich Re Ein Unternehmen der ERGO Versicherungsgruppe
Timetable • 1998: globalisation, mergers & acquisitions, international capital markets, “going to NYSE“ . It has been gold rush time! • 1998-2000: ERGO forced IAS-accounting. 1999 first business year published in 2000 according to IAS/US-GAAP • 2000: Maximum hausse, high noon of speculation • 2002 March: Maximum baisse , changes in statutory taxation and accounting have been necessary until end of 2003. • 2002 July: order of EU-Parliament & Council for international accounting rules and their adaption by national authorities • 2005: IFRS as a must for all companies on capital market and beginning of phase I) for insurance contracts • 20??: beginning of phase II) Ein Unternehmen der ERGO Versicherungsgruppe
The US-GAAP-Solutions IAS/US-GAAP Management: • IAS where standards exists, otherwise US-GAAP • FAS 60: natural policyholder participation not in general • Basic assumptions: claims per head (Kx), interest rate (i), lapse rate (wx), death rate (qx), statutory values accepted as best estimate with PAD. • Most important differences – i : statutory (<=3,5%) / US-GAAP starting with (5%-6%) – reserves zillmerized / DAC activated – reserve for claim regulatuion only in US-GAAP • Actuarial excercises: Set start values for existing contracts and build a parallel management. Ein Unternehmen der ERGO Versicherungsgruppe
The US-GAAP-Solution Typical Methods • Model-points: classify contracts (sex, tariffs, entry-age, duration ) and calculate FAS 60 developement from beginning for one exemplary contract (p.e. with Excel). • Aggregation: classify contracts due to some basic assumptions (sex, tariffs, age, a.o. ), condense the input values and calculate benefit reserve with them. • Calculate reserves and DAC for every single contract and then save these values separately, too. • Often a mix of the above methods is used. F.e. take I or II (with an adjusted model) to determine the start values and initialize the contract management system. Ein Unternehmen der ERGO Versicherungsgruppe
The US-GAAP-Solution Typical Methods = − ⋅ ( ) ( ) z z V A P a + + + / m x x m x x m x m = ⋅ ( ) ( ) z z V ( 5 , 5 ) g ( 5 , 5 ; 3 , 5 ) V ( 3 , 5 ) + m x x m m x J n ( ) ( ) ∑ ∑ = DAC J DAC i − ( J j ) x ( j ) = = j j i 1 0 = BR ( 5 , 5 ) m x ( ) + ⋅ + ( ) z ( 1 Sreg ) V ( 5 , 5 ) DAC ( 5 , 5 ) m x m x “Dezillmerization“ Ein Unternehmen der ERGO Versicherungsgruppe
Special german items • Well-known from combined life insurance the net premium in German health insur. allows a splitting into two components: ( ) = + = − + ( z ) ( z ) P SP RP P K K + + + x m x x m x x m x m With a risk driven deposit component SP and the natural risk component RP. • Vctoria shows the following situation for long term insurance (Jan. to March): – 141,3 Mio EUR gross premium – 81,0 Mio EUR benefits without regulation – 34,1 Mio EUR saving component (deposit) – 9,8 Mio EUR direct acquisition costs for agents . Ein Unternehmen der ERGO Versicherungsgruppe
Special german items • Waiting period and selection profits (WuS): – tariffs include some restrictions for benefits to be paid in the first years (waiting period) – selections lead to applicants with a lower level of desease than or with appropriate premium enhancements. • statutory: claims not reduced, WuS as amortized acquisition costs • If the WuS are generated only in the first year we have: = − ⋅ ' ' ' V A P a + + m x x m x x m 0 = ; 0 m = WuS + ⋅ V a > + ; 0 m m x x m a x Ein Unternehmen der ERGO Versicherungsgruppe
Special german items • change in tariffs: – 178f VVG gives an insured the right to change his (q) tariffs to (a) others in the same company with similar benefits and take along the full reserve. – Therefore you need some rules to distribute the reserves from the source to the aim (an example): ∑ q = q Q V ( i ) = s m x i 1 = ⋅ max a ( ) ( ) ( ) V j P j a j + + m x x m x m ∑ = a max max ( ) A V j = s m x 1 j = ⋅ max max V ( j ) Q V ( j ) / A m x s m x s Ein Unternehmen der ERGO Versicherungsgruppe
Change of interest rate • The mechanism of statutory regulated premium adjustment demanded an equivalent treatment in accordance with FAS 60. • As a basic guidance we took Criss Clonningers “prospective unlocking“, which is a familiar method. • First we thought to have the right to adjust the US-GAAP- interest rate every time we adjust the gross premium at all. • Auditors now: right exists <=> gross premium is adjusted because of changes in interest rates (margin of earnings!). • Under respect of this treatment and the recent financial market the interest rates were mostly chosen too unsafe. • Every tariff can be corrected by prospective unlocking at once . Ein Unternehmen der ERGO Versicherungsgruppe
The risks • The current statutory valuation system only refers to one system of basic calculation assumptions: – premium calculation – statutory accounting (reserves) – solvency – taxation (but perhaps with different asset valuation) – shareholder participation – policyholder participation • Big differenences to IAS/US-GAAP in capital earnings (-42,9) and benefits and related expenses (+27,4), costs (+10,0) • The material existence depends only on statutory regulations! • Munich Re publishes IAS for analysts not German GAAP! • How to control? IAS? German GAAP? Embedded Value? Ein Unternehmen der ERGO Versicherungsgruppe
ED5/IFRS 4 • IFRS4 published at the beginning of April. • DAV subgroup worked out an help manual to support German health insurer finding their way to IFRS4 (based on ED5). • In this manual we deal with the following items: – Accounting options: The principles used at the end of business year 2004 determine the possible acounting methods of the next periods. Local GAAPS are widely accepted. – Classification of insurance contracts: significant risk, adversely affects insured, uncertain future event. Criteria: fullfilled by the single contract view! – Unbundling: The saving component is completely accounted in the liabilities. No unbundling necessary. Ein Unternehmen der ERGO Versicherungsgruppe
ED5/IFRS 4 – Embedded derivatives: A premium deposit has to be accounted out from insurance contracts. Other products checked fail as e.d. – RfB: We recommend to show policyholder participation as liability and not to hide them in equity (options). – Reinsurance: signing of reinsurance should not lead to new basic assumtions on the liabilities. – Loss recognition: Test as a must, method is familiar with existing tools (US-GAAP). If LR-test alr. established in a sufficient way, it can be contiunued. No need with German GAAP? • Phase II: no explicit date of new IFRS. Phase I) to be continued until new standards set. Fair value will be the name, what could be the content? Ein Unternehmen der ERGO Versicherungsgruppe
From local to global health mathematics - Experiences of Dresden IAAHS Colloqium Dresden 2004 Ein Unternehmen der ERGO Versicherungsgruppe
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