“The low interest environment continues to present the largest challenge for the Austrian insurance industry,” the Executive Directors of the Austrian Financial Market Authority (FMA), Helmut Ettl and Eduard Müller, commented in the “FMA Report on the State of the Austrian Insurance Industry 2020” (Bericht der FMA 2020 zur Lage der österreichischen Versicherungswirtschaft): “Low interest rates lead to higher liabilities, place solvency ratios under pressure and lead to reduction in bonds yields.” Due to the COVID-19 crisis, the interest rate turnaround that had been hoped for in 2019, has been put off for a few years, which places life insurance companies under additional pressure, as their margins[1] already stand at under 1%. Furthermore, the COVID-19 pandemic has almost doubled stock market volatility – i.e. the scope, probability and intensity of volatility – compared to pre-COVID times. The capital base of the Austrian insurance industry, measured in terms of the Solvency Capital Requirement (SCR)[2], has fallen from 259% in 2018, to 238% in 2019 and 214% as of mid-2020, but nevertheless is still more than twice as high as is necessary.
The hunt for yield: challenging low interest environment
How difficult it is in the current environment to realise adequate returns on investments, is already apparent from a single key figure: in October 2020 globally a bond volume of € 16,300 billion was traded with negative rates. In this environment, the individual insurance undertakings pursuant very varied investment strategies in the hunt for yield. Four insurance undertakings invest more than two-thirds of their total assets in investment funds, whereas two others have more than one-third of their assets invested in real estate (in the markets as a whole the median is a mere 3%). Furthermore, a trend is also observed towards long-term financial instruments, as they carry higher interest rates. This approach however carries the risk of losses in market value in the effect of a turnaround in interest rates.
In mid-2020, the insurance undertakings invested 25.1% of their assets in corporate debt, 22.2% in government debt, 19.6% in investment funds, 16.7% in participations and the remaining amount in real estates, credits, cash and shares. In total approx. 60% is invested in bonds. No “home bias” can be observed in favour of Austrian government bonds: a mere 5% or € 5.8 billion is invested in them. It is however significant that insurers are increasingly making use of the expertise of external asset managers for the management of assets, who managed 20% of assets in June 2020 compared to only 13% of total assets managed in 2016.
Investments that are exposed to risks
The FMA refers to its analysis in the report about how exposed insurance undertakings’ assets are towards specific categories of risks: 6% or € 8 bn of assets are invested in economic branches that are particularly at threat due to COVID-19; around 20% of assets are in invested in investments that are potentially affected by the transition to a climate-neutral economy.
Advancing market concentration
The number of insurance undertakings has decreased from 106 in 2011 to 83 (in 2019); the most noticeable decrease is for undertakings with the stock company legal form (Aktiengesellschaft) which has fallen from 46 to 29, while small mutual insurance associations (kleine Versicherungsvereine) the number has fallen by six from 53 to 47. By insurance sector the number of exclusively life insurance providers has decreased from seven to six, with exclusively indemnity insurance undertakings falling from 21 to 13, and composite insurance undertakings from 24 to 16. In mid 2020, the three largest Austrian insurance groups collectively managed 65% of all assets in the Austrian insurance industry, or €126 billion. The full “FMA Report on the State of the Austrian Insurance Industry 2020” can be found on the FMA website in German through the following Link.
Journalists may address further enquiries to:
Klaus Grubelnik (FMA Media Spokesperson)
+43/(0)1/24959-6006, or +43/(0)676/88 249 516
[1] Net Interest less average assumed interest rate
[2] SCR (Solvency Capital Requirement): this figure for the Solvency Capital Requirement states how high the capital base of an insurance undertaking is required to be, to be able with a probability of 99.5% to absorb unexpected losses within the next twelve months, and despite this also be able to continue to meet all its obligations towards insurance policyholders.