The period of low interest rates experienced in 2014 also continued throughout 2015, with rates falling to historically low levels in some cases. This situation has a particularly marked effect in life insurance. Depending on the investment strategy, the persistently low interest rates can lead to a situation in which the income generated is insufficient to finance the guarantees made to policyholders. The topic of low interest rates continues to be of concern to the entire European insurance industry and is leading to intensive discussions about how insurance companies can ensure that customer options and guarantees (in both existing and new business) are financed over the long term. Significant measures taken by UNIQA within the defined life strategy have been to focus on implementing the ALM approach including stringent management rules (e.g. regarding the management of profit sharing) and to provide continuous portfolio management to support the new business strategy in the personal injury insurance business.
One specific issue is the question of requirements (which vary from country to country) to recognise supplementary discount rate provisions, i.e. requirements to set aside special provisions in the respective local accounting if interest rates are low. As at 31 December 2015, UNIQA had set aside a special provision exclusively in local accounting in the amount of € 67.8 million in its Austrian companies because there is a statutory requirement in Austria to recognise this special provision. The corresponding regulations for forming the special provision were revised as part of the restructuring of the Insurance Supervision Act in Austria, whereby it must be emphasised that a part of the expenditure from 2016 represents a deduction item in the assessment basis for the profit participation. This special provision in the local accounting is to be seen alongside the liability adequacy test (LAT) to check whether the provisions in the IFRS financial statements are adequate. Depending on the interest rate situation and the resulting planning of investment income, there is the fundamental risk in the future of a potential provision requirement as a consequence of the LAT.
In terms of the insurance market in CEE, improved economic outlooks in the countries of Central and Eastern Europe provide better opportunities for growth for the insurance industry, considerably outperforming those in the already saturated insurance markets of Western Europe. However, the premium revenue remains patchy for 2015. For life insurance, the premium volume for the entire region fell slightly, primarily due to the continued heavy decrease in single premium business, particularly in the Czech Republic. In contrast, a series of insurance markets in Southeastern Europe recorded very strong growth in the life insurance business. The market generally grew in the non-life sector, although the intense price competition, particularly in the vehicle and property insurance lines in several Central and Eastern European markets, also resulted in lower premium revenues. Reforms to legal structural conditions combined with the exit or withdrawal of individual competitors should, however, help improve the competitive situation in individual markets. Expectations of higher premium revenue in 2016 remain cautiously optimistic in line with the changes in the insurance markets over the past year and the improved economic conditions. The additional effects of the current political crisis on the insurance industries in Ukraine and Russia are difficult to assess at the present time, although we do expect there to be a trend towards improvement in the market situation. Further political risks in the region are difficult to assess at the present time and cannot be ruled out completely, although they should be of less relevance to the Group in 2016. The risk of sustained or even more intense price competition can be categorised as comparatively higher, particularly in the non-life sector in the Central European markets.
The continued political uncertainty in Ukraine caused by the separatist movement in the east of the country raises questions about whether the country will be able to go on servicing some of its borrowing. As at 31 December 2015, the UNIQA Group’s portfolio of Ukrainian government bonds came to a nominal value of € 19.0 million and a fair value of € 16.4 million. Of these, a nominal value of € 16.9 million are invested in the Ukrainian subsidiary.
The Ukrainian currency, the hryvnia (UAH), weakened by approximately 27 per cent against the euro during the course of 2015 (exchange rate as at 31 December 2015: 0.0383. The total value of all the UAH securities in the UNIQA Group amounts to a fair value of € 6.2 million.
The continued EU sanctions against Russia are impacting the exchange rate of the rouble to the euro (exchange rate as at 31 December 2015: 0.0124). In turn, this led to a volatile interest rate environment and the devaluation of government bonds. The fair value of the total portfolio of RUB securities in the UNIQA Group amounts to a fair value of € 71.4 million, of which € 52.1 million are invested in the Russian subsidiary. The nominal value of Russian government bonds in the UNIQA Group’s portfolio amounts to € 100.9 million (of which € 61.2 million in the Russian subsidiary), with a fair value in the amount of € 95.5 million.
In terms of technical risk, the further development of the motor business in CEE countries (comprehensive vehicle insurance, including liability insurance) continues to represent the greatest challenge because this business segment accounts for a considerable proportion of the property and casualty insurance in the CEE region. The most significant difficulties are, firstly, that there is a continuously changing legal environment leading to higher benefit payments in the event of personal injury claims and, secondly, that many markets are still subject to a price war as companies vie to win customer segments. UNIQA increasingly relies on a professional pricing approach. In addition to conducting ongoing market analyses, the Company carries out standardised profitability tests to ensure that pricing is appropriate. In addition, guidelines are intended to ensure that international insurance claims (known as green card claims) are settled within UNIQA affiliated companies or with exclusively specified partners.
In the second half of 2015, the agreements between all relevant UNIQA countries were amended accordingly. For the first time, there is an internal solution in place with UNIQA Assicurazioni as an expert partner in Italy; UNIQA Romania was the first country to switch in September 2015. The next focal point is on the selection of exclusive partners that meet our quality requirements in those countries in which we have no representation via a UNIQA company.
A structured review (leakage audit) was carried out in 12 countries in 2015 on closed claims with the aim of achieving ongoing improvements in the claims processes, with individual measures agreed with each country as a result. This will be continued in 2016. The focus will also be on “combating fraud” and measures aimed at countering the development of “personal injury”.
The topic of the introduction of Solvency II continues to present a major challenge, particularly as the new legal framework is now coming into full effect for the first time. It must be highlighted here in particular that UNIQA has developed a partial internal model for property/casualty insurance which is being evaluated by the Austrian insurance supervisory authority as part of a pre-application phase. Sufficient resources must be dedicated to this task as a result of the high level of administrative effort involved in the official procedure.
Concerning operational risk, there is a need for capital investment in the renewal of IT infrastructure and systems. The present situation is currently marked by very elaborate business processes and the complexity resulting from them in the IT sector. The greatest risks in the IT sector are the increasing IT complexity, any destabilisation of older environments, monopoly of knowledge and the growing risk in the area of IT security. As a response to this, UNIQA began modernising its operating model within the IT sector in 2014, simultaneously standardising all IT processes and control bodies in the sector and reducing the operational risk in the IT field. These days, IT works exclusively based on individual tools and workflows that are standardised, with the workflows regulated by quality gates in the event of changes to the environments. Once the IT organisation has been modernised, UNIQA plans to modernise IT as a whole starting in 2016. This programme involves modernisation of the most important insurance programmes and thereby responds to the constant changes in the competitive environment, along with the requirements from customers and those related to products in today’s insurance market. This solution will allow a reduction in the complexity in IT as well as in the length of time required for marketing inventions and new developments, with no need to continue relying solely on the knowledge of key individuals.
The preparatory work on Solvency II now results in control processes that will take full effect for the first time in 2016. For instance, the reporting requirements (Pillar 3 of Solvency II) in particular present challenges that must be given the appropriate priority. It is the quantitative reporting requirements (QRTs) and associated data and process requirements that result in high additional effort within the organisation and that require attention accordingly. More qualitative reports are required for the supervisory authority in the form of the Regular Supervisory Report (RSR) and the Actuarial Function Report (AFR). Extensive preparations are also needed for the Solvency and Financial Condition Report (SFCR) in order to create a good publication for the first time in 2017 (for the reporting year 2016). As already mentioned with regard to the challenges, a high priority is also being assigned to the approval procedure for the partial internal model for property/casualty insurance and the associated resources it calls for.
UNIQA is working on developing its value-oriented control approach on a continuous basis, and this is being put on a more secure footing as a result of Solvency II coming into force. In the future, capital management and the planning of estimated income will be extensively based on the risk capital position in the Group, the individual operating units and their areas of business. We have set ourselves the objective of achieving a transparent presentation of our approach to capital, the most significant risks and related stress, the associated target returns and an appropriate dividend policy. From the starting point of a defined risk-bearing capacity, the target returns are to be selected such that the return on risk capital permanently exceeds the cost of capital, ensuring ongoing dividend payments, while at the same time not jeopardising risk-bearing capacity. Assurances are in place to support this ambition which guarantee that a consistent framework is used for economic value creation, starting with the risk and earnings assessment in the new product process through to the analysis of the results.
Continuation of the strategic programmes relating to cost management, ensuring profitability in property/casualty insurance, the further development of the life insurance strategy, including portfolio management (in-force management), capital investment from an ALM perspective and the associated internal processes represent crucial strategic cornerstones as they have in previous years as a result of the ongoing period of low interest rates. All programmes are to make a contribution to enable the Group to achieve the planned profits in 2016 and sustain this level in the years ahead. Particularly in this period of low interest rates and significant volatility in capital markets, the successful implementation of projects that stabilise or improve net profit in the core operating business is central to our activities.
Starting in 2016, UNIQA will pay greater attention to the topic of further developing future IFRSs (IFRS 4 and IFRS 9). The major changes expected in the assessment (balance sheet as well as income statement) of the insurance business require an adequate lead time in order for the content and process-related challenges to be implemented accordingly. Despite UNIQA’s good preparations within the scope of Solvency II, we still expect that significant additional effort will be required in order to be able to meet the upcoming IFRS requirements. Initial studies are due to be carried out for this purpose in 2016 with the aim of developing a tangible implementation plan for the coming years.
Work on developing a Target Operating Model (TOM) for finance processes is taking place for the first time in 2016 as part of the restructuring and optimisation of the finance division, similar to the work on the core processes in the last few years. “TOM Finance” is aimed at ensuring as uniform an acquisition process as possible within the Group, as well as improving and accelerating processes and eliminating any inefficiencies that may still exist. We see this as a further consistent step towards improving the quality of the figures while at the same time speeding up the compilation process.
The promotion of the digital single market as well as the further development of consumer protection provisions related to financial services for private customers will support us within the scope of regulatory changes. The Green Paper published by the European Commission in mid-December 2015 has already started a consultation process on the consequences of digitalisation of financial products, and examines the potential for developing new innovative products in this field. In addition to this, the European Commission is also examining the options for creating a beneficial environment for Pan-European Pension Products (“PEPPs”) via a call-for-advice to EIOPA. The appeal of long-term infrastructure investments will also increasingly be incentivised through accompanying regulatory measures and will influence investment strategies. The EU Insurance Distribution Directive “IDD” which was decided at the end of 2015 must be implemented by the Member States within the next 24 months, and will again ensure increased transparency (including in relation to disclosing commissions, standardised information sheets and disclosing the total costs of life insurance).