3.1. Low interest rates
A constant decline in the interest rate curve has been observed since 2009. This effect has had a particularly severe impact on life insurance.
Depending on the investment strategy adopted, these persistently low interest rates may lead to a situation where the income generated is not sufficient to finance policyholders’ guarantees.
Measures to be implemented as a priority in order to minimise this risk are the reorientation of the life strategy and stringent implementation of an ALM approach.
UNIQA 2.0 life insurance strategy
A programme was developed in 2011 and 2012 as part of a project aimed at ensuring “value-oriented management of the UNIQA Group” which set out a strategy for how the life insurance business model could be safeguarded on a sustainable basis in the future. Based on analyses focusing on traditional life insurance in Austria – due to the high proportion this represents in market risk – a range of work packages were adopted aimed at improving the risk and earning situation:
3.2. European sovereign debt crisis and stability of the euro
The largest systemic risk in the first six months of 2012 was the European sovereign debt crisis potentially turning into a currency crisis (crisis in the European Monetary Union). As a result of the haircut and elections in Greece in June 2012, there was increasingly serious discussion of a euro zone country leaving the European Monetary Union (EMU). Due to economic contagion effects, the possibility of a chain reaction of further peripheral euro zone countries leaving the currency area could no longer have been ruled out in this extreme scenario. In the worst case scenario, this could have resulted in huge devaluation affecting a core euro in some cases (with Austria as a member of a core union) and a series of defaults in countries leaving the union.
Provision was already made in the UNIQA Group for the risk of potential defaults by reducing corresponding risk portfolios in the first quarter of 2012. Austria would be a member of the core euro zone as a traditional hard-currency country. Converting balance sheets into new currencies (e.g. Italy) on both the assets and liabilities side would absorb the effect on the insurance group to a certain extent in the relevant countries.
Governments made relatively large efforts over the course of 2012 to stabilise the euro zone in the long term and restore economic convergence among the euro zone countries. The European Fiscal Compact was signed in March 2012, which aims to secure the countries’ debt sustainability on a long-term basis. The European Stability Mechanism (ESM) came into force in the second half of the year. The recapitalisation of the Spanish banking sector with an approved credit line of € 100 billion in July set the precedent for a direct bank rescue package from the ESM. EU finance ministers agreed in December to establish a standardised supervision mechanism for European banks. The decision made by the European Central Bank in the middle of the year to support euro zone countries where necessary as a “lender of last resort” by means of an unlimited bond-buying programme (OMT) brought considerable relief and extra time to implement further structural reforms in the member states.
Despite intense effort on the part of governments and the central banks, overcoming the debt crisis still harbours significant risks. Events such as the outcome of parliamentary elections in Italy and Germany constitute very uncertain factors with regard to the further development of the euro zone and peripheral nations.
3.3. Solvency II
The introduction of Solvency II has been delayed further. The date scheduled for its entry into force was postponed to 1 January 2014 in September 2012 by means of a quick-fix directive. However, there is already speculation that this deadline will not be retained either. A long-term guarantee assessment must be concluded in order for Solvency II to be implemented. This assessment must be performed in order for the Omnibus II Directive to be adopted. This study will determine the impact of assumptions used in the valuation of long-term guarantees on the solvency of insurance companies – in particular, what impact adjusting the interest rate curve will have, which is used to discount technical provisions.
EIOPA (European Insurance and Occupational Pensions Authorities) is currently examining the introduction of “phasing-in”, where parts of Solvency II would come into force ahead of schedule. The following are currently being discussed:
- Risk management – governance and risk management process issues
- ORSA (Own Risk and Solvency Assessment) and
- Sections of Solvency II reporting
Despite the delays, the UNIQA Group is continuing with all projects it has initiated with the same level of intensity, as the management believes that the processes and tools implemented and adapted Group control processes (ORSA) will make a significant contribution to implementing the UNIQA 2.0 strategy.