The period of low interest rates continued throughout 2014, 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 the UNIQA Group 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 2014, UNIQA had set aside a provision in the amount of €34.1 million in its Austrian companies because there is a statutory requirement in Austria to recognise this special provision. As the supplementary discount rate provision is to be built up over a period of 10 years in Austria, corresponding expenses are to be expected (in local accounting) over the coming years. 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.
With regard to the insurance market in CEE countries, the expected economic situation in the Eastern European markets poses a certain challenge to the Group to achieve disproportionately high growth in the short term and compared to the Western European insurance markets. For example, the Group was unable to record any premium growth in this region in 2014. The premium volume for the entire region contracted, mainly in the life insurance business, although this also continued to be attributable to a sharp drop in single premium business in Poland and a deliberate reduction in the volume of motor vehicle insurance in selected markets. Given this disappointing trend in the past year, expectations of higher premium revenue in 2015 remain moderate.
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 2014, the UNIQA Group’s portfolio of Ukrainian government bonds came to a nominal value of €34.1 million and a fair value of €25.2 million. Of these, a nominal value of €30.1 million are invested in the Ukrainian subsidiary.
The Ukrainian currency, the hryvnia (UAH), weakened by approximately 41 per cent against the euro during the course of 2014 (exchange rate as at 31 December 2014: 0.0523; as at 31 December 2013: 0.088). The total value of all the UAH securities in the UNIQA Group amounts to a fair value of €4.0 million.
Together with the fall in the price of oil in December 2014, the EU sanctions imposed on Russia caused an immediate and sharp drop in the value of the rouble against the euro (exchange rate as at 31 December 2014: 0.0142, as at 31 December 2013: 0.0221). In turn, this led to a volatile interest rate environment and the devaluation of government bonds. The total value of all the RUB securities in the UNIQA Group amounts to a fair value of €47.9 million, of which €37.7 million are invested in the Russian subsidiary. The nominal value of Russian government bonds in the UNIQA Group’s portfolio amounts to €123.0 million (of which €55.7 million in the Russian subsidiary), with a fair value of €102.3 million.
In terms of actuarial 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/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 Group 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 in conjunction with specified partners.
After the Solvency II Directive (Directive 2009/138/EC) has been implemented into Austrian law with the Insurance Supervision Act 2016, which is a complete revision of the existing Austrian legislation, new versions of all existing regulations will also be enacted. One of the main challenges in 2015 will be to provide detailed support for this process. The new Insurance Supervision Act was published in the Austrian Federal Gazette on 20 February 2015 and will come into force on 1 January 2016.
The preparatory work in connection with Solvency II is closely associated with the Insurance Supervision Act 2016. In addition to the new reporting obligations, the biggest challenge in this preparatory work is the project being undertaken by the UNIQA Group to promptly apply for a partial internal model relating to property/casualty insurance. This project is subject to a very narrow timeframe because of the late publication of the regulatory requirements. Sufficient resources must therefore be dedicated to the project to enable the Group to submit an approval application in a timely manner.
As regards operational risk, there is a need for some capital investment in the renewal of IT infrastructure and systems. In the short- and medium terms, the Group is faced in numerous instances with a switch between generations of technologies to enable it to maintain the proper operation of the business and respond to changing customer and market expectations.
A strategic question for 2015 is how to proceed with the handling of the changing circumstances in CEE countries in relation to associated partners. In February 2015, UNIQA's key partner in international banking sales (Raiffeisen Bank International) announced its intention to withdraw from the Polish and Slovenian markets. Even though the impact is immaterial because the business involved represents a small proportion of the Group's overall business, there remains the issue of the subsequent strategic direction of bank sales in these markets. Another ongoing challenge is the question of reputational risk. This is the risk of an unexpected adverse change in enterprise value caused by damage to UNIQA's reputation. The identification of reputational risk is an important part of the risk management process. These risks are discussed in the quarterly committee meetings and the Management Board initiates appropriate corrective action. A risk assessment in accordance with a risk map, i.e. a presentation of the key risks faced by the UNIQA Group across all risk classes, is also presented for information purposes to the Supervisory Board.
As in the past year, further preparatory work relating to Solvency II will continue to have a very high priority in 2015. In accordance with the transition guidelines that have been put in place (section 130c of the Insurance Supervision Act), the Group will have to meet a range of first-time reporting obligations to the supervisory authorities in 2015. Quantitative information in connection with the solvency calculation and also qualitative information, particularly in relation to governance requirements, must be prepared at Group level by mid-July 2015. In addition, we will continue to expand our partial internal model as part of the advance approval process and adapt processes and models in line with the evolving Solvency II standards. The forward-looking own risk and solvency assessment (ORSA) also forms a core component of the preparation for Solvency II. Whereas the ORSA requirements in 2014 were focused on the assessment of the overall solvency requirement, further elements will be added in 2015 to facilitate the presentation of a complete picture of the risk assessment: Firstly, an in-depth analysis of the extent to which the solvency requirements and technical provisions are satisfied on an ongoing basis; secondly, a review to establish whether the calculation used for the solvency capital requirement appropriately reflects the risk profile of the Company.
Further developments at UNIQA in connection with value-based management are also closely linked to the implementation of Solvency II. In the future, capital management and also 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.
A further priority for 2015 is to continue the strategic programmes relating to cost management, 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. The use of the latest standards in underwriting the risk in the property and casualty insurance business, primarily in connection with international insurance claims (green card insurance), is another area of focus. All programmes are to make a contribution to enable the Group to achieve the planned profits in 2015 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.
In life insurance, another important milestone was achieved in the area of new product design in December 2014. At UNIQA Österreich and Raiffeisen Versicherung AG, the lowering of the maximum permissible discount rate (as of 1 January 2015 to 1.50 per cent) was used to completely revise the products in the classic life insurance line, and give them a new title: “New Classic”. The “New Classic” will give customers a 100 per cent capital guarantee on net premiums, high repurchase values from the beginning, along with the possibility of making variable additional payments and withdrawals during the term. In addition, costs and fees are spread out proportionally over the entire term and no longer taken from the premium but rather from the profit. The entire premium amount (excl. insurance tax) thus flows directly into the investment, resulting in a considerably higher savings premium from the beginning than is offered by conventional life insurance. This means the product offers customers much more transparency and flexibility.
From the Company’s point of view, this product concept has the advantage that, among other things, the discount rate is set at 0 per cent, which leads, in particular on longer terms, to a reduction of the guarantee requirement. In addition, this new product concept also meets the future legal requirements concerning transparency and capital adequacy. The sales success in the first three months after the launch of this product are impressive proof that the concept has been understood and accepted by both customers and the sales people. The successful positioning of the product on the Austrian market and the transfer of the ideas on which it is based into other markets are a priority for 2015 – at the same time offering the opportunity to make life insurance future-oriented.