Risk report

40.5 Risk profile

UNIQA’s risk profile is very heavily influenced by life insurance and health insurance portfolios in UNIQA Österreich Versicherungen AG. This situation means that market risk plays a central role in UNIQA’s risk profile. The composition of market risk is described in the section “Market and credit risk”.

The group companies in Central Europe operate in the property and casualty segment as well as in the life and health insurance segment.

In the regions of Southeastern (SEE) and Eastern Europe (EE), insurance business is currently conducted primarily in the property and casualty segment.

This structure is important to UNIQA, because it creates a high level of diversification from the life and health insurance lines dominated by the Austrian companies.

The distinctive risk features of the regions are also reflected in the risk profiles determined by using the internal measurement approach.

After every calculation for the life, non-life and composite insurers at UNIQA, benchmark profiles are created and compared with the risk profile for each company. The benchmark profiles show that, for composite insurers, there is a balance between market and actuarial risk. Composite insurers are also in a position to achieve the highest diversification effect.

Market and credit risk

The characteristics of the market and credit risks depend on the structure of the capital investment and allocation of this into the different categories of investment. The table below shows investments classified by asset category.

Asset Allocation

In € thousand

31/12/2017

31/12/2016

Fixed-income securities

16,541,550

16,556,545

Real estate assets

1,236,630

1,356,041

Equity investments and other stocks

855,308

803,721

Equities

604,563

439,657

Time deposits

331,191

579,951

Derivative financial instruments

165,037

135,122

Other investments

110,252

113,703

Loans

33,135

40,033

Total

19,877,666

20,024,773

However, the market and credit risks not only have impact on the value of investments, but also influence the level of actuarial liabilities. Thus, there is – particularly in life insurance – a dependence between the (price) growth of assets and liabilities from insurance contracts. UNIQA manages the income expectations and risks of assets and liabilities arising from insurance contracts as part of the (ALM) process. The objective is to achieve a return on capital that is sustainably higher than the technical liabilities carried forward while retaining the greatest possible security. To do this, assets and liabilities are allocated to different accounting groups.

The following two tables show the main accounting groups generated by the various product categories.

Assets

In € thousand

31/12/2017

31/12/2016

Long-term life insurance contracts with guaranteed interest and profit participation

12,158,962

12,664,450

Long-term unit-linked and index-linked life insurance contracts

5,034,492

4,879,928

Long-term health insurance contracts

3,575,455

3,352,381

Short-term property and casualty insurance contracts

5,036,955

4,755,872

Total

25,805,865

25,652,631

These values refer to the following items:

  • Property, plant and equipment
  • Investment property
  • Financial assets accounted for using the
  • Other investments
  • Unit-linked and index-linked life insurance investments
  • Cash and cash equivalents
Technical provisions and liabilities (net)

In € thousand

31/12/2017

31/12/2016

Long-term life insurance contracts with guaranteed interest and profit participation

11,187,817

11,836,846

Long-term unit-linked and index-linked life insurance contracts

5,019,325

4,846,591

Long-term health insurance contracts

3,038,285

2,880,768

Short-term property and casualty insurance contracts

2,940,919

2,708,379

Total

22,186,347

22,272,584

These values refer to the following items:

  • Technical provisions
  • Technical provisions for unit-linked and index-linked life insurance
  • liabilities (only securities account liabilities from reinsurance ceded)
  • Reinsurers’ share of technical provisions
  • Reinsurers’ share of technical provisions for unit-linked and index-linked life insurance

Interest rate risk

Interest rate risk arises on all statement of financial position asset and liability items whose value fluctuates as a result of changes in risk-free yield curves or associated volatility. Given the high proportion of interest-bearing securities in the investment, interest rate risk forms an important part of market risk. A structural reduction in the interest rate risk has been achieved as a result of the ALM-based investment strategy pursued for several years.

The following table shows the maturity structure of fixed-income securities.

Exposure by term

In € thousand

31/12/2017

31/12/2016

Up to 1 year

1,157,926

1,368,044

More than 1 year up to 3 years

1,920,831

2,123,798

More than 3 years up to 5 years

2,475,017

2,375,886

More than 5 years up to 7 years

2,507,702

2,571,683

More than 7 years up to 10 years

2,846,914

2,424,867

More than 10 years up to 15 years

2,323,211

2,232,827

More than 15 years

3,309,949

3,459,442

Total

16,541,550

16,556,545

In comparison with this, the next table shows the before in health and life insurance and the gross provision for unsettled claims in non-life insurance, broken down into annual brackets. In health and life insurance the breakdown takes place using expected cash flows from the ALM process.

IFRS reserve by expected maturity date

In € thousand

31/12/2017

31/12/2016

Up to 1 year

1,443,546

1,334,940

More than 1 year up to 3 years

1,690,150

2,311,871

More than 3 years up to 5 years

1,124,251

1,434,894

More than 5 years up to 7 years

1,088,078

1,177,977

More than 7 years up to 10 years

1,687,476

1,797,645

More than 10 years up to 15 years

2,383,198

2,307,471

More than 15 years

6,082,316

5,357,720

Total

15,499,016

15,722,518

Due to the particular importance of the ALM process in life insurance, the focus will be placed on this segment. For practical reasons, it is not possible to fully achieve the objective of matching cash flows for assets and liabilities. The of the assets in life insurance is 8.1 years, while for liabilities it is longer. This difference is known as a duration gap and means that changes in interest rates result in different changes in value in the assets and liabilities (interest rate risk). The discount rate that may be used in the costing when new business is written in most UNIQA companies takes into account a maximum discount rate imposed by the relevant local supervisory authority. In all those countries in which the maximum permissible discount rate is not imposed in this way, appropriate prudent, market-based assumptions are made by the actuaries responsible for the calculation. In our core market of Austria, the maximum interest rate beginning 1 January is 0.5 per cent per year. However, the portfolio also includes older contracts with different discount rates. In the relevant markets of the UNIQA Group, these rates amount to as much as 4.0 per cent per year. The following table provides an overview of the average discount rates by region and currency.

Average technical discount rates, core business by region and currency

In per cent

EUR

USD

Local currency

Austria (AT)

2.4

 

 

Central Europe (CE)

3.4

 

3.2

Eastern Europe (EE)

3.6

3.9

3.3

Southeastern Europe (SEE)

2.7

2.1

1.4

Russia (RU)

3.0

2.9

4.0

As these discount rates are guaranteed by the insurance company, the financial risk lies in not being able to generate these returns. Since classic life insurance business predominantly invests in interest-bearing securities, the unpredictability of long-term interest rate trends is the most significant financial risk for a life insurance company. Investment and reinvestment risk arises from the fact that received in the future must be invested to achieve the rate of return guaranteed when a policy is written. However, it is entirely possible that no appropriate securities will be available at the time the premium is received. In the same way, future income must be reinvested to achieve a return equivalent to at least the original discount rate. For this reason, UNIQA has already decided to offer products to its key markets that are only based on a low or zero discount rate. One example of this in Austria is the sale of deferred pension products with a discount rate of 0 per cent.

Spread risk

Spread risk refers to the risk of changes in the price of asset or liability items in the financial statement, as a consequence of changes in credit risk premiums or associated volatility, and under II is ascertained for individual securities in accordance with their rating and . When investing in securities, UNIQA chooses securities with a wide variety of ratings, taking into consideration the potential risks and returns.

The following table shows the credit quality of those fixed-income securities that are neither overdue nor written down, based on their ratings.

Exposure by rating

In € thousand

31/12/2017

31/12/2016

AAA

4,316,755

3,227,227

AA

4,063,019

5,337,798

A

4,042,640

3,766,503

BBB

2,287,377

2,351,805

BB

961,445

1,151,994

B

198,127

124,947

≤ CCC

183,097

232,220

Not rated

489,089

364,052

Total

16,541,550

16,556,545

Equity risk

Equity risk arises from movements in the value of equities and similar investments as a result of fluctuations in international stock markets, and therefore, stems in particular from the asset categories of shares and investments and other interests. The effective equity weighting is controlled by with the selective use of derivative financial instruments.

Currency risk

Foreign currency risk is caused by fluctuations in exchange rates and associated volatility. Given the international nature of the insurance business, UNIQA invests in securities denominated in different currencies, thus following the principle of ensuring matching liabilities with assets in the same currency to cover liabilities at the coverage fund or company level. Despite the selective use of derivative financial instruments for hedging purposes, it is not always possible on cost grounds or from an investment point of view to achieve complete and targeted currency matching between the assets and liabilities. The following table shows a breakdown of assets and liabilities by currency.

Currency risk

In € thousand

31/12/2017

Assets

Provisions and liabilities

EUR

24,868,208

22,547,049

USD

487,254

87,257

CZK

586,717

474,119

HUF

485,880

578,675

PLN

1,167,861

1,011,021

RON

289,729

220,337

Other

858,235

632,036

Total

28,743,885

25,550,494

Currency risk

In € thousand

31/12/2016

Assets

Provisions and liabilities

EUR

29,645,082

27,759,009

USD

738,810

81,978

CZK

525,420

443,214

HUF

450,209

542,874

PLN

944,326

832,182

RON

282,564

209,137

Other

1,052,749

558,000

Total

33,639,160

30,426,394

Concentration risk

UNIQA strives to keep investment concentrations in securities from individual issuers or groups of issuers as low as possible depending on their credit rating.

Asset liability management
Management concept whereby decisions related to company assets and the equity and liabilities are coordinated with each other. Strategies related to the assets and the equity and liabilities are formulated, implemented, monitored and revised with this in a continuous process in order to attain the financial objectives given the risk tolerances and restrictions specified.
Equity method
Investment in associates is accounted for using this method. The value assessed corresponds with the Group’s proportional equity in these companies. In the case of shares in companies that prepare their own consolidated financial statements, their Group equity is assessed accordingly in each case. Within the scope of ongoing valuations, this value must be updated to incorporate proportional changes in equity; the pro rate profit on ordinary activities is imputed to the Group results with this.
Reinsurance
An insurance company insures part of its risk via another insurance company.
Insurance provision
Provision in the amount of the existing obligation to pay insurance benefits and reimbursements, predominantly in life and health insurance. The provision is determined using actuarial methods as a balance of the present value of future obligations less the present value of future premiums.
Reinsurance
An insurance company insures part of its risk via another insurance company.
Duration
Duration refers to the weighted average term of an interest rate-sensitive investment or of a portfolio and is a measure of risk for the sensitivity of investments in the event of changes to interest rates.
Premiums
Total premiums written. All premiums from contracts written in the financial year from business acquired by the company directly and as inward reinsurance.
Solvency
An insurance company’s equity base.
Duration
Duration refers to the weighted average term of an interest rate-sensitive investment or of a portfolio and is a measure of risk for the sensitivity of investments in the event of changes to interest rates.
Hedging
Hedging against unwanted changes in exchange rates or prices using an appropriate offsetting item, particularly derivative financial instruments.
Stress test
Stress tests are a special form of scenario analysis. The objective is to provide a quantitative statement on the loss potential for portfolios in the event of extreme market fluctuations.
SCR
Solvency Capital Requirement. The eligible own funds that insurers or reinsurers must hold to enable them to absorb significant losses and give reasonable assurance to policyholders and beneficiaries that payments will be made as they fall due. It is calculated to ensure that all quantifiable risks (such as market risk, credit risk, life underwriting risk) are reliably taken into account. It covers both current operating activities and the new business expected in the subsequent twelve months.
ECR
Economic Capital Requirement. Risk capital requirement that results from the economic capital model.
Fair value
The fair value is the price that would be collected in an ordinary business transaction between market participants for the sale of an asset or that would be paid for transferring a liability.
Acquisition costs
The amount paid to acquire an asset in cash or cash equivalents or the fair value of another form of compensation at the time of acquisition.
Profit participation
Policyholders have a reasonable right under statutory and contractual regulations to the company’s surplus profits generated in life and health insurance. The level of this profit participation is determined again each year.
Deferred acquisition costs
These include the costs of the insurance company incurred in connection with the acquisition of new or the extension of existing contracts. Costs such as acquisition commissions as well as costs for processing applications and risk assessments are some of the items to be recorded here.
(Partial) internal model
Internally generated model developed by the insurance or reinsurance entity concerned and at the instruction of the FMA to calculate the solvency capital requirement or relevant risk modules (on a partial basis).
Premiums
Total premiums written. All premiums from contracts written in the financial year from business acquired by the company directly and as inward reinsurance.
IFRSs
International Financial Reporting Standards. Since 2002 the term IFRSs has applied to the overall concept of standards adopted by the International Accounting Standards Board. Standards already adopted beforehand continue to be referred to as International Accounting Standards (IASs).
Insurance benefits
Total of insurance benefit payments and changes in the claims provision during the financial year in connection with direct insurance and reinsurance contracts (gross). This involves net insurance benefits when reduced by the amount ceded to reinsurance companies. This does not include claims settlement expenses and changes in the provisions for claims settlement expenses.
Insurance provision
Provision in the amount of the existing obligation to pay insurance benefits and reimbursements, predominantly in life and health insurance. The provision is determined using actuarial methods as a balance of the present value of future obligations less the present value of future premiums.
Solvency II
European Union Directive on publication obligations and solvency rules for the equity base of an insurance company.
Solvency
An insurance company’s equity base.