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.
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 asset liability management (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.
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 equity method
- Other investments
- Unit-linked and index-linked life insurance investments
- Cash and cash equivalents
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
- Reinsurance 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.
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 insurance provision before reinsurance 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.
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 duration 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.
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 premiums 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 Solvency II is ascertained for individual securities in accordance with their rating and duration. 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.
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 hedging 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.
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 |
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.