Risk report

43. 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 Group companies in Central Europe operate in the property and casualty segment as well as in the life and health insurance segment. The insurance business predominantly relates to the property and casualty sectors in the CEE region.

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.

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

31/12/2018

31/12/2017
adjusted

Fixed-income securities

16,217,516

16,722,298

Real estate assets

1,104,517

1,236,630

Equity investments and other stocks

743,401

855,308

Equities

739,458

604,563

Time deposits

398,672

331,935

Derivative financial instruments

20,804

165,037

Other investments

25,750

110,252

Loans

86,950

33,148

Total

19,337,067

20,059,171

However, the market and credit risks not only have an impact on the value of investments, but also influence the level of technical liabilities. There is therefore a dependency between the (price) growth of assets and liabilities from insurance contracts, particularly in life insurance. 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 ensure sufficient liquidity while retaining the greatest possible security and balanced risk in order to achieve a return on capital that is sustainably higher than the guaranteed performance of the technical liabilities. 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

31/12/2018

31/12/2017
adjusted

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

12,612,019

12,289,254

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

4,751,183

5,034,492

Long-term health insurance contracts

3,591,681

3,598,565

Short-term property and casualty insurance contracts

4,813,330

5,065,059

Total

25,768,212

25,987,370

These values refer to the following items:

  • Land and buildings for own use
  • Investment property
  • Financial assets accounted for using the equity method
  • Other investments
  • Unit-linked and index-linked life insurance investments
  • Cash and cash equivalents
Technical provisions and liabilities (net)

In € thousand

31/12/2018

31/12/2017
adjusted

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

10,890,862

11,223,577

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

4,721,904

5,019,325

Long-term health insurance contracts

3,191,419

3,038,285

Short-term property and casualty insurance contracts

2,970,578

2,940,919

Total

21,774,763

22,222,106

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

The 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. The interest rate risk is actively managed as part of the ALM-based investment strategy.

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

Exposure by term

In € thousand

31/12/2018

31/12/2017
adjusted

Up to 1 year

768,320

1,339,431

More than 1 year up to 3 years

1,895,285

1,920,831

More than 3 years up to 5 years

2,571,055

2,475,017

More than 5 years up to 7 years

3,169,290

2,507,702

More than 7 years up to 10 years

2,816,568

2,846,914

More than 10 years up to 15 years

2,141,868

2,323,211

More than 15 years

2,855,131

3,309,949

Total

16,217,516

16,723,055

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.

IFRS reserve by expected maturity date

In € thousand

31/12/2018

31/12/2017

Up to 1 year

1,138,678

1,443,546

More than 1 year up to 3 years

1,359,578

1,690,150

More than 3 years up to 5 years

1,007,618

1,124,251

More than 5 years up to 7 years

1,074,549

1,088,078

More than 7 years up to 10 years

1,578,545

1,687,476

More than 10 years up to 15 years

2,455,407

2,383,198

More than 15 years

6,896,491

6,082,316

Total

15,510,867

15,499,016

Since the interest rate risk is particularly relevant in life insurance as a result of the long-term liabilities, the focus below is placed on this segment. The modified duration of the assets in life insurance is 8.5 per cent, while for liabilities it is 13 per cent. 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 budget that is accepted for the interest rate risk on strategic grounds is determined as part of the annual ALM process.

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 2017 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)

2.3

 

 

Central Europe (CE)

3.4

 

3.1

Eastern Europe (EE)

3.6

3.7

3.3

Southeastern Europe (SEE)

2.5

2.3

1.3

Russia (RU)

2.9

2.8

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 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 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.

Exposure by rating

In € thousand

31/12/2018

31/12/2017
adjusted

AAA

3,866,678

4,358,396

AA

3,989,617

4,097,169

A

3,707,064

4,096,105

BBB

2,526,245

2,314,270

BB

720,223

976,377

B

240,932

202,287

≤ CCC

6,090

9,294

Not rated

1,160,667

665,173

Total

16,217,516

16,719,071

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.

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

31/12/2018

Assets

Provisions and liabilities

EUR

24,776,455

22,526,995

USD

437,881

128,123

CZK

598,874

475,748

HUF

494,772

568,962

PLN

948,421

789,665

RON

289,381

213,284

Other

958,016

814,473

Total

28,503,801

25,517,251

Currency risk

In € thousand

31/12/2017
adjusted

Assets

Provisions and liabilities

EUR

24,868,208

22,491,054

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

25,494,500

UNIQA strives to keep concentration risks as low as possible. There could be an inappropriate concentration risk from the transfer of insurance business to individual reinsurance companies. Late payment (or non-payment) by an individual reinsurer can have a material influence on the UNIQA Group’s result. This risk is controlled in the UNIQA Group by an internal reinsurance company, which is responsible for selecting external reinsurance parties, taking into account strict guidelines for avoiding material concentration risks.

Throughout the investment period, the company continuously checks whether the investment volumes in securities of individual issuers exceed certain limits in relation to the total investment volume, defined according to the respective credit rating. If this is the case, a risk premium will be added to the portfolio items that are in excess of the limit.

Reinsurance
An insurance company insures part of its risk via another insurance company.
Solvency II
European Union Directive on publication obligations and solvency rules for the equity base of an insurance company.
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.
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).
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.