Risk report
44. 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.
In € thousand |
31/12/2019 |
31/12/2018 |
---|---|---|
Fixed-income securities |
16,473,243 |
15,461,745 |
Real estate assets |
1,137,444 |
1,104,146 |
Pension fund |
834,227 |
721,760 |
Equity investments and other stocks |
794,450 |
734,817 |
Shares and equity funds |
765,038 |
729,683 |
Time deposits |
384,762 |
395,016 |
Other investments |
235,631 |
189,899 |
Total |
20,624,797 |
19,337,067 |
However, the market and credit risks not only have an impact on the value of investments, but also influence the level of technical 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 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.
In € thousand |
31/12/2019 |
31/12/2018 |
---|---|---|
Long-term life insurance contracts with guaranteed interest and profit participation |
12,251,003 |
12,612,019 |
Long-term unit-linked and index-linked life insurance contracts |
4,680,403 |
4,751,183 |
Long-term health insurance contracts |
4,068,651 |
3,591,681 |
Short-term property and casualty insurance contracts |
5,073,948 |
4,813,330 |
Total |
26,074,005 |
25,768,212 |
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
In € thousand |
31/12/2019 |
31/12/2018 |
---|---|---|
Long-term life insurance contracts with guaranteed interest and profit participation |
11,143,552 |
10,890,862 |
Long-term unit-linked and index-linked life insurance contracts |
4,646,152 |
4,721,904 |
Long-term health insurance contracts |
3,359,589 |
3,191,419 |
Short-term property and casualty insurance contracts |
3,061,309 |
2,970,578 |
Total |
22,210,602 |
21,774,763 |
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
The market and credit risk is broken down into interest rate, credit spread, equity, currency and market concentration risk.
The interest rate risk arises on all asset and liability items of the statement of financial position 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.
In € thousand |
31/12/2019 |
31/12/2018 |
---|---|---|
Up to 1 year |
673,476 |
770,848 |
More than 1 year up to 3 years |
1,888,393 |
1,892,686 |
More than 3 years up to 5 years |
2,468,311 |
2,557,814 |
More than 5 years up to 7 years |
2,323,011 |
2,443,177 |
More than 7 years up to 10 years |
3,067,014 |
2,800,238 |
More than 10 years up to 15 years |
2,503,197 |
2,141,868 |
More than 15 years |
3,549,841 |
2,855,114 |
Total |
16,473,243 |
15,461,745 |
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 |
31/12/2019 |
31/12/2018 |
---|---|---|
Up to 1 year |
1,133,007 |
1,138,678 |
More than 1 year up to 3 years |
1,085,507 |
1,359,578 |
More than 3 years up to 5 years |
994,309 |
1,007,618 |
More than 5 years up to 7 years |
1,127,128 |
1,074,549 |
More than 7 years up to 10 years |
1,490,459 |
1,578,545 |
More than 10 years up to 15 years |
2,433,869 |
2,455,407 |
More than 15 years |
7,226,506 |
6,896,491 |
Total |
15,490,785 |
15,510,867 |
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. Using UNIQA Österreich Versicherungen AG as an example, the average interest rate sensitivity of life insurance in the event of a change in interest rates of +/–50 basis points for the assets is €453.0 million, and that of liabilities €563.0 million. The difference between these two values is used as the control basis for the interest rate risk or the duration gap. During the annual ALM process, it is determined from a strategic point of view which budgets for interest rate risk can be accepted at the operating company level.
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.
In per cent |
EUR |
USD |
Local currency |
---|---|---|---|
Austria (AT) |
2.3 |
|
|
Central Europe (CE) |
3.5 |
|
3.0 |
Eastern Europe (EE) |
3.5 |
3.6 |
3.3 |
Southeastern Europe (SEE) |
2.2 |
1.9 |
0.8 |
Russia (RU) |
2.7 |
2.7 |
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 0.0 per cent.
The credit 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 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 |
31/12/2019 |
31/12/2018 |
---|---|---|
AAA |
3,770,117 |
3,854,062 |
AA |
4,063,442 |
3,988,504 |
A |
4,135,223 |
3,640,541 |
BBB |
3,191,344 |
2,524,826 |
BB |
421,238 |
712,052 |
B |
271,218 |
240,932 |
≤ CCC |
2,837 |
6,090 |
Not rated |
617,825 |
494,739 |
Total |
16,473,243 |
15,461,745 |
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 “Equity investments and other stocks” and “Equities”. 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 tables show a breakdown of assets and liabilities by currency.
In € thousand |
31/12/2019 |
|
---|---|---|
Assets |
Provisions and liabilities |
|
EUR |
24,914,175 |
22,255,561 |
USD |
315,363 |
92,359 |
CZK |
651,244 |
530,656 |
HUF |
492,803 |
576,893 |
PLN |
993,648 |
804,969 |
RON |
379,563 |
203,371 |
Other |
981,612 |
844,177 |
Total |
28,728,409 |
25,307,986 |
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 |
UNIQA strives to keep the market concentration risk as low as possible. 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.
Stress tests and sensitivity analyses are used in particular to measure and manage market and credit risk, in addition to figures from the established market and credit risk models (MCEV, SCR, etc.).
The following tables show the most important market risks in the form of key sensitivity figures, along with their impact on equity and profit/(loss) for the period. Depending on the measurement principle to be applied, any future losses from the measurement at fair value may result in different fluctuations in profit/(loss) for the period or in other comprehensive income. The key figures are calculated theoretically on the basis of actuarial principles and do not take into consideration any diversification effects between the individual market risks or countermeasures taken in the various market scenarios.
Sensitivities for other investments are determined by simulating each scenario for each individual item, keeping all other parameters constant in each case. Market value changes that have no effect on the balance sheet include reclassified bonds and loans in the case of interest rate and credit spread risk.
In € thousand |
31/12/2019 |
31/12/2018 |
||
---|---|---|---|---|
+100 |
–100 |
+100 |
–100 |
|
Government bonds |
–854,656 |
1,033,307 |
–736,457 |
851,479 |
Corporate bonds (incl. covered) |
–381,292 |
426,367 |
–316,143 |
375,514 |
Other |
–46,957 |
58,958 |
–35,852 |
15,855 |
Total |
–1,282,905 |
1,518,632 |
–1,088,451 |
1,242,848 |
Of which income statement |
–951 |
2,292 |
1,781 |
–1,127 |
Of which equity |
–1,281,954 |
1,516,340 |
–1,090,232 |
1,243,975 |
In € thousand |
31/12/2019 |
31/12/2018 |
||
---|---|---|---|---|
|
+100 |
|
+100 |
|
Income statement |
|
–1,784 |
|
–2,743 |
Equity |
|
–1,275,863 |
|
–1,111,082 |
Total |
|
–1,277,647 |
|
–1,113,826 |
In € thousand |
31/12/2019 |
31/12/2018 |
||
---|---|---|---|---|
|
–30% |
|
–30% |
|
Income statement |
|
–126,609 |
|
–305,289 |
Equity |
|
–107,515 |
|
–69,897 |
Total |
|
–234,124 |
|
–375,186 |
In € thousand |
31/12/2019 |
31/12/2018 |
||
---|---|---|---|---|
10% |
–10% |
10% |
–10% |
|
PLN |
51,970 |
–51,970 |
48,526 |
–48,526 |
USD |
24,921 |
–50,962 |
20,855 |
–20,855 |
CZK |
40,396 |
–30,432 |
38,422 |
–38,422 |
RUB |
26,206 |
–26,206 |
18,673 |
–18,673 |
HUF |
17,283 |
–17,283 |
15,703 |
–15,703 |
Other |
53,026 |
–57,559 |
56,569 |
–54,950 |
Total |
213,802 |
–234,412 |
198,747 |
–197,128 |
Of which income statement |
203,222 |
–223,833 |
186,416 |
–184,798 |
Of which equity |
10,580 |
–10,580 |
12,330 |
–12,330 |
In life insurance, the interest rate assumptions are the crucial influencing factor on the liability adequacy test and deferred acquisition costs. The impact of the implied new funds assumption (including reinvestment) is therefore stated below.
If new funds are assumed with a +100 bp increase, then the resulting net effect (after accounting for the deferred profit participation) amounts to €6.62 million. A –100 bp reduction in this assumption results in a net effect of €–7.21 million. The effects described relate to the changes in deferred acquisition costs along with the impact on the liability adequacy test. The results were determined using the traditional business in Austria which makes up the majority of insurance provision in the Group.
In non-life insurance, the provision for unsettled insurance claims is formed based on reported claims and applying accepted statistical methods. One crucial assumption here is that the pattern of claims observed from the past can be sensibly extrapolated for the future. Additional adjustments need to be made in cases where this assumption is not possible.
The calculation of claim provisions is associated with uncertainty based on the time required to process claims. In addition to the normal chance risk, there are also other factors that may influence the future processing of the claims that have already occurred. In particular, the reserving process for court damages in property and casualty insurance should be mentioned here. A reserve estimate is prepared here for these damages based on expert assessment, although this estimate can be exposed to high levels of volatility specifically with major damage at the start of the process for collecting court costs.
The partial internal model in property and casualty insurance is a suitable instrument for quantifying the volatility involved in processing. Pursuant to analysis of these model results, it was determined that a deviation of 5 per cent from the basic provision determined may represent a realistic scenario. Based on the current provision for unsettled claims of €2,608 million (excluding additional provisions such as provisions for claim settlement) in the Group on a gross basis, this would mean an increase in claims incurred by €128 million.
Health insurance similar to life technique is now also affected by the period of low interest rates. Since 1 January 2018 only tariffs with the 1.0 per cent discount rate are being sold. That fact, together with the tariffs sold in 2017 at the discount rate of 1.75 per cent, further reduces the average discount rate. A reduction in the capital earnings by 100 bp (based on investment results 2019) would reduce the earnings before taxes by €35.6 million.