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.

Asset allocation

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 (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

31/12/2019

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
  • Other investments
  • Unit-linked and index-linked life insurance investments
  • Cash and cash equivalents
Technical provisions and liabilities (net)

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
  • 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.

Exposure by term

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 before in health and life insurance and the gross 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

31/12/2019

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 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.

Average technical discount rates, core business by region and currency

In per cent

EUR

USD

Local currency

Austria (AT)

2.3

 

 

Central Europe (CE)

3.5

 

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 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.

Exposure by rating

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 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.

Currency risk

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

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

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.

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, , 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 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.

Interest rate risk

In € thousand

31/12/2019

31/12/2018

+100
basis points

–100
basis points

+100
basis points

–100
basis points

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

Credit spread risk

In € thousand

31/12/2019

31/12/2018

 

+100
basis points

 

+100
basis points

Income statement

 

–1,784

 

–2,743

Equity

 

–1,275,863

 

–1,111,082

Total

 

–1,277,647

 

–1,113,826

Equity risk

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

Currency risk

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 . 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 ) 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 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 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.

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; it is used to impute the pro rata profit on ordinary activities to the Group results.
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.
Provisions for unsettled claims
Also known as a claims reserve; takes into account obligations from claims that have already occurred as at the reporting date but which have not yet been settled in full.
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.
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.
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).
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.
Solvency
An insurance company’s equity base.