“The massive uncertainties and unknown factors caused by the COVID-19 pandemic as well as the continuing low-interest and to some extent even negative-interest environment are the largest challenges for the Austrian insurance industry,” summarised the Executive Directors of the Austrian Financial Market Authority (FMA), Helmut Ettl and Eduard Müller about the “FMA Report on the State of the Austrian Insurance Industry 2021”, which was published today. “Low interest rates reduce yields in the most important form of investment, bonds, increasing liabilities and having a massive effect on solvency ratios. The strong capitalisation of Austrian insurance undertakings compared against international counterparts has proven itself in this difficult environment.” While, the turbulence caused by COVID-19 has placed the high solvency ratio under pressure – the median of the solvency ratio stood at 230% as of the end of 2019, at 216% in 2020 –, and recovered significantly during the first half of 2021 to 221%. As a result, more than high of insurers have twice as much own funds as is necessary under supervisory law. Furthermore, despite the difficult environment, there has not been any discernible deterioration in credit quality to date in the investment portfolio according to the report. The FMA, however is reckoning, due to the lower yields and increased risks associated with bonds that insurers in the long-term will increasingly invest in alternative investment classes.
The challenge of sustainability risks
Since on the one hand the climate crisis in causing the frequency and extent of damage caused by natural catastrophes to increase, while on the other hand the transformation towards a CO2-neutral economy are placing the value of assets that are affected by them in question, the FMA has focused on analysing sustainability risks in this macro report for 2021. In doing so, the analysis of shares and corporate debt with a total volume of € 38 billion held in the portfolios of Austria’s insurers have shown that they are more strongly invested, compared against international insurers, in the critical sectors of electrical energy, steel, as well as oil and natural gas. At the same time in turn within these sectors there is an over proportional investment in providers that use comparatively low-CO2 technologies. A climate stress test conducted by the FMA as of the reporting date of 30.06.2021 has shown that in a shock scenario in the case of shares there are threatened losses in value of up to € 185 million or -2.2% for the the analysed share portfolio, or in the case of corporate debt of up to € 113 million or -0.4%. A similar stress test performed on the government debt portfolio held by the Austrian insurance industry (in total € 22 billion in government debt was subjected to such a screening), returned a loss potential of € 130 million or -0.58% as of 30.06.2021.
Large differences in investment strategy
Austria’s insurance undertakings pursue to some extent very varied strategies in relation to their investment strategy. Three providers have more than three quarters of their assets in funds, while four other hold more than 2%5 in real estate. The most important asset classes (as at mid-2021) are: corporate debt 20.0%, government debt and shares in associated companies 18.8%, funds 17.9%, shares in associated companies 18.8%, real estate 7.3%, mortgages and loans 4.5%, cash and deposits 2.6% as well as shares 1.1%. The remainder distributed among other assets. While there has been a trend for the proportion of bonds to decrease, investments in funds have stagnated, and all other asset classes are increasing slowly.
Further increases in market concentration
The market concentration has been increasing among Austrian insurance undertakings for years, in particular due to group restructurings with the amount of managed assets increasing slightly. The number of insurance undertakings fell from 102 (2012) to 78 (at the end of Q3 2021) in the past ten years. The number of small mutual insurance associations fell from 53 to 44, with the number of insurance undertakings in the form of stock companies decreasing from 42 to 27. Broken down by sector, composite insurers (16) continue to dominate, followed by out and out non-life insurers (13) and life insurers (5) (2020).
The full FMA Report on the State of the Austrian Insurance Industry 2021 can be downloaded (in German only)
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Annemarie Bauer
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