## 1autea2020003 ## Source details **Canonical URL:** [1autea2020003](https://www.imf.org/-/media/files/publications/cr/2020/english/1autea2020003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1autea2020003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1autea2020003.pdf.json) --- ### Executive summary — scope and focus - Technical note updating the Austrian insurance sector and analyzing regulatory and supervisory regime; prepared as part of the 2019 Financial Sector Assessment Program (FSAP). - Work drew on discussions in Austria during May 15–June 5, 2019, and references the Insurance Core Principles (ICPs) issued by the IAIS (October 2011; revised November 2018). - Focus areas: recent developments in regulation and supervision; Solvency II implementation; operational independence of the FMA; actuarial function for nonlife insurers; FMA stress-test coverage; FMA contribution to cross-sector macroprudential supervision; cross-border cooperation (CESEE); crisis management and early intervention frameworks, including recovery and resolution arrangements. ### Market structure, products, and performance - Key statistics and trends: - Total assets: EUR 133 billion at end-2018. - Sector size: approximately 40 percent of Austrian GDP. - Gross written premiums: EUR 18.5 billion. - Life premiums: decline of -17 percent in the last four years; -3 percent in 2018, EUR 5.5 billion. - Nonlife gross premiums: increased by 4 percent during 2014–2018. - Health gross premiums: increased by 18 percent during 2014–2018. - Number of insurance companies: declined from 106 in 2011 to 87 in 2017. - Observations: - Growth is low and driven mainly by deterioration in life business amid a prolonged low-interest-rate environment. - Some segments, notably single-premium life products, face material premium declines and little new production. - Profitability under pressure due to low investment returns and increased interest-related provisions. - Industry response: large-scale domestic mergers and cross-border expansion. - Duration gap between assets and liabilities is among the highest in European peers. - Average guaranteed rates remain high while investment returns continue to decline. ### Solvency II implementation and solvency metrics - Implementation outcomes: - FMA implemented Solvency II with improved data quality and analytical capacity. - New risk management and reporting requirements enhanced monitoring of risks. - Stress testing established as a yearly practice. - Solvency metrics: - SCR coverage ratio (weighted average) as of Q3 2018: 284 percent. - European average SCR coverage ratio: 243 percent. - Average SCR ratio without LTG and transitional measures: 243 percent. - EU average SCR ratio without LTG and transitional measures: 172 percent. - All Austrian entities met the minimum SCR ratio (100 percent) without relying on LTG and transitional measures in 2017. - Risks and implementation challenges: - Heavy reliance on internal models for valuation and capital calculation requires ongoing validation and scrutiny. - Asset allocation shifting toward less liquid assets complicates reliable valuation. - FMA and Oesterreichische Nationalbank (OeNB) validated market risk internal models jointly; continued close cooperation recommended. - Need to preserve sufficient supervisory resources with appropriate skills in both the FMA and the OeNB. ### Future profits, product mix, and duration risk - Expected profits included in future premiums (EPIFP): - Average share of EPIFP in Austria: over 10 percent. - Two largest Austrian insurance groups include such future expected profits as a substantial part of their own funds. - Firms would still meet SCR in absence of these instruments, but reliance on EPIFP requires careful market conduct management. - Product mix and duration: - Traditional life insurance with minimum benefit guarantee and profit sharing accounted for 70 percent of technical provision as of 2017. - Some legacy liabilities have minimum investment guarantee up to 4 percent; 10-year Austrian government bond yield was close to zero in May 2019. - Asset-weighted modified duration of life insurance (excluding index and unit linked) in 2017: seven years. - Liabilities’ duration remains substantially longer than assets. ### Asset allocation, related-party exposures, and foreign activities - Asset allocation: - Bonds: more than 50 percent of assets. - CIS investment accounts: 20 percent of assets. - Related-party shares: 13 percent of assets (excluding holding companies figure would be 10 percent). - Property: 8 percent of assets (real estate share significantly above European average of about 1 percent). - Related-party and bancassurance linkages: - Ratio of related-party holdings to total assets: 13 percent in Austria; European average: 7 percent. - Four large groups (VIG, UNIQA, Grawe, and Wüstenrot Group) contribute to high related-party ratio. - Related-party exposures typically face capital charges of 22 percent. - Bancassurance share of premium: about 13 percent. - Insurers’ exposure to banks declined from over 20 percent of total assets in 2012 to approximately 13 percent as of end-2018. - “Bail-in-able” assets: - Total market-wide exposure: approximately 12 percent of total assets. - Approximately 30 percent of the “bail-in-able” exposure is held by index and unit-linked products. - A few insurers have invested more than 20 percent of their total assets into “bail-in-able” bonds. - Foreign expansion and currency exposure: - Foreign business accounts for about 40 percent of premiums for internationally active Austrian insurers. - In 2017, 96 Austrian insurers operated in 27 countries. - FMA identifies six key CESEE markets: Czech Republic, Croatia, Hungary, Poland, Romania, and Slovakia (key market defined as generating 4 percent or more of total foreign gross premiums). - FMA encouraged to fill data gap on currency composition of technical provisions to detect currency mismatches. ### Market composition, concentration, and liquidity risks - Concentration and group linkages: - Five major insurance groups account for 56 percent of total premium written in 2017. - Composite insurers (life and nonlife combined) dominate. - Several insurance groups have links with banking groups; one group qualifies as a financial conglomerate under FICOD. - Asset quality and liquidity: - Austrian insurers hold more illiquid assets than the European average: property investment more than 5 percent of total assets (European average about 1 percent). - Deferred tax liabilities are much higher than the European average. - Higher allocations to illiquid assets can increase liquidity risk under higher redemptions; FMA is monitoring property exposure. ### Supervisory capacity, communication, and enforcement - FMA organization and resources: - Insurance Department (Department II) has four divisions covering general insurance and pension supervision, prudential supervision, onsite inspections and internal models, and analyses and statistics. - Total staff dedicated to insurance supervision: 46.8 ETEs. - Of those, 45.9 FTEs have special qualifications (actuaries, lawyers, economists, accountants, asset management experts, etc.). - Turnover ratio: less than 5 percent. - Supervisory strengths: - Enhanced data quality, analytical capacity, and regular stress testing. - Supervisory review process well organized with bottom-up analysis; built databases and in-house IT systems storing both local GAAP and Solvency II basis. - Risk scoring system (1–4) guides supervisory intensity and inspection frequency. - Areas for improvement: - Need for clearer and more targeted communication from senior FMA officials to firms on strategic and implementation issues, with clear timeframes and firm commitments to resolve identified issues. - Translation of sophisticated analyses into actionable measures requires stronger top-down steering. - Risk of weakening Solvency II oversight if supervisory resources and expertise are not retained. - Enforcement and market conduct: - Higher legal, reputational, and conduct risks in life insurance due to EU and domestic court decisions and unclear cancellation rights. - Policyholder complaints increased significantly in 2018. - FMA has limited powers over independent intermediaries; independent insurance agents and brokers are overseen by the Federal Ministry of Digital and Economic Affairs and 106 regional district supervisors. - FMA has taken corrective administrative enforcement actions within its scope. - Recommendations include government-initiated studies of conduct risks of intermediaries and enhanced FMA cooperation with district-level supervisors. ### Stress testing practice and findings - FMA stress-test program: - Annual Solvency II-based stress tests on the entire insurance sector since 2014. - National stress tests also conducted on the basis of national GAAP. - Selected stress-test outcomes and features: - 2017 national stress test: covered all solo entities with Solvency II balance sheet > EUR1 billion; covered 17 out of 37 solo entities; scenarios included rising interest rates and continued low interest rate scenarios. - 2018 EIOPA stress test: Austrian participant VIG (accounts for about 55 percent of total technical provision in Austria based on solo reporting) met SCR without LTG or transitional measures in all scenarios. - 2019 national stress test: focus on life insurance solo entities and includes a multi-year shock; includes two scenarios: constant low interest rate and sudden increase of interest rate; mass lapse event incorporated into high interest rate scenario. - Observations and recommendations on stress testing: - Stress tests are a core tool for FMA risk assessment. - FMA encouraged to focus on fewer scenarios and conduct targeted analysis on high-impact assumptions such as lapse risk, loss-absorption of technical provisions, and deferred tax assets. - Recommendations to focus stress tests on insurers’ identified vulnerabilities and on segments where future profitability materially contributes to own funds; consider enforcement measures (e.g., capital add-ons). ### Deckungsstock, Zinszusatzrueckstellung (ZZR), and crisis tools - Deckungsstock (safety net): - Pool of special funds insurers must establish for life assurance as well as health and accident insurance. - Assets in the Deckungsstock may only be subject to execution for the benefit of policyholders and beneficiaries in bankruptcy or runoff. - Assets require trustee’s written consent for legal disposal; trustee reports quarterly and annually to FMA and must alert FMA to concerns. - Deckungsstock actuary responsible for adequacy of technical provisions; annual report to insurer Management Board and escalation to authority if disagreement. - Zinszusatzrueckstellung (ZZR) — additional interest rate reserves: - Total additional required by end-2021: about EUR 1.5 billion of regulatory provisions. - At end-2018: life insurers had accrued EUR 1035 million on the back of ZZR. - ZZR contributions in 2018: about EUR 158 million. - Insurers have built up EUR 1 billion and would have to set aside additionally EUR 0.3 billion by 2021. - ZZR introduced in 2013; adjusted in 2016 to allow co-financing; transitional period shortened to seven years with 2021 deadline. - ZZR derived by formula using life insurance provision, average guaranteed rate of an insurer, and annual average Austrian government bond yield. - FMA supervisory powers under VAG 2016: - Measures include capital add-ons; convening general meetings; requiring solvency plans; restricting business activities; requesting portfolio transfers; dismissal of Board members; appointment of a commissioner; investigative and conduct-of-business measures. - Extraordinary measures (Article 316 VAG) include temporarily prohibiting payments of insurance benefits and, for life assurance, prohibiting surrenders and advance payments on policies; such measures are revoked when financial situation permits. ### Recovery and resolution (RR) considerations and design elements - Ongoing discussions and proposed measures: - Clarify existing provisions and introduce requirement for pre-emptive recovery plans for insurers offering interest-sensitive products. - Limit dividend distribution on a broader assessment than imminent breach of the SCR. - Define framework for new generation insurance guarantee products. - Clarify prudent person principle to strengthen Austrian PPS (Deckungsstock). - Strengthen position and independence of the actuary and introduce expert qualification requirements for statutory auditors. - Proposed expansion of FMA powers (discussion stage): - Extend restructuring powers to all kinds of insurance and all types of creditors. - Mandate portfolio transfers; formally adopt principle that losses must be borne first by shareholders and other creditors before affecting policyholders. - Extend powers to impose losses to all creditors and clarify order and extent of loss absorption. - Ability to invite but not force portfolio transfers to one or more insurers, possibly with financial support of an internal guarantee fund (to be established). - Role and design of a comprehensive RR framework: - Review scope and responsibilities of competent authorities. - Introduce resolution tools including transfer of assets and liabilities to bridge institutions. - Secure resolution funding arrangements with appropriate safeguards and legal protection. - Clearly separate supervisory and resolution responsibilities and decision making to avoid overlaps and conflicts of interest. - Funding and cross-border challenges: - Effective resolution should combine private funding arrangements (adequate ex ante resources) and credible provisions for public funding. - Current Deckungsstock is internal and only subject to execution for insurance claims; redesign would be required for participation in forced portfolio transfers or resolution funding. - Present lack of private ex ante resources would make capitalization and liquidity of a bridge institution challenging. - RR framework should strongly encourage cross-border cooperation; recovery and resolution planning should translate into trusted cross-border crisis management and coordination with foreign judicial proceedings. - Operationalization and resourcing: - Austria has no recent history of systemic insurer failures; operationalizing and testing crisis management regime is a key challenge. - Prepare operational manuals, procedural steps, alerts/triggers, escalation processes, and simulation exercises (internal, authority-level, domestic, cross-border). - Implementation of an RR framework will require FMA to improve staff expertise and likely increase total number of FTEs. ### Supervisory colleges, group supervision, and information sharing - Group supervision and international cooperation: - Supervisory colleges established for five internationally active Austrian groups (VIG, UNIQA, Grawe, Merkur, and Wüstenrot). - Annual face-to-face meetings or conference calls organized with college members from EEA and non-EEA jurisdictions. - FMA started sharing the Group Risk Report with college participants in 2018 and bringing the group work plan for discussion. - Group solvency and adjustments: - Group SCR based on consolidated balance sheet; if group SCR is lower than sum of solo SCRs due to diversification, group SCR adjusted to equal sum of solo SCRs. - Some own funds available only to particular entities are deducted from group capital calculation. - Recommendation: - Enhance information sharing with host supervisors, particularly where Austrian insurers have systemically significant market share; ground information-sharing efforts in FMA’s annual program. ### Operational, IT, cyber, climate, and digitalization risks - Operational and IT risks: - Consolidation and M&A increase operational and IT risks; many insurers use legacy IT systems managing long-term business up to 50 years. - FMA issued “FMA guide IT Security in insurance and reinsurance undertakings”. - Cyber risk: - Only three insurers provided cyber-risk policies in 2017; total cyber premium was less than EUR 500,000 in 2017. - Some policies do not explicitly exclude cyber incidents, exposing insurers to silent cyber risk. - Climate risk: - FMA incorporating climate-change risks in supervisory stress testing and conducting a sector-wide thematic study. - Observed/forecasted climate effects: (i) more frequent and longer heat waves; (ii) more frequent and more severe windstorms and floods. - Digitalization and Big Data Analytics (BDA): - 23 percent of insurers actively using BDA. - Main use cases: CRM, sales, risk management, fraud detection. - Identified risks: data quality shortfalls, erroneous models, transparency and discrimination risks from individual pricing, increased legal risk and cyberattack vulnerability. - Recommendation: FMA to continue monitoring BDA use and analyze both benefits and risks. ### Key recommendations (selected and prioritized) - Improve targeting of entity-specific communication from senior FMA levels to insurance firms on strategic and implementation concerns, with clear timeframe and commitments for resolution. (FMA) Timing: C; Priority: H - Continue to focus stress tests on entities with identified vulnerabilities. (FMA) Timing: ST; Priority: H - Conduct stress testing on the segments/business lines in which future profitability is a material contributor of the own funds and impose appropriate enforcement actions, such as capital add-on or other measures to address medium-term uncertainty. (FMA) Timing: ST; Priority: H - Enhance additional information sharing with host supervisors, as part of the annual supervisory cycle, in particular where Austrian insurers have significant local market share, regardless of materiality at the group level. (FMA) Timing: ST; Priority: H - Initiate studies of conduct risks of insurance brokers and agents. (Government) Timing: MT; Priority: M - Enhance cooperation with current supervisory bodies of insurance brokers and agents at the district level to improve the analysis and oversight of market conduct based on the present legal framework. (FMA) Timing: ST; Priority: M - Enhance crisis management preparedness by including pre-emptive recovery planning for insurers, adequately scoped and based on microprudential and macroprudential considerations, and with due consideration to the proportionality principle. (BMF and FMA) Timing: ST; Priority: M - Develop a resolution regime in line with international standards, introducing the overarching principle that losses must be borne first by shareholders and other creditors before they affect policyholders’ claims in the context of a formal recovery and resolution framework proposal. (BMF) Timing: MT; Priority: H - Review the adequacy of skillset, expertise, and level of human resources for the continuous improvement of the Solvency II regime, market conduct supervision, and its enhancement with a recovery and resolution framework. (FMA) Timing: MT; Priority: M *Source: 1autea2020003 — IMF staff summary of the Austria insurance-sector assessment (selected excerpts).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Introduction and scope - This technical note updates the Austrian insurance sector and analyzes key aspects of the regulatory and supervisory regime; prepared as part of the 2019 Financial Sector Assessment Program (FSAP). - Work drew on discussions in Austria during May 15–June 5, 2019, and references the Insurance Core Principles (ICPs) issued by the IAIS (October 2011; revised November 2018). - Focus areas include recent developments in regulation and supervision, Solvency II implementation, operational independence of the FMA, actuarial function for nonlife insurers, FMA stress-test coverage, FMA contribution to cross-sector macroprudential supervision, and cross-border cooperation (CESEE region). - The note also addresses crisis management and early intervention frameworks, including recovery and resolution arrangements. ### Market structure, products, and recent performance - Key statistics and trends: - Total assets: EUR 133 billion at end-2018. - Sector size: approximately 40 percent of Austrian GDP. - Gross written premiums: EUR 18.5 billion. - Life premiums: decline of -17 percent in the last four years; -3 percent in 2018, EUR 5.5 billion. - Nonlife gross premiums: increased by 4 percent during 2014–2018. - Health gross premiums: increased by 18 percent during 2014–2018. - Number of insurance companies: declined from 106 in 2011 to 87 in 2017. - Observations: - Growth is low and driven mainly by deterioration in life business amid a prolonged low-interest-rate environment. - Some segments, notably single-premium life products, face material premium declines and little new production. - Profitability under pressure due to low investment returns and increased interest-related provisions. - Industry response: large-scale domestic mergers and cross-border expansion. - Duration gap between assets and liabilities is among the highest in European peers. - Average guaranteed rates remain high while investment returns continue to decline. ### Solvency II implementation and solvency metrics - Implementation outcomes: - FMA implemented Solvency II with improved data quality and analytical capacity. - New risk management and reporting requirements enhanced monitoring of risks. - Stress testing established as a yearly practice. - Solvency metrics (preserve exact values): - SCR coverage ratio (weighted average) as of Q3 2018: 284 percent. - European average SCR coverage ratio: 243 percent. - Average SCR ratio without LTG and transitional measures: 243 percent. - EU average SCR ratio without LTG and transitional measures: 172 percent. - All Austrian entities met the minimum SCR ratio (100 percent) without relying on LTG and transitional measures in 2017. - Risks and implementation challenges: - Solvency II relies heavily on internal models (valuation and capital calculation); ongoing validation and scrutiny by regulators is necessary to avoid manipulation or delayed regulatory action. - Asset allocation is shifting toward less liquid assets, complicating reliable valuation. - FMA and Oesterreichische Nationalbank (OeNB) validated market risk internal models jointly; continued close cooperation recommended. - Need to preserve sufficient supervisory resources with appropriate skills in both the FMA and the OeNB. ### Supervisory capacity, communication, and enforcement - Supervisory strengths: - Enhanced data quality, analytical capacity, and regular stress testing by the FMA. - Areas for improvement: - Need for clearer and more targeted communication from senior FMA officials to firms on strategic and implementation issues, with clear timeframes and firm commitments to resolve identified issues. - Translation of sophisticated analyses into actionable measures requires stronger top-down steering. - Risk of weakening Solvency II oversight if supervisory resources and expertise are not retained. - Enforcement and market conduct: - Higher legal, reputational, and conduct risks in life insurance, driven by recent EU and domestic court decisions and unclear cancellation rights. - Policyholder complaints increased significantly in 2018. - Austrian parliament recently amended the Insurance Contract Act to clarify policyholder cancellation rights; legal risk persists, particularly in market stress scenarios. - No FMA enforcement cases to date concerning insurance intermediation outside those brought through insurance companies and banks—possibly due to FMA’s limited powers over intermediaries, which are supervised by 106 regional district supervisors. - FMA has taken corrective administrative enforcement actions related to intermediaries within its scope. - Recommendation: government-initiated studies of conduct risks of insurance intermediaries at the local level; FMA to enhance cooperation with district-level supervisory bodies under the existing legal framework. ### Recovery, resolution, and crisis management - Ongoing discussion: - FMA is discussing improvements to insurance law to clarify recovery and resolution framework and broaden supervisory toolkit for crisis preparedness. - Discussions include formal adoption of the overarching principle that losses must be borne first by shareholders and other creditors before policyholders’ and beneficiaries’ claims are affected. - Recommended design elements: - A new formal recovery and resolution framework should introduce sought powers with appropriate safeguards and legal protection. - Clear delineation of scope and responsibilities between supervisory and resolution authorities to avoid overlaps and conflicts of interest. - Include pre-emptive recovery planning for insurers, adequately scoped and based on microprudential and macroprudential considerations, with proportionality respected. ### Market composition and asset profile risks - Concentration and group linkages: - Five major insurance groups account for 56 percent of total premium written in 2017. - Composite insurers dominate (life and nonlife combined). - Several insurance groups have links with banking groups; one group qualifies as a financial conglomerate under FICOD. - Asset quality and liquidity: - Austrian insurers hold more illiquid assets than the European average: - Property investment: more than 5 percent of total assets (European average about 1 percent). - Deferred tax liabilities are much higher than the European average. - Higher allocations to illiquid assets can increase liquidity risk in a scenario of higher redemptions; FMA is monitoring property exposure. ### Key recommendations (from Table 1) — recommendation text, responsible authority, timing, and priority - Improve targeting of entity-specific communication from senior FMA levels to insurance firms on strategic and implementation concerns, with clear timeframe and commitments for resolution. (FMA) Timing: C; Priority: H - Continue to focus stress tests on entities with identified vulnerabilities. (FMA) Timing: ST; Priority: H - Conduct stress testing on the segments/business lines in which future profitability is a material contributor of the own funds and impose appropriate enforcement actions, such as capital add-on or other measures to address medium-term uncertainty. (FMA) Timing: ST; Priority: H - Enhance additional information sharing with host supervisors, as part of the annual supervisory cycle, in particular where Austrian insurers have significant local market share, regardless of materiality at the group level. (FMA) Timing: ST; Priority: H - Initiate studies of conduct risks of insurance brokers and agents. (Government) Timing: MT; Priority: M - Enhance cooperation with current supervisory bodies of insurance brokers and agents at the district level to improve the analysis and oversight of market conduct based on the present legal framework. (FMA) Timing: ST; Priority: M - Enhance crisis management preparedness by including pre-emptive recovery planning for insurers, adequately scoped and based on microprudential and macroprudential considerations, and with due consideration to the proportionality principle. (BMF and FMA) Timing: ST; Priority: M - Develop a resolution regime in line with international standards, introducing the overarching principle that losses must be borne first by shareholders and other creditors before they affect policyholders’ claims in the context of a formal recovery and resolution framework proposal. (BMF) Timing: MT; Priority: H - Review the adequacy of skillset, expertise, and level of human resources for the continuous improvement of the Solvency II regime, market conduct supervision, and its enhancement with a recovery and resolution framework. (FMA) Timing: MT; Priority: M *Source: 1autea2020003 - EXECUTIVE SUMMARY* ### 9. Some large Austrian insurance groups rely substantially on future profits. Solvency II ### 9. Some large Austrian insurance groups rely substantially on future profits. Solvency II ### Future profits and Solvency II - Solvency II allowed insurers to recognize the expected profit in future premiums as part of their own funds (Tier 1) with certain conditions and disclosure. - In Austria, the average share of Expected Profits Included in Future Premiums (EPIFP) is over 10 percent. - The two largest Austrian insurance groups include such future expected profits as a substantial part of their own funds. - The firms would still meet SCR in the absence of these instruments, but groups that rely substantially on EPIFP need careful market conduct management. ### Product mix and duration risk - As of 2017, traditional life insurance with minimum benefit guarantee and profit sharing accounted for 70 percent of the technical provision. - Some legacy liabilities have minimum investment guarantee up to 4 percent, versus the 10-year Austrian government bond yield which was close to zero in May 2019. - In 2017 the average asset-weighted modified duration of life insurance (excluding index and unit linked) was seven years. - Liabilities’ duration remains substantially longer than assets, posing challenges under a low-for-long interest rate scenario. ### Asset allocation and search for yield - More than 50 percent of assets are invested in bonds. - CIS investment accounts for 20 percent of assets. - Related-party shares account for 13 percent of assets (excluding holding companies the figure would be 10 percent). - Property accounts for 8 percent of assets. - The real estate share (8 percent) is significantly above the European average (1 percent). - The share of related-party investment (13 percent) is much higher than the European average (7 percent). - Investment returns of life insurance companies have remained above the average guaranteed interest rate of 2.2 percent, while the margin has been shrinking gradually but steadily. - Insurers are gradually increasing investment in illiquid asset classes, such as infrastructure financing and private equities (anecdotal evidence). ### Foreign expansion, currency, and geographic exposure - Foreign business accounts for about 40 percent of premiums for internationally active Austrian insurers. - In 2017, 96 Austrian insurers operated in 27 countries. - The FMA identifies six key CESEE markets: Czech Republic, Croatia, Hungary, Poland, Romania, and Slovakia (key market defined as generating 4 percent or more of total foreign gross premiums). - Large insurance groups have both investment and underwriting in foreign currencies; hedging those currencies to EUR could be difficult in stressed periods in some CESEE markets. - Foreign activities are smaller in terms of total assets for some groups (example: UNIQA group has about 82 percent of its group total asset in its Austrian subsidiary). - The FMA is encouraged to fill the data gap on currency composition of technical provisions to detect currency mismatches. ### Related-party investments and bancassurance linkages - The ratio of related-party holdings to total assets is 13 percent in Austria, versus a European average of 7 percent. - Four large groups (VIG, UNIQA, Grawe, and Wüstenrot Group) contribute to the high related-party ratio. - Related-party exposures are subject to relatively high capital charges (typically 22 percent), encouraging reduction. - The FMA is monitoring exposures and observing gradual declines due to consolidation and strategic changes. - Bancassurance is an important distribution channel; the share of premium via bancassurance is about 13 percent. - All five major Austrian groups have ownership linkages with banks (examples provided: Raiffeisen group owns 11 percent of UNIQA group; Grawe group fully owns Hypo Bank Burgenland; Wüstenrot Versicherung is a subsidiary of Bausparkasse Wüstenrot). - Insurers’ exposure to banks declined from over 20 percent of total assets in 2012 to approximately 13 percent as of end-2018. - The total market-wide exposure to “bail-in-able” assets, including index and unit-linked contracts, is approximately 12 percent of total assets; approximately 30 percent of the “bail-in-able” exposure is held by index and unit-linked products. - A few insurers have invested more than 20 percent of their total assets into “bail-in-able” bonds. ### Specific product and guarantee features - State-sponsored retirement provision (Prämienbegünstigte Zukunftsvorsorge/PZV) assets under management estimated at EUR 8.9 billion as of end-2017, up from EUR 6 billion in 2012. - The pool of guarantors for PZV consists of 18 financial institutions; the 3 largest guarantors amounted to a share of 56.5 percent. - Guarantees for PZV provided via: insurance (31 percent), reinsurance (29 percent), derivatives (16 percent), and other/mixed forms (24 percent). ### Operational, IT, cyber, climate, and liquidity risks - Consolidation and growth via M&As increase operational and IT risks; many insurers use legacy IT systems managing long-term business up to 50 years. - The FMA issued the “FMA guide IT Security in insurance and reinsurance undertakings” to promote operational and IT risk-management practices. - Only three insurers provided cyber-risk policies in 2017; total cyber premium was less than EUR 500,000 in 2017. - Some existing policies do not explicitly exclude cyber incidents, exposing insurers to silent cyber risk. - The FMA is incorporating climate-change risks in supervisory stress testing and is conducting a sector-wide thematic study. - Observed and forecasted climate effects include: (i) more frequent and longer heat waves; and (ii) more frequent and more severe windstorms and floods. - The 2018 EIOPA stress test covered windstorms, floods, and earthquakes; impact on an Austrian participating group was almost negligible due partly to mismatch between scenario and group exposure. - Austrian insurers hold a large share of highly rated government and corporate bonds, which supports liquidity for claims and short-term liabilities. - Tax incentives and redemption penalties discourage lapses: major savings products (endowment and unit-linked) subject to lower tax such as 4 percent of insurance premium; policy surrender within 10 or 15 years would be subject to higher tax rates such as 11 percent of insurance premium. - Some insurers are increasing illiquid investments (EM bonds, infrastructure financing, and property); the FMA monitors liquidity mismatch positions via offsite analysis and stress testing. ### Exempted activities and distribution channels - Activities exempted from some regulations, including Solvency II capital requirements, are not material: (i) small mutual associations (total assets EUR 85 million); (ii) personal insurance activities by corporations under public law (no available size data); (iii) certain auto assistance activities; (iv) funeral cost insurance with benefits not exceeding average funeral costs or provided in kind. - The main distribution channel is insurance firms’ employees, followed by brokers; online channel is limited. - Aggregators and Insurtech entrants are active but have not brought material threat to traditional distribution channels. ### EU cross-border activity - EU-domiciled insurers provide products in Austria under Freedom of Establishment (FOE) and Freedom of Services (FOS). - As of end-2018, over 1,000 FOE/FOS entities registered with total written premium over EUR 2 billion. - Premium value appears to have almost doubled since 2013, noting data before 2016 may be inconsistent; EIOPA began EU-wide FOE/FOS data collection in 2016 improving quality and consistency. ### Regulatory and supervisory setting - The FMA regulates and supervises insurers and distribution of insurance products directly by insurers or banks; independent insurance agents and brokers are overseen by the Federal Ministry of Digital and Economic Affairs. - The FMA has a Supervisory Board and an Executive Board (two persons); Supervisory Board approves financial matters and must consent to appointment of certain employees; supervisory decisions are taken by the Executive Board without Supervisory Board participation. - The OeNB is involved when an internal model requires approval related to the market risk module. - The Financial Market Stability Board (FMSB) established in 2014 meets four times a year; members include OeNB, FMA, the Fiscal Advisory Council, and the Federal MoF (chair). - The FMSB scans for systemic risks, issues risk warnings, and presents recommendations to the FMA; the FMA implements FMSB recommendations on a comply-or-explain basis. - The OeNB organizes quarterly risk workshops with the FMA and other stakeholders to translate research into actionable plans and to set the FMSB meeting agenda. *Source: IMF staff summary of the Austria insurance-sector assessment (chapter text).* ### 25. The Audit Oversight Body of Austria, Abschlussprüferaufsichtsbehörde (APAB), and ### 25. The Audit Oversight Body of Austria, Abschlussprüferaufsichtsbehörde (APAB), and the FMA ### MAIN FINDINGS — A. Independence and Resources - The Insurance Department (Department II) supervises insurance and pension funds and consists of four divisions: - (i) general insurance and pension supervision issues (division 1); - (ii) prudential supervision of insurance and pension funds (division 2); - (iii) onsite inspections and internal models (division 3); - (iv) analyses and statistics (division 4). - Total staff dedicated to insurance supervision: 46.8 ETEs. - Of those, 45.9 FTEs have special qualifications (actuaries, lawyers, economists, accountants, asset management experts, etc.). - Turnover ratio: less than 5 percent. - FMA staff have supervisory experience from multiple regulatory reforms, including Solvency II implementation. - Human resources under strain: proper Solvency II implementation requires significant resources for: - validation of best estimates of insurance liabilities; - valuation of illiquid assets; - international information exchange; - approval and continuous validation of internal models. - OeNB has a role in market risk model validation and needs to keep current expertise to support robust internal model validation. Recommendations (A) - The FMA should retain enough budget and flexibility to retain highly skilled and experienced supervisors and reinforce its range of expertise in line with a broadening scope of activities. - Sufficient budget is needed to support recruitment and retention of staff with specialized expertise (examples given: Solvency II internal model validation, IT, and stress testing). - Increasing needs for market conduct supervision in the insurance intermediaries would likely require additional efforts from existing resources in the 106 local supervisors. ### MAIN FINDINGS — B. Solvency II Implementation - The life insurance sector faces challenges from the low-interest-rate environment. - The FMA has managed to implement Solvency II smoothly. - Economic valuation under Solvency II required higher valuation on insurance liabilities with high guarantees, lowering SCR coverage ratios. - Early in implementation the FMA identified a small number of firms likely to face difficulties and intensified supervision of those weak firms. - As of end-2017, all insurers met the SCR without LTG or transitional measures. - The average SCR coverage ratio is higher than that of other EU countries. - High SCR ratio is supported by uncertain estimations: Austrian insurers rely on factors including: - (i) future profit from long-term business (mainly health insurance); - (ii) loss-absorption capacities of technical provisions; - (iii) loss-absorption capacities of deferred tax liabilities; - (iv) diversification benefits between life and non-life businesses. - These factors are legitimate under Solvency II but subject to uncertainty and adverse future developments. Valuation of Assets and Liabilities - Solo-level statutory accounting standards remain in force and are generally more conservative than Solvency II valuation standards. - Assets: generally required to be valued at lower of either cost or current market valuation. - Liabilities (including insurance liabilities): valued more conservatively than Solvency II, including overall life insurance liabilities. - For Solvency II purposes: - Assets: valued at mark-to-market when market data available. - Insurance liabilities: valued with the best estimate (probability-weighted average of future cash flow, taking account of the time value of money), plus risk-margin estimation through the Cost of Capital Approach (mainly corresponds to Margin Over Current Estimate (MOCE)). - The best estimate is discounted by the relevant risk-free interest rate term structure derived from EIOPA. Capital Requirements - Solvency II capital requirements cover major quantifiable risks. Austrian insurers are exposed to relatively high risk from: - (i) asset and liability mismatches; - (ii) strategic investment to related parties (including investment to banks); - (iii) property risk; - (iv) lapse risk. - These risks are incorporated in both standardized and internal model approaches for capital calculation. - Interest rate risk module captures asset-liability mismatch via two stressed interest rate term structures; standardized approach provides up-and-down scenarios with shocks ranging from 75 percent in the shortest end-maturity to 20 percent in the longest end-maturity from the base line risk-free term structure. Capital charge is based on the worse scenario between the two scenarios. - The current standardized approach does not capture interest rate risk well under current low and negative interest rate environments. - Strategic investments to related parties: Solvency II requires capital deduction if insurer’s holding of a bank’s shares exceeds 10 percent of insurer’s own funds; otherwise exposure treated as ordinary asset. - Most equity investments recognized as “strategic investments” and are subject to a reduced capital charge of 22 percent from standard equity charges (39 percent for listed equities and 49 percent for unlisted equities), according to the FMA. - Insurers using LTG and transitional measures are subject to more intensive supervision: - LTG and transitional measures allowed to a small number of insurers, subject to FMA approval. - Insurers with significant reliance on those measures face more intense monitoring and frequent onsite examinations. - FMA is closely monitoring SCR coverage ratio without LTG and transitional measures; risk score is assigned based on SCR coverage ratio without transitional measures. Capital Resources - Own funds of Austrian insurers include some relatively lower quality capital (conforming with Solvency II). - Subordinated debt and other lower quality capital instruments issued before Solvency II; some insurers use the 10-year transitional arrangement to an immaterial extent. - There is uncertainty about market availability and financing cost for rollovers; FMA monitors potential refinancing and associated funding cost. - FMA has observed no difficulties issuing new instruments that comply with full Solvency II requirements; amount of refinanced needs has been negligible. Internal Model Validation - FMA conducts onsite inspections for internal model validations, often in close coordination with OeNB. - When models include the market risk module (or parts), OeNB provides expert opinion and must assess compliance (Art. 182 VAG); related onsite inspections conducted in coordination with OeNB. - FMA conducted 11 onsite inspections to validate internal model applications before Solvency II implementation date. - In the subsequent three years, FMA continued to receive internal model applications (e.g., expansion of coverage of partial internal models). - As of June 2019, 20 onsite inspections were conducted and an additional 6 inspections were planned for 2019. - Modeling techniques are becoming complex, increasing workload and expertise requirements for validation exercises. ### Box 2. FMA Stress Tests (findings) - FMA has conducted annual Solvency II based stress tests on the entire insurance sector since 2014. - First Solvency II-based stress test was rolled out two years before implementation, focusing on continued low interest rates. - Since Solvency II implementation (January 2016), national stress tests have been conducted annually. - FMA also conducts stress tests based on national GAAP measurements; national GAAP can result in lower levels of equity and potentially trigger insolvency where Solvency II would still be solvent. - 2017 national stress test: - Covered all insurance solo entities with a Solvency II balance sheet of more than EUR1 billion; covered 17 out of 37 solo entities. - Scenarios: two rising interest rate situations (with and without credit spread increase) and one continued low interest rate scenario. - Low interest rate scenario subdivided into three sub-scenarios focusing on dependence on new business lines and reinvestment yield. - In first rising interest scenario (risk-free yield curve up with credit spread expansion), some companies would lose relatively large amounts of own funds. - 2018 EIOPA stress test: - Conducted at group level; only Austrian participant was the VIG group (accounts for about 55 percent of total technical provision in Austria based on solo reporting). - Scenarios: (i) yield curve up; (ii) yield curve down; (iii) natural catastrophe scenario. - VIG met the SCR coverage ratio without relying on LTG or transitional measures in all scenarios. - Largest impact observed in interest rate “up” scenario; natural catastrophe scenario showed little impact. - 2019 national stress test: - Focus on life insurance solo entities and includes a multi-year shock. - Previous tests used single instant shocks; multi-year scenarios allow monitoring prolonged low interest rate effects. - Limited management actions recognized (e.g., change of asset allocation after stress period, not during). - Test includes two scenarios: constant low interest rate and sudden increase of interest rate. - New business and its positive impact are not incorporated; tests conducted under going-concern assumptions. - A mass lapse event is incorporated into the high interest rate scenario to identify sales and transactions of assets. - Stress testing practice observations: - Stress tests are a core tool for FMA risk assessment. - FMA encouraged to focus on fewer scenarios and conduct more targeted analysis on high-impact assumptions. - Over several exercises, FMA has developed common methodologies and comprehensively validated results with available data. - Large volume data validation may impede focus on material assumptions; focused validation on lapse risk, loss-absorption of technical provisions, loss-absorption of deferred tax assets, and impact of mass lapse could identify differing practices among insurers. Recommendations (B — Stress Tests) - Focus stress tests more intensely on insurers’ identified vulnerabilities, leveraging information on individual risks to tailor entity/group-specific scenarios. - Conduct stress tests on segments where future profitability is a material contributor to own funds, with scenarios tailored to key uncertainties given long-term engagement business models (including potential inability to increase premiums in line with costs, such as healthcare prices, under current law). - Take concrete enforcement or supervisory action (e.g., impose capital add-on) to address medium-term uncertainty and prevent over-reliance on future profit from particular segments (example: rapidly growing health insurance business). ### MAIN FINDINGS — C. Supervisory Reporting, Monitoring, and Onsite Inspection - FMA’s supervisory review process is well organized and increasingly analytically efficient, with bottom-up analysis. - FMA built several databases and in-house IT systems parallel to Solvency II implementation; financial information of both local GAAP and Solvency II basis is stored. - System allows automatic validation of Solvency II data; expansion of validation function to local GAAP figures is in progress. - Key system is built on Excel with analysis templates and flexible ad hoc tools enabling supervisors to view insurer positioning by industry, line of business, and peer groups. - A risk scoring is assigned to all solo and group entities and determines supervisory intensity: - Risk score ranges: 1–1.9 (low), 2-2.9 (normal), 3–3.9 (high), 4 (very high). - Score determined by combination of Financial Soundness Indicators (FSIs) and qualitative expert judgments by line supervisors. - FSIs include: (i) balance sheet risk (ALM, SCR, etc.); (ii) profitability (financial result, nonlife, health, life technical results); (iii) governance and operational risk. - Expert judgment applied as reasoned adjustments; scores adjusted at least every year and claimed to be continuously updated in practice. - Offsite monitoring intensity depends on risk score; full analysis of Solvency and Financial Condition Report occurs when insurer has high or very high risk score. - Risk scoring determines frequency and scope of onsite inspections: - Each insurance company (except small mutual insurance companies) must be examined at least every five years. - If company score is high or very high, inspection frequency increases to once every three years. - Internal FMA policy: onsite inspections of the two largest groups at least once a year. - FMA conducted inspections on 20 insurance entities in 2018. - Areas of attention: consistency of internal models; conclusion of work on best estimate calculations; management and internal governance. - Typical inspection length: 2–4 weeks, team of 2–3 experts. - Inspection results communicated to Management Board about four weeks after conclusion. _Italic line: Source: 1autea2020003 - 25. The Audit Oversight Body of Austria, Abschlussprüferaufsichtsbehörde (APAB), and the FMA._ ### 45. Recently, the FMA decided to communicate the risk score to the insurers in the high or ### 1autea2020003 - 45. Recently, the FMA decided to communicate the risk score to the insurers in the high or ### Communication of Individual Risk Scores - In the first quarter of 2019, the FMA engaged in a formal communication of individual risk scores to all insurers in the high or very high-risk category. - The communication letter covers: - (i) a description of rating approach; - (ii) a composition of the final score to the submodules behind it; and - (iii) internal guidelines regarding this communication. - Discussions have been held before and after this formal communication of the risk rating. ### Recommendations — Targeted Entity-Specific Communication - The FMA should improve the targeting of entity-specific communication from senior FMA officials on strategic and implementation concerns, with clear timeframes and commitments for the resolution of identified issues. - Enhancements suggested: - Communicate major strategic issues, such as business model shift. - Communicate key concerns behind high or very high-risk ratings at a high level. - Include clear indication of the timeframe and require commitments from insurers for resolution of identified issues. ### Group Supervision and International Cooperation — Structure and Reach - The Austrian insurance sector has presence in a total of 29 markets with varying size, concentration, and maturity. - The five internationally active insurers in Austria are: VIG, UNIQA, Grawe, Merkur, and Wüstenrot. - Foreign business contribution to the five groups’ overall profitability is significant; in three of these five groups, the profit premium margin15 of foreign business is higher than the domestic one (2017 data, FMA calculations). - The FMA is one of the first signatories to the IAIS Multilateral Memorandum of Understanding (MMoU), which has been signed by 70 insurance supervisory authorities. - The FMA has bilateral MoUs with 12 jurisdictions. ### Group Risk Assessment Tools and Processes - Group risk assessment considers risk analysis at three levels: - (i) market level; - (ii) solo level; and - (iii) group level. - An internal database (“Cube”) is available at the group level enabling supervisors to conduct various analyses (including peer comparison) of number of risk indicators. - Market-level drivers analyzed include: - (i) macroeconomic development; - (ii) political situation and independence of state institutions; - (iii) changes in the legal, tax, and regulatory framework; - (iv) insurance market development; - (v) climate change and natural catastrophe events; and - (vi) consumers’ behavior. - Solo-level analysis: - FMA collects solo risk assessment and supervisory review processes from host supervisors and uses its own solo risk assessment for domestic insurance entities. - Group-level analysis: - Documented in the group Financial and Risk Analysis and Group Risk Report. - Risks analyzed include: (i) strategic risk (new market entries); (ii) transformation risk from M&A activities; (iii) financial risks (such as increasing cost ratios); (iv) operational risks from IT integration or introduction of new IT systems; and (v) human resources risks and governance risks. ### Group Solvency and Adjustments - Group solvency requirement is based on the consolidated balance sheet of the group. - If the group SCR becomes lower than the sum of solo SCRs of the groups due to diversification effect, the group SCR is adjusted to be equal to the sum of solo SCRs of the group. - Some own funds (such as surplus funds and some DTAs) that are available only to the loss of particular entity(ies) are deducted from the group capital calculation. - If an insurance group has banking and other regulated subsidiaries, capital requirements of such regulated entities are incorporated based on the relevant sector’s capital requirements. ### Supervisory Colleges and Cross-Border Cooperation - Supervisory colleges have been established for the five internationally active Austrian insurance groups. - Annual face-to-face meetings, or at least conference calls for small groups, have been organized with college members from EEA and non-EEA jurisdictions. - Information exchange templates have been set up by the FMA since 2014 (and subsequently updated) containing KPIs, supervisory assessments, and activities of NCAs. - In 2018 the FMA started sharing the Group Risk Report with supervisory college participants and bringing the group work plan for discussion to achieve more coordination in supervisory priorities and (joint) onsite inspections with host supervisors. ### Recommendations — Group Supervision and Information Sharing - The FMA should enhance information sharing with host supervisors, particularly with jurisdictions where Austrian insurers have a systemically significant market share. - These information-sharing efforts should be firmly grounded in the FMA’s annual program. - Supervisory college broad-based membership should not impact the flow of information necessary for the joint assessment performed within a college. ### Market Conduct — Regulations and Implementation - EU regulations implemented include: - PRIIPs Regulation entered into force in January 2018; FMA circular on Key Information Documents for PRIIPs in February 2018. - Life Insurance Information Requirements Regulation 2018 to facilitate IDD implementation. - Information Requirements Regulation for Occupational Group Insurance entered into force in January 2016. - Minimum standards for information requirements in occupational pension group insurance entered into force in July 2015. - Supervision of distribution: - FMA supervises distribution directly by insurers or banks. - Federal Ministry of Digital and Economic Affairs has general authority over insurance agents. - Supervision of insurance brokers and agents is conducted by 106 local supervisors at the district level. - Mediation is conducted by the ministry; Arbitration Board for consumer business (Verbraucherschlichtung Austria) offers voluntary mediation free of charge; Austrian Insurance Association (VVO) handles complaints at their Information and Complaints Office. ### FMA Market-Conduct Practices and Complaints Data - FMA conduct supervision relies on analysis of complaints, market monitoring activities, thematic desktop reviews, and integration of findings into entity risk assessments. - Insurers are required to submit reports related to complaints they receive. - In 2018, the FMA received approximately 1,700 complaints, 300 of which were against insurance companies. - Complaint trends: - Increasing trend over the last three years, with a material increase in 2018. - Arbitration Board for consumer business and VVO received 75 percent and 65 percent more complains in 2018 than in 2017, respectively. - Majority of complaints were related to auto insurance (about 40 percent), followed by life insurance (about 10 percent). ### Legal Risks and Mass Cancellations — Life Insurance - ECJ ruling in Walter Endress versus Allianz (2014) and subsequent Austrian Supreme Court (OGH) rulings: - Policyholder or beneficiary may be entitled to an unlimited right of cancellation where incorrect information about the duration of the period of cancellation was provided at origination. - Policyholder is entitled to premium payments as well as 4 percent interest. Interest coverage and other issues are currently under the OGH for its ruling. - Legislative work is underway to clarify the law: after five years from contract origination, cancellation is possible at surrender value. - FMA data-collection exercises on potential impacts of mass cancellations conducted four times: April 2016, September 2016, June 2017, and April 2018. - FMA is intensively discussing compliance of pre-contractual information requirements, governance of product designs, and level of provisioning for potential future cancellations. ### Recommendations — Market Conduct and Intermediaries - The government should initiate studies on conduct risks of insurance brokers and agents due to fragmented institutional framework (FMA and 106 local supervisors). - Relevant ministries should conduct comprehensive data collection and risk analysis of conduct risks in insurance brokers and agents. - The FMA should develop a coordinated strategy with current supervisory bodies at the district level to improve risk-based supervision of market conduct, including: - Coordinated market-focused inspections with local supervisors and potential joint inspections. - Information sharing systems and agreements not limited to enforcement actions but covering a wider range of data and information for effective risk-based supervision. ### Enforcement Powers and Limits - The FMA has enforcement tools including orders and administrative fines to individuals and legal entities. - Maximum fines for breaches: - EUR 700,000, or double the amount of the benefit derived from the breach to an individual, or - EUR 5 million, 5 percent of total annual turnover, or up to double the amount of the benefit derived from the breach for a legal entity. - The FMA is required to publish all fines and legally take measures for breaches against obligations pursuant to provisions for insurance distribution and internal policies for the distribution. - The FMA does not have authority over independent brokers and agents; the Federal Ministry of Digital and Economic Affairs is responsible for policy making of independent brokers and agents; 106 local supervisors at district level handle certification, training, supervision, and enforcement of intermediaries. ### Safety Net and Crisis Management — Deckungsstock System - The safety net in the insurance sector is the Deckungsstocksystem, a pool of special funds—the “Deckungsstock”—that insurers need to establish for life assurance as well as health and accident insurance.17 - The Deckungsstock constitutes a special internal fund in case of bankruptcy/insolvency of an insurance company. - Assets held for this purpose are registered in a specific register monitored by a trustee (Treuhänder) appointed by the FMA. - The Deckungsstock trustee: - Informs the FMA via quarterly and annual reports. - Is mandated to bring immediately to the authority’s attention any circumstances that may raise concerns regarding compliance with the cover requirement (Art. 305 para 1 no. 3 VAG 2016). - The Deckungsstock actuary: - Is responsible for the adequacy of the amount of technical provisions that each insurer must maintain to ensure continuous fulfillment of commitments from contracted insurance policies. - The role can be entrusted to the actuary employed by the insurance entity. - Insurance law (Art. 116, para 6 VAG 2016) foresees an annual report on the required amount of technical provisions from the responsible actuary to the MB of the insurer, and an escalation to the authority in case of disagreement or divergence of views within the insurance company. *Source: 1autea2020003 - Excerpt of IMF country report chapter on Austria (selected paragraphs 45–70).* ### 71. The assets dedicated to the Deckungsstock may only be subject to execution for the ### 1autea2020003 - 71. The assets dedicated to the Deckungsstock may only be subject to execution for the ### Legal status and execution of the Deckungsstock - The assets dedicated to the Deckungsstock may only be subject to execution for the benefit of policyholders and beneficiaries in bankruptcy or runoff. - Legal disposal of assets dedicated to this pool requires the trustee’s written consent. - If the FMA files a petition of bankruptcy in case of insolvency or over-indebtedness of an insurer: - From that point on, the settlement of insurance contracts falls within the responsibility of the bankruptcy court. - For long-term (life and health) policyholders, contracts are terminated. - The register of assets dedicated to the Deckungsstock is immediately submitted to the bankruptcy court, which would initiate proceedings. - In the event of a run-off (Article 286 VAG 2016), the supervisory authority (FMA) assumes responsibility for the insurance entity in the process. ### Zinszusatzrueckstellung (ZZR) and life insurers’ resilience - The FMA has required the life insurance sector to accumulate additional regulatory provisions (interest rate reserves) known as Zinszusatzrueckstellung (ZZR). - Total additional required by end-2021: about EUR 1.5 billion of regulatory provisions (interest rate reserves). - At end-2018: - Life insurers had accrued EUR 1035 million on the back of ZZR. - ZZR contributions in 2018 were about EUR 158 million. - Insurers have built up EUR 1 billion and would have to set aside additionally EUR 0.3 billion by 2021. - The ZZR: - Was introduced in 2013 and initially had to be funded by ordinary profits. - In 2016 was adjusted to allow co-financing by available surpluses from the sharing system. - Originally had a 10-year phase-in; after amendments the transitional period was shortened to seven years, creating the 2021 deadline. - Is derived by a simple formula using: (i) life insurance provision; (ii) the average guaranteed rate of an insurance company; and (iii) the annual average Austrian government bond yield. - Statutory accounting with the additional interest rate reserve is presented as a reasonable safeguard, given Solvency II’s reliance on modeling assumptions. ### FMA supervisory powers under VAG 2016 and extraordinary measures - VAG 2016 (national Solvency II implementation) preserved features of the previous regime (such as the Deckungsstock) while enabling intense and intrusive oversight. - FMA’s available supervisory measures include (non-exhaustive list): - Capital add-ons. - Convening a general meeting. - Requiring submission of a solvency plan and finance scheme. - Restrictions/prohibitions in business activities to de-risk the balance-sheet. - Request of a portfolio transfer. - Dismissal of Board members and/or senior managers. - Appointment of a commissioner. - Investigative and conduct-of-business measures. - VAG allows the FMA to take extraordinary measures in the interest of policyholders and beneficiaries: - Temporarily prohibit payments of insurance benefits. - For life assurance, prohibit surrenders and advance payments on policies. - Reduce the obligations of the insurer arising from life assurance, in accordance with the existing assets. - Extraordinary measures (Article 316 VAG) are revoked when the financial situation of the insurer permits it. ### Crisis preparedness, recovery and resolution (RR) considerations - Domestic and international developments point to the possible creation of a minimum harmonization framework in the EU; the FMA is discussing enhancements to legal certainty and supervisory toolkit effectiveness in crisis preparedness. - Proposed discussions and measures (first category) include: - Clarifications of existing provisions. - Introduction of a requirement for drawing pre-emptive recovery plans from insurers (only those offering interest-sensitive products). - Limitation of dividend distribution on a broader assessment than imminent breach of the SCR. - Definition in law of a framework for new generation insurance guarantee products. - Clarification of the prudent person principle to strengthen Austrian PPS (Deckungsstock). - Strengthening position and independence of the actuary within insurers. - Introduction of expert qualification requirements for statutory auditors to ensure adequate insurance knowledge. - Ongoing discussion to substantially reinforce FMA powers to: - Extend restructuring powers to all kinds of insurance and all types of creditors. - Mandate a portfolio transfer. - Formally adopt principle that losses must be borne first by shareholders and other creditors before affecting policyholders and beneficiaries. - Extend powers to impose losses to all creditors (shareholders, bondholders, agents, reinsurers) and clarify order and extent of loss absorption. - Ability to invite but not force portfolio transfers to one or more insurers, possibly with financial support of an internal guarantee fund (to be established). ### Role and design of a Recovery and Resolution (RR) framework - A comprehensive RR framework would: - Review scope and responsibilities of competent authorities. - Introduce resolution tools including power to transfer assets and liabilities to bridge institutions. - Secure support of resolution funding arrangements with appropriate safeguards and legal protection. - Clearly establish scope and responsibilities of the resolution authority (FMA) and its interaction with other policy-making entities. - Clearly separate supervisory and resolution responsibilities and decision making to avoid overlaps and conflicts of interest. - Funding considerations: - Effective resolution should combine private funding arrangements (adequate ex ante resources) and credible provisions for public funding. - Currently, the Deckungsstock is an internal pool of funds only subject to execution for benefit of insurance claims; only the FMA may file a petition in bankruptcy/insolvency. - The Deckungsstock could participate in forced portfolio transfers and provide funding in liquidation if its mandate were redesigned for resolution funding. - Present lack of private funding arrangements and ex ante resources dedicated to resolution funding would make capitalization and liquidity of a bridge institution a challenge. - Cross-border cooperation: - RR framework should strongly encourage and depend on cross-border cooperation. - FMA engages competent authorities across EEA and non-EEA countries via Supervisory College platform, bilateral and ad hoc initiatives. - Recovery and resolution planning should translate into trusted cross-border crisis management, timely coordination, and mechanisms to coordinate with foreign judicial proceedings. - Pre-emptive recovery plans: - FMA considers requiring pre-emptive recovery plans from life insurers with interest-sensitive products. - Selection of insurers for recovery plans should be grounded in microprudential and macroprudential considerations. - Considerations include: risk profile, nature/structure of business, scope/complexity, interconnectedness, cross-border operations, systemicity, and impact on host jurisdictions. - Proportionality should shape content, timeframe to draft and approve, and updating policy for recovery plans. ### Operationalization, resourcing, and testing - Austria has not dealt with systemic insurance failures historically; no insolvency case since before WWII and no reported near-failures of non-systemic insurers. - Main challenge: operationalizing and testing crisis management regime and institutional arrangements. - Prepare operational manuals, procedural steps, alerts/triggers, escalation processes, and simulation exercises (internal, with authority, domestic, and cross-border). - Existing FMA internal-crisis manual is not sufficient; broader exercises and procedures are recommended. - Resource implications: - Implementation of an RR framework will require FMA to improve staff expertise and likely increase total number of FTEs. - Current Insurance Division handles going-concern tasks efficiently, but new RR tasks require reassessment of resources and skills. - Resource limitations could hinder assessment of recovery plans, preparation of resolution plans, and framework-related policy development. ### Recommendations (as stated) - Enhance crisis management preparedness by including pre-emptive recovery planning for a group of insurers, adequately selected based on microprudential and macroprudential considerations, with due consideration to the proportionality principle. - Introduce the formal adoption of the overarching principle that losses must be borne first by shareholders and other creditors before they affect policyholders’ and beneficiaries’ claims as a fundamental building-block toward a formal recovery and resolution framework. - When further developing and modernizing the FMA’s supervisory toolkit on the basis of the existing Deckungsstocksystem: - Take into account standards and principles forming the basis for future EU legislation. - Introduce new powers with appropriate safeguards and legal protection. - Clearly delineate the scope and respective responsibilities of authorities (supervisory and resolution) to avoid overlaps and potential conflicts of interest. *International Monetary Fund — Austria: Excerpt on Deckungsstock, Zinszusatzrueckstellung, FMA supervisory powers, and recovery and resolution considerations.* ### Box 3. Overview of Recovery and Resolution Frameworks for Insurers in Europe (continued) ### Box 3. Overview of Recovery and Resolution Frameworks for Insurers in Europe (concluded) ### Resolution objectives and toolkit (Netherlands) - Resolution objectives: protecting policyholders, avoiding unnecessary value destruction and minimizing the overall costs of resolution. - Resolution authority: DNB. - Resolution toolkit: - (i) bail-in: the power to write down or convert equity or debt, or restructure insurance policies. - (ii) sale of business: sell the shares of an insurance group or troubled company within the group. - (iii) bridge institution: temporarily transfer the insurer's shares and/or (part) of its assets and liabilities to a bridge institution, to the extent that a market solution cannot be found. - (iv) asset separation: ability to transfer assets and liabilities to an asset management vehicle (AMV). This measure can only be used in combination with one of the other measures. ### Public interest test (Netherlands) - Default insolvency stance: the default option is that a failing insurer would go to insolvency. - Purpose: assess whether resolution is warranted by testing necessity and proportionality relative to resolution objectives, and whether a normal bankruptcy procedure would not lead to the same results. - Public interest test criteria: - (a) is resolution is in the interest of policyholders; - (b) does it avoid a disruption to the society, i.e., does it minimize the social cost; - (c) does it prevent a severe impact to the financial system and real economy; - (d) are public funds better protected, i.e., is the cost of failure minimized? - Policyholder protection: not of paramount importance; prevention of major social consequences or significant adverse consequences for financial markets or the economy is prioritized. - NCWO safeguard: resolution may impose losses on policyholders under the NCWO safeguard. - Proxy factors for societal impact: how many policyholders are affected, the type of insurance, and the replaceability of the insurance contract in the market. - Thresholds cited: 1 million policyholders and 1 billion of technical provisions; public interest test is conducted at the time of failure and is a case-by-case assessment. ### Recovery and resolution preparedness (Netherlands) - All insurers must participate in crisis preparedness by drawing up preventive recovery plans (coined “preventive crisis plans” in the Netherlands). - Proportionality principle applies to depth and detail of plans. - Resolution authority will draft resolution plans for insurers captured by the thresholds, using preventive recovery plans as input. ### Romania: RR framework features - Historical note: Romania was the first European country with an RR framework for insurers. - Framework design: draws heavily on the BRRD with a notable exception—lack of bail-in tool in the resolution toolkit. - Competent authority: Financial Supervisory Authority (FSA). - Early intervention powers: can be taken if an insurer is not meeting, or is likely not to meet capital requirements due to rapid deterioration of financial situation, including solvency capital and own funds covering solvency capital requirements. - Possible early intervention measure: appointment of a temporary Director for a maximum of one year to replace or cooperate with the insurer’s existing management. - Resolution trigger: FSA can impose resolution if an insurer enters or is likely to enter into a state of major difficulty and the measure is necessary from a public interest perspective. - Resolution governance: FSA appoints a Resolution Director who carries out all responsibilities of shareholders and management. - Pre-resolution valuation: before ordering a resolution measure, the FSA will require a financial auditor to perform a valuation of the assets, liabilities and equity of the insurer. - Resolution measures may include: share capital increases, shareholding changes or takeover of control of the insurer by other insurers with adequate financial soundness. ### Romania: resolution toolkit and safeguards - Resolution tools (FSA) — bail-in powers are not provided: - (i) Sale of activity and portfolio: FSA can transfer an insurer’s shares to a buyer, as well as any category of insurer assets, rights or obligations. - (ii) bridge-institution: an entity controlled by the FSA, to which the FSA can transfer the shares, assets, rights, and obligations of the insurer, with or without consent of failing insurer’s shareholders. Assets, rights, and obligations can subsequently be transferred either to third parties or back to the insurer per FSA decision. - (iii) separation of assets: FSA can transfer assets, rights, and obligations of an insurer or of a bridge-institution to an AMV, without needing approval of insurer’s shareholders. AMVs are controlled and managed by the FSA for sale of assets and/or portfolios, or for liquidation. - NCWO principle: shareholders and creditors must not be treated worse than in an insolvency procedure; if they are, they are entitled to compensation equal to the difference, paid from resolution financing. - Resolution financing mechanism: Insurers Resolution Fund set up and managed by the Insured Guarantee Fund. - Funding of the resolution fund: established with insurers’ contributions, up to a maximum of 1 percent of the gross premiums collected. - Recovery planning: each insurer must develop and regularly update a recovery plan submitted to the FSA for assessment. - Resolution planning: FSA establishes a resolution plan for Romanian insurers that are likely to be of systemic importance. ### Macroprudential surveillance and thematic reviews (Austria / FMA) - FMA activities: horizontal reviews, ad hoc industry-wide surveys, stress testing, benchmarking exercises, and thematic reviews; collects industry information when risks are identified. - Objective: identify outliers excessively exposed to risks; conduct supervisory reviews and inspections to improve firms’ practices and risk profiles. - Example thematic reviews and findings: - 2016 property investment survey scope: valuation methods and parameters (location, type of property, rental income, economic lifetime, discounting yield, vacancies, local gap accounting information, and market value). - Overall finding: prudence in industry valuations (e.g., assumed rental income). - Identified issues: - (i) significant concentrations of property location (in Vienna); - (ii) a large share (39 percent) of the properties are valued using internal valuation reports; - (iii) some portion (9 percent) of the market values of the properties are valued using valuation reports older than three years. - Follow-up actions: detailed analysis of property portfolios of 10 insurers; one onsite inspection taking place and additional review of two insurers will be taking place in 2019. - Health insurance technical provisions: - Finding: potential needs for considerable premium adjustments in health insurance. - Context: shares of premium or assets of health insurance are still small, but the sector is growing faster than other subsectors. - Liability profile: Austrian insurers are required to provide lifetime policies to all policyholders, resulting in quite long duration of liabilities. - Low interest rate impact: affects technical provisions to meet future obligations. - Modeling practice: insurers mainly use deterministic approaches rather than stochastic modeling for best estimate calculations. - Premium adjustment assumption: insurers assume premium could be adjusted in line with inflation of health care services; premium is allowed to be adjusted according to contract law (cf. Art 178 f Insurance Contract Act). - Surrender behavior and liquidity: - IDD implementation: in 2016 Insurance Distribution Directive (IDD) introduced to ensure policyholder protection regardless of distribution channel. - Data collection: approximately 11 million contracts covering 2012 to 2016 were analyzed (cooperation with Austrian Ministry of Economy). - Findings: bank distribution channels had the highest lapse rate; approximately 47 percent of contracts have been canceled due to lapsing. ### Digitalization and Big Data Analytics (FMA) - FMA actions: surveys and analyses on digitalization; collected information on potential impact of digitalization and industry strategies, processes, cyber risks, and IT landscape from all Austrian insurers. - ORSA and IT risk: FMA assessed IT and operational risks in the Own Risk and Solvency Assessment (ORSA) and conducted a survey concerning main IT systems. - Industry investment: insurers investing to improve IT systems to meet higher customer needs and prepare for competitive pressures. - BDA usage statistics: 23 percent of insurers are actively using Big Data Analytics (BDA). - Current main-use cases: customer relationship management (CRM), sales, risk management, and fraud detection. - Product innovations: some insurers introduced products connected with telematics and other Internet of Things (IoT) devices. - FMA expectations: technology will be used in pricing and product development. - Identified risks of BDA: - shortfalls in data quality and erroneous models leading to flawed results and high complexity; - individual pricing can lead to lack of transparency and undue discrimination; - increased collection of sensitive data increases legal risk and exposes vulnerabilities to more incentivized and motivated cyberattacks. - Recommendation: FMA is encouraged to continue to monitor the use of BDA and analyze both benefits and risks. *Source: Box 3. Overview of Recovery and Resolution Frameworks for Insurers in Europe (concluded).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1autea2020003.pdf_