## _cr1414

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---

### Introduction and scope
- Updates the Austrian insurance industry review and analyzes its regulatory and supervisory regime since the December 2007 update.
- Benchmarks: Insurance Core Principles (ICPs) as adopted by the IAIS in October 2011 and amended in October 2012.
- Primary sources: Insurance Supervision Act (VAG), material provided by the FMA, and discussions during the FSAP Update mission in February 2013.
- Prepared by Michael Hafeman and Mustafa Saiyid.

### Sector overview and market structure
- At Q3-2012 there were 50 insurance companies with assets of €108 billion, making up nearly 40 percent of GDP.
- Total premiums were €16 billion at end-2012.
- Company types: three solely life, 15 solely non-life, 29 both, and three reinsurers.
- Assets of life insurers comprise about 70 percent of the industry’s assets.
- The two largest groups account for almost half of the €16.5 billion of premiums written in Austria in 2011.
- The five largest groups operating in Austria account for nearly three-quarters of the total.
- Consolidation: 14 mergers over the past 15 years resulting in a 20 percent decline in the number of firms.
- CESEE exposure: more than 40 percent of the total premiums and nearly one-third of total profits of the five internationally-active Austrian groups come from foreign operations—mostly CESEE.
- Main CESEE markets: Czech Republic, Poland, Slovakia, Romania — together account for nearly two-thirds of total CESEE premiums.
- Industry profitability: posted a profit of nearly €1 billion, an after-tax ROA of nearly one percent during 2011.
- Profits fell by 5 percent in 2011 versus 2010; 2012 results (as of May 2013) looked better though full-year figures were not yet available.

### Key asset exposures and solvency metrics
- About 20 percent of insurance assets, nearly €20 billion, are exposed to European banks—largely through holdings of bank debt.
- Of this banking exposure, insurers hold nearly half, or about €10 billion, in Austrian bank bonds.
- Bond holdings of banks in Euro area countries under market pressure, including Italy, Spain and Ireland, amount to about €1.2 billion.
- One large insurer took significant write-downs on Greek exposure, causing an operating loss in 2011.
- Less than 10 percent of asset portfolios is allocated to real estate or equities.
- Solvency ratios generally above 200 percent (as of end-2011): life insurers about 180 percent; non-life close to 590 percent.
- Earned premiums in 2012 were only slightly less than 1 percent below 2011 results.
- For the industry overall, declining life premiums were mostly offset by rising non-life premiums.

### Risks and vulnerabilities
- Low interest rate environment and legacy liabilities:
  - Some legacy liabilities contracted at rates more than 200 bps above the current yield on government bonds.
  - Legacy liabilities carrying rates of up to 4 percent compared with a current yield on comparable duration government bonds of 1.75 percent.
  - Maturity gap: liabilities average maturity 9 years vs assets average maturity 7 years, implying rollover risk.
  - FMA study (April 2013): assets of over €12 billion are subject to rollover risk during a 10-year period ahead.
- Counterparty and bank-guarantee risks:
  - Technical provisions for products with external guarantors were slightly more than €6 billion at end-2011.
- Regulatory uncertainty:
  - Interim EIOPA draft guidelines since March 2013 covering governance, risk management, internal models, and reporting have reduced some uncertainty on timing and content of Solvency II.
  - Further preparatory work needed in risk management, financial measurement and reporting, capital planning, product management, and investment policy.

### Supervision, governance, and supervisory resources
- Actuarial and accounting capacity:
  - Availability of well-trained actuaries remains a concern.
  - Actuarial Association membership: ordinary members increased from 430 in June 2012 to 462 in January 2013; full members declined from 274 to 268 in the same period.
  - Transition to IFRS has been coped with; market-consistent reporting under Solvency II will increase demand for specialized accountants and auditors.
- FMA powers and staffing:
  - FMA can issue regulations, circulars, and minimum standards; some industry confusion exists over the nature of minimum standards.
  - Staffing: about 59 people in the Insurance and Pensions Supervision Department at the time of writing, compared to 40 in 2007 and 35 in 2003.
  - Human resources are strained by Solvency II preparation and industry demand for FMA expertise.
- Cross-border cooperation:
  - FMA actively participates in EIOPA work and supervisory protocols for international insurance groups.
  - Austria is signatory to the IAIS Multilateral MoU and has bilateral MoUs with several jurisdictions, but not all jurisdictions where Austrian groups operate are covered.
  - FMA uses other cooperation channels where MoUs are absent.

### Supervisory practices and on-site work
- Information collection and risk assessment:
  - The FMA collects extensive quantitative and qualitative information from insurers through various systems, and compiles financial soundness and performance indicators used as input to entity risk ratings.
  - Risk rating systems differ among entity types.
  - Insurers must notify the FMA of all facts that put continued compliance with insurance obligations at risk.
- Stress testing:
  - FMA requires prescribed stress scenarios and entity-developed scenarios; scope exists to strengthen these tests.
  - Insurers performed stress tests as part of Solvency II quantitative impact studies; additional stress testing for internal risk management is not common practice.
  - Implementation of Solvency II is expected to require internal risk and solvency assessments.
- On-site inspections:
  - FMA conducts planned and ad hoc formal inspections, thematic inspections, company visits, and regular meetings with boards and senior managers.
  - Formal inspections are focused rather than full-scope; 133 formal inspections of insurers were carried out during 2008–12.
  - Most but not all entities were inspected at least once during that period; largest insurers inspected numerous times.
  - Inspection intensity has been strengthened.
- Preventive and corrective measures:
  - FMA has a wide range of measures and sanctions, including fines up to €150,000 for the most serious offences.
  - Under Austrian law only natural persons may be fined and not corporations.

### Group supervision, crisis management, and macroprudential work
- Group supervision and colleges:
  - Structured methodology for supervising insurance groups and conglomerates involving internal departments and supervisors in other jurisdictions.
  - Supervisory colleges established for each of the five internationally-active Austrian insurance groups; supervisors from all significant markets participate (96.5 percent of foreign business based on premium 2011).
  - FMA has developed a CESEE strategy and risk map and has participated in some joint on-site inspections in other jurisdictions.
- Crisis management:
  - FMA prepared a Crisis Management Handbook defining supervisory crisis situations and processes.
  - Two actual group problem situations were handled successfully with college involvement.
  - In 2011 a multilateral emergency test was conducted through EIOPA.
  - Insurers are not required to maintain contingency plans and procedures based on their specific risk for going- and gone-concern situations.
- Macroprudential responsibilities:
  - FMA prepares regular trend and risk analyses using supervisory analyses, stress tests, consultations within FMA and with OeNB, and EIOPA sources.
  - The Financial Market Committee serves as a cooperation and information-exchange platform.
  - Authorities have not yet assigned responsibilities for macroprudential supervision or established a process for assessing potential systemic importance of insurers.

### Prudential framework: valuation, reinsurance, investment, risk management, and capital
- Reinsurance:
  - FMA assesses reinsurance programs off-site and on-site; reinsurance documentation reviewed during inspections.
  - No explicit legal requirements on timeliness/completeness of reinsurance documentation; about 91 percent of reinsurance ceded goes to reinsurers of EEA countries or equivalent non-EEA countries.
- Valuation and provisioning:
  - Austrian GAAP requirements for valuation fall short of revised ICPs.
  - FMA receives fair values alongside local GAAP figures and detailed liability calculations from actuarial reports; asset-liability valuation consistent with standards will be implemented under Solvency II.
  - Insurers must establish additional provisions if investment returns fall short of interest rate guarantees; methods and assumptions are left to the responsible actuary’s judgment.
  - FMA is working on a circular concerning calculation of additional provisions for guaranteed life insurance products.
- Investment and risk management:
  - Insurers invest under a traditional limit-based system; no formal requirement to invest in a manner appropriate to the nature of liabilities. A “prudent person” investment regime is expected under Solvency II.
  - FMA has not issued a regulation or minimum standard on risk management; it has expressed expectations that insurers establish risk management functions and the industry association issued non-binding guidance.
  - Current risk management practices of many insurers reportedly fall well short of ICP expectations and Solvency II requirements in risk quantification, asset-liability management, and preparation of own risk and solvency assessments.
- Capital adequacy:
  - Capital adequacy requirements remain based on Solvency I; insurers are legally required to meet solvency margin requirements continuously but routinely report solvency margins to the FMA only annually.
  - Both the FMA and industry acknowledge Solvency I does not appropriately recognize insurers’ risks; Solvency II would be more risk sensitive, and industry has concerns about complexity, calibration, volatility, management understanding, and effects on some traditional products.

### Markets, distribution, consumer protection, disclosure, and AML/CFT
- Distribution and supervision:
  - FMA supervises distribution by insurers and through banks; the Federal Ministry of Economy, Family, and Youth has general authority over agents and brokers.
  - Trade Act provisions for brokers consistent with the EU Insurance Mediation Directive.
  - Complaints-handling: Ministry handles agents and brokers; FMA handles bancassurance and direct distribution.
  - Maximum fine for illicit activity by an intermediary is €3,600.
- Consumer protection and disclosure:
  - Provisions on consumer protection covered in the Trade Act; disclosure requirements set out in the EU Insurance Mediation Directive.
  - 2008 amendment to minimum standards for the life insurance sector requires disclosure about the amount of the invested premium and/or the amount of the overall costs.
  - Tied selling is not prohibited; it is being considered in the revision of the Insurance Mediation Directive.
  - FMA inspects claims-handling and has published the EIOPA Guidelines on Complaints-Handling by Insurance Undertakings as part of the regulatory framework.
  - Public disclosure covered under UGB and VAG; all commercial insurers subject to disclosure requirements applicable to large companies (listed companies must disclose quarterly).
  - Those reporting on IFRS or US GAAP have additional disclosure requirements; FMA annually reviews consistency and quality of insurer disclosures.
  - Current disclosure requirements are not as extensive as ICPs envisage; Solvency II is expected to close remaining gaps.
- AML/CFT:
  - AML/CFT consolidated in a single FMA division with a staff of eight full time employees and budgeted growth to 12 in 2013.
  - One person in the International Affairs and European Integration division has AML/CFT responsibilities.
  - AML/CFT division communicates with insurance supervision divisions and expects to cover about 10 percent of life insurers annually through on-site inspections or company visits.
  - Insurance supervision staff are expected to notify the AML/CFT division of relevant control weaknesses.
  - Supervisors receive AML/CFT training through the FMA Academy and ad hoc seminars.

### Implementation of IAIS ICPs — findings and progress
- 2003 detailed assessment and the December 2007 update found the regulatory framework and implementation generally high standard and effective; some challenges remain relevant.
- Progress on 2007 recommendations:
  - Tax and regulatory neutrality: Changes made to taxation of single premium life insurance, but tax neutrality remains a concern; regulatory neutrality between pension supervisors not yet achieved.
  - Actuarial capacity: FMA supportive of increasing actuary supply, but the issue remains a concern.
  - Stress testing and market indicators: FMA requires standardized stress tests; insurers have done stress testing for Solvency II quantitative impact studies; further refinement and more extensive company-specific stress testing recommended. FMA investigated market-based indicators but found the small number of listed insurers impractical for this approach.

### Conclusions and policy recommendations (specific recommendations in source order)
- The FMA should continue to prepare itself—and take steps to ensure that the industry is prepared—to effectively implement Solvency II.
- The FMA will have to update its entire risk assessment process under Solvency II, adopt a structured system for the internal review of risk assessments, and increase the use of risk ratings in planning supervisory activities.
- Legislation should be revised to reinforce the operational independence of the FMA by requiring that the reasons for the dismissal of any member of its boards be publicly disclosed.
- Legislation should be revised to include explicit suitability requirements for key persons in control functions, as consistent with EIOPA guidelines.
- Legislation should be revised to require non-life insurers to establish an actuarial function and to appoint a responsible actuary.
- Legislation should be revised to require that the responsible actuary and the head of internal audit either report directly to the supervisory board or guarantee their access to it.
- The FMA should require all insurers to report solvency margins at a frequency consistent with EIOPA guidelines.
- Legislation should be revised to require insurers to promptly report any material changes or incidents that could affect their condition or customers.
- The FMA should enhance its standard stress tests by widening the range of risks tested, including more refined stress scenarios (such as a shift in the yield curve), and encouraging use of internal models.
- The FMA should increase the frequency of on-site inspections to ensure significant activities and control functions of each entity are inspected within a period reasonable in relation to its risk profile and supervisory risk rating.
- The FMA should continue to strengthen training on AML/CFT issues for supervisors of life insurance companies.
- The Ministry of Finance should enter into additional MoUs, as necessary, to facilitate participation of insurance supervisors in all jurisdictions where Austrian insurance groups have significant operations in relevant supervisory colleges.
- The FMA should provide input on establishment of cross-sector macroprudential supervision responsibilities and participate on an ongoing basis, including establishing a process for assessing potential systemic importance of insurers.
- The FMA should require insurers to maintain contingency plans and procedures based on their specific risk for use in a going- and gone-concern situation.
- Legislation should be revised to strengthen prudential requirements to enhance observance of the ICPs, consistent with EIOPA guidelines, which might include:
  - enacting revisions to the VAG;
  - revising the liability valuation approach to take fuller account of emerging experience and anticipated future experience;
  - requiring consistent provisioning for guarantees, both those provided by the originating insurer or pension company and those backed by a third party; and
  - issuing a minimum standard on enterprise risk management, and developing a methodology for assessing capital adequacy that considers a wider range of risks than Solvency I (such as a factor-based system or a stress testing-based approach).
- Legislation should be revised to increase fines imposed in case of illicit activity by an intermediary.

### Financial Soundness Indicators for the Insurance Industry (selected series)
- Life insurance — Total premimums (euro millions): 2006 7,136 2007 7,157 2008 7,317 2009 7,356 2010 7,467 2011 6,928
- Life insurance — Pre-tax earnings/net premium: 2006 4.7 2007 3.4 2008 -1.7 2009 2.3 2010 4.2 2011 3.0
- Life insurance — Loss ratio: 2006 105.9 2007 103.4 2008 79.6 2009 117.3 2010 115.9 2011 96.6
- Life insurance — Expense ratio: 2006 15.1 2007 14.7 2008 14.2 2009 13.3 2010 14.1 2011 15.6
- Life insurance — Investment income/investment assets: 2006 4.7 2007 4.1 2008 2.6 2009 3.0 2010 3.4 2011 2.8
- Life insurance — Equity/total assets: 2006 8.4 2007 8.1 2008 4.3 2009 4.8 2010 4.2 2011 4.1
- Life insurance — Equity and related assets/total assets: 2006 11.2 2007 10.9 2008 9.7 2009 9.0 2010 8.6 2011 7.3
- Life insurance — Fixed income securities/math Reserves: 2006 54.5 2007 55.9 2008 58.6 2009 59.3 2010 60.9 2011 60.3
- Life insurance — Equity/math Reserves: 2006 9.2 2007 8.9 2008 4.8 2009 5.2 2010 4.6 2011 4.4
- Life insurance — Alternative investments/math Reserves: 2006 0 2007 2.1 2008 1.8 2009 1.3 2010 1.1 2011 0.8
- Life insurance — Solvency ratio: 2006 160.1 2007 163.9 2008 206.8 2009 211.6 2010 210.1 2011 178.1

- Health insurance — Total premimums (euro millions): 2006 1,445 2007 1,491 2008 1,543 2009 1,598 2010 1,645 2011 1,704
- Health insurance — Pre-tax earnings/net premium: 2006 5.0 2007 2.7 2008 3.9 2009 5.3 2010 7.3 2011 4.9
- Health insurance — Loss ratio: 2006 72.1 2007 71.5 2008 71.0 2009 69.7 2010 68.5 2011 67.6
- Health insurance — Expense ratio: 2006 14.4 2007 14.2 2008 14.5 2009 13.2 2010 14.2 2011 15.1
- Health insurance — Investment income/investment assets: 2006 4.1 2007 3.0 2008 2.3 2009 2.9 2010 3.7 2011 3.0
- Health insurance — Solvency ratio: 2006 396.6 2007 380.0 2008 354.8 2009 389.7 2010 400.3 2011 430.4

- Non-life insurance — Total premimums (euro millions): 2006 8,912 2007 9,220 2008 9,200 2009 9,102 2010 9,685 2011 10,387
- Non-life insurance — Pre-tax earnings/net premium: 2006 11.0 2007 11.6 2008 7.1 2009 7.9 2010 10.3 2011 11.0
- Non-life insurance — Loss ratio: 2006 67.6 2007 67.1 2008 68.7 2009 73.2 2010 65.2 2011 63.9
- Non-life insurance — Expense ratio: 2006 27.4 2007 27.9 2008 27.8 2009 27.4 2010 27.4 2011 27.9
- Non-life insurance — Combined ratio: 2006 95.0 2007 94.9 2008 96.5 2009 100.6 2010 92.7 2011 91.8
- Non-life insurance — Investment income/investment assets: 2006 7.1 2007 6.2 2008 3.7 2009 3.8 2010 3.9 2011 4.1
- Non-life insurance — Solvency ratio: 2006 361.2 2007 438.6 2008 551.7 2009 578.4 2010 619.2 2011 592.5

*Source: IMF staff report — INTRODUCTION (Austria FSAP Update).*

### INTRODUCTION  __________________________________________________________________________________  4

### _cr1414 - INTRODUCTION  __________________________________________________________________________________  4

### Introduction and scope
- The note updates the Austrian insurance industry review and analyzes its regulatory and supervisory regime since the December 2007 update.
- Benchmarks used are the Insurance Core Principles (ICPs) as adopted by the IAIS in October 2011 and amended in October 2012.
- Primary sources: Insurance Supervision Act (VAG), material provided by the FMA, and discussions during the FSAP Update mission in February 2013.
- Prepared by Michael Hafeman and Mustafa Saiyid.

### Overview of the Austrian insurance sector
- Market structure and size:
  - At Q3-2012 there were 50 insurance companies with assets of €108 billion, making up nearly 40 percent of GDP.
  - Total premiums were €16 billion at end-2012.
  - Company types: three solely life, 15 solely non-life, 29 both, and three reinsurers.
  - Assets of life insurers comprise about 70 percent of the industry’s assets.
- Market concentration and groups:
  - The two largest groups account for almost half of the €16.5 billion of premiums written in Austria in 2011.
  - The five largest groups operating in Austria account for nearly three-quarters of the total.
  - Significant consolidation: 14 mergers over the past 15 years resulting in a 20 percent decline in the number of firms.
- Geographic exposure and profitability:
  - Expansion into CESEE: more than 40 percent of the total premiums and nearly one-third of total profits of the five internationally-active Austrian groups come from foreign operations—mostly CESEE.
  - Main CESEE markets: Czech Republic, Poland, Slovakia, Romania — together account for nearly two-thirds of total CESEE premiums.
  - Industry profitability: posted a profit of nearly €1 billion, an after-tax ROA of nearly one percent during 2011.
  - Profits fell by 5 percent in 2011 versus 2010; 2012 results (as of May 2013) looked better though full-year figures were not yet available.

### Key asset exposures and solvency metrics
- Asset composition and bank exposure:
  - About 20 percent of insurance assets, nearly €20 billion, are exposed to European banks—largely through holdings of bank debt.
  - Of this banking exposure, insurers hold nearly half, or about €10 billion, in Austrian bank bonds.
  - Bond holdings of banks in Euro area countries under market pressure, including Italy, Spain and Ireland, amount to about €1.2 billion.
  - One large insurer took significant write-downs on Greek exposure, causing an operating loss in 2011.
  - Less than 10 percent of asset portfolios is allocated to real estate or equities.
- Solvency and premiums:
  - Solvency ratios generally above 200 percent (as of end-2011).
  - Life insurers about 180 percent; non-life close to 590 percent.
  - Earned premiums in 2012 were only slightly less than 1 percent below 2011 results.
  - For the industry overall, declining life premiums were mostly offset by rising non-life premiums.

### Risks faced by the insurance sector
- Low interest rate environment and legacy liabilities:
  - Life insurers face legacy liabilities contracted at rates well above current sovereign bond yields; some legacy liabilities are contracted at rates more than 200 bps above the current yield on government bonds.
  - Legacy liabilities carrying rates of up to 4 percent compared with a current yield on comparable duration government bonds of 1.75 percent.
  - Maturity gap: liabilities average maturity 9 years vs assets average maturity 7 years, implying rollover risk.
  - Based on an FMA study (April 2013), assets of over €12 billion are subject to rollover risk during a 10-year period ahead.
- Counterparty and bank-guarantee risks:
  - Banks provide guarantees on some insurance products; guarantees could become less effective if counterparties are under pressure.
  - Technical provisions for products with external guarantors were slightly more than €6 billion at end-2011.
- Regulatory uncertainty:
  - Uncertainty on timing and content of Solvency II has been reduced by recent EIOPA draft guidelines (interim guidelines since March 2013) covering governance, risk management, internal models, and reporting.
  - Further preparatory work needed in risk management, financial measurement and reporting, capital planning, product management, and investment policy.

### Implementation of IAIS Insurance Core Principles — findings and progress
- Overall assessment:
  - The 2003 detailed assessment and the December 2007 update found the regulatory framework and implementation generally high standard and effective; some challenges remain relevant.
- Progress on 2007 recommendations (high-level items from Table 1):
  - Tax and regulatory neutrality: Changes made to taxation of single premium life insurance, but tax neutrality remains a concern; regulatory neutrality between pension supervisors not yet achieved.
  - Actuarial capacity: FMA supportive of increasing actuary supply, but the issue remains a concern.
  - Stress testing and market indicators: FMA requires standardized stress tests; insurers have done stress testing for Solvency II quantitative impact studies; further refinement and more extensive company-specific stress testing recommended. FMA investigated market-based indicators but found the small number of listed insurers impractical for this approach.

### Conditions for effective supervision and supervisory system
- Actuarial and accounting capacity:
  - Availability of well-trained actuaries remains a concern.
  - Actuarial Association membership: ordinary members increased from 430 in June 2012 to 462 in January 2013; full members declined from 274 to 268 in the same period.
  - Transition to IFRS has been coped with; market-consistent reporting under Solvency II will increase demand for specialized accountants and auditors.
- FMA powers and resources:
  - FMA can issue regulations, circulars, and minimum standards; some industry confusion exists over the nature of minimum standards.
  - Staffing: about 59 people working in the Insurance and Pensions Supervision Department at the time of writing, compared to 40 in 2007 and 35 in 2003.
  - Human resources are strained by Solvency II preparation and industry demand for FMA expertise.
- Cross-border cooperation:
  - FMA actively participates in EIOPA work and supervisory protocols for international insurance groups.
  - Austria is signatory to the IAIS Multilateral MoU and has bilateral MoUs with several jurisdictions, but not all jurisdictions where Austrian groups operate are covered; FMA uses other cooperation channels where MoUs are absent.

### Supervised entities, governance, and reporting
- Suitability and fit-and-proper requirements:
  - From January 1, 2008, the chairperson of a supervisory board of an insurer with a gross written premium volume over € 500 million is subject to a fit and proper test covering probity and professional experience.
  - New appointees to executive boards undergo an oral examination by the FMA on VAG and Solvency II basics; failures may retake the examination once.
  - Suitability requirements apply to supervisory board members and significant owners; requirements for key control function holders (e.g., risk manager) are implicit rather than explicit.
- Actuarial and audit reporting:
  - Insurers underwriting life or long-term health insurance must appoint a responsible actuary.
  - Responsible actuary must report to the executive board within five months of the end of the financial year or earlier if a serious deficiency is detected; the report is passed to the FMA.
  - Legislation does not require reporting or guarantee access to the supervisory board by the responsible actuary or internal audit.
  - Under VAG, external auditors must report significant concerns to the FMA with copies to management and supervisory boards; this appears potentially in conflict with the Company Code (UGB) which requires reporting first to management and supervisory boards.

### Ongoing supervision — operational notes
- FMA conducts supervision and enforcement, with roles also for the Federal Ministry of Economy, Family, and Youth over agents and brokers.
- FMA supervises insurance distribution directly by insurers or banks.

*Source: IMF staff report — INTRODUCTION (Austria FSAP Update), as extracted from the supplied content unit.*

### 23.      The FMA collects extensive quantitative and qualitative information from insurers. It

### The FMA collects extensive quantitative and qualitative information from insurers.

### Supervisory information, risk assessment, and reporting
- The FMA collects extensive quantitative and qualitative information from insurers through various systems and processes for collecting, analyzing, and storing information, which are enhanced on an ongoing basis.
- Financial soundness and performance indicators are regularly compiled and serve as input to the risk ratings assigned to the entities.
- The results are used to help determine priorities for on-site supervision and intensified monitoring.
- Risk rating systems differ among the various types of entities, reflecting differences in the nature of their businesses.
- Insurers are required to notify the FMA of all facts that put continued compliance with insurance obligations at risk.

### Stress testing
- The FMA continues to require various stress tests of insurers, including both prescribed stress scenarios and those developed by the entities.
- There is scope for strengthening these tests.
- Insurers have performed stress tests as part of the Solvency II quantitative impact studies, but additional stress testing undertaken for risk management purposes does not appear to be common practice in the insurance sector.
- Implementation of Solvency II is expected to require insurers to perform internal risk and solvency assessments.

### On-site supervision and inspections
- The FMA conducts planned and ad hoc formal inspections, thematic inspections, company visits, and regular meetings with boards and senior managers.
- Formal inspections are focused rather than full-scope; a first-hand look at all aspects of an entity’s operations develops over a period of years.
- During 2008–12, the FMA carried out 133 formal inspections of insurers.
- Most but not all entities were inspected at least once during that period, with the largest insurers inspected numerous times.
- The intensity of inspections has been strengthened.

### Preventive and corrective measures
- The FMA has a wide range of preventive and corrective measures and sanctions, including the power to impose fines for various administrative offences.
- The maximum fines were recently increased to as much as €150,000 for the most serious offences.
- Under Austrian law only natural persons may be fined and not corporations.

### Group supervision and cross-border cooperation
- The FMA follows a well-structured methodology for supervising insurance groups and conglomerates involving various internal departments and supervisors in other jurisdictions.
- Supervisory colleges have been established for each of the five internationally-active Austrian insurance groups and the FMA participates in supervisory colleges for foreign groups with a significant presence in Austria.
- Presently, supervisors from all significant markets participate in the colleges (96.5 percent of foreign business based on premium 2011).
- The FMA undertakes both group-related and jurisdiction-related analyses of risks, considering share of business by jurisdiction and combined market share of Austrian groups.
- The FMA has developed a CESEE strategy and risk map and has participated in some joint on-site inspections in other jurisdictions.

### Trend analysis and macroprudential responsibilities
- The FMA prepares regular analyses of trends and risks using supervisory analyses, stress test results, consultations within the FMA and with the OeNB, and international sources such as EIOPA.
- The Financial Market Committee (composed of senior representatives of the FMA, the OeNB, and the Ministry of Finance) serves as a cooperation and information-exchange platform.
- The authorities have not yet assigned responsibilities for macroprudential supervision or established a process for assessing the potential systemic importance of insurers.

### Crisis management
- The FMA has prepared a Crisis Management Handbook defining supervisory crisis situations and setting out processes, including communication.
- Two actual problem situations involving groups have been dealt with successfully with involvement of the respective supervisory colleges.
- In 2011 a multilateral emergency test was conducted through EIOPA.
- Insurers are not required to maintain contingency plans and procedures based on their specific risk for use in a going- and gone-concern situation.

### Prudential requirements: reinsurance, valuation, investment, risk management, and capital
- The FMA assesses reinsurance programs through off-site analysis and on-site inspections; reinsurance documentation is reviewed during on-site inspections.
- There are no explicit requirements regarding timeliness and completeness of reinsurance documentation, but the FMA regards timely finalization of binding contracts as part of proper administration and notes it has never had issues concerning incomplete or delayed written reinsurance contracts.
- About 91 percent of reinsurance ceded goes to reinsurers of EEA countries or equivalent non-EEA countries.
- Austrian GAAP requirements for valuation of assets and liabilities fall short of the standards in the revised ICPs.
- The FMA receives fair values of assets along with local GAAP figures and detailed liability calculations from actuarial reports; an asset-liability valuation consistent with standards will be implemented under Solvency II.
- Insurers are required to establish additional provisions if investment returns fall short of interest rate guarantees, but methods and assumptions are left to the responsible actuary’s judgment.
- The FMA is working on a circular concerning calculation of additional provisions for guaranteed life insurance products.
- Insurers invest under a traditional limit-based system; no formal requirement exists to invest in a manner appropriate to the nature of liabilities. A “prudent person” investment regime is expected under Solvency II.
- The FMA has not issued a regulation or minimum standard on risk management; it has expressed expectations that insurers establish risk management functions and the industry association issued non-binding guidance.
- Current risk management practices of many insurers reportedly fall well short of ICP expectations and Solvency II requirements in risk quantification, asset-liability management, and preparation of own risk and solvency assessments.
- Capital adequacy requirements remain based on Solvency I; insurers are legally required to meet solvency margin requirements continuously but routinely report solvency margins to the FMA only annually.
- Both the FMA and industry acknowledge Solvency I does not appropriately recognize insurers’ risks; proposed Solvency II would be more risk sensitive, and industry has concerns about complexity, calibration, volatility, management understanding, and effects on some traditional products.

### Markets, distribution, consumer protection, and disclosure
- The FMA supervises distribution by insurers and through banks; the Federal Ministry of Economy, Family, and Youth has general authority over insurance agents and brokers, aided by local administrative authorities.
- The Trade Act includes provisions for brokers consistent with the EU Insurance Mediation Directive.
- Complaints-handling: Ministry of Economy, Families, and Youth handles agents and brokers; the FMA handles bancassurance and direct distribution.
- The maximum fine for illicit activity by an intermediary is €3,600.
- The FMA and the Ministry of Economy, Families, and Youth communicate frequently on complaints, legislation interpretation, and international developments; Ministry representatives participate in EIOPA meetings regarding intermediaries.
- Provisions on consumer protection are covered in the Trade Act; disclosure requirements are set out in the EU Insurance Mediation Directive.
- Improvements in disclosures associated with savings products include a 2008 amendment to minimum standards for the life insurance sector requiring disclosure about the amount of the invested premium and/or the amount of the overall costs.
- Tied selling (bundling of loan and insurance coverage) is not prohibited; it is being considered in the revision of the Insurance Mediation Directive.
- The FMA inspects insurers’ claims-handling and has published the EIOPA Guidelines on Complaints-Handling by Insurance Undertakings as part of the regulatory framework.
- Public disclosure by insurers is covered under UGB and VAG; all commercial insurers are subject to disclosure requirements applicable to large companies (same information for listed and non-listed companies, though listed companies must disclose quarterly).
- Those reporting on IFRS or US GAAP have additional disclosure requirements; the FMA annually reviews consistency and quality of insurer disclosures.
- Current disclosure requirements are not as extensive as ICPs envisage; Solvency II is expected to close remaining gaps.

### AML/CFT supervision
- The FMA has consolidated AML/CFT compliance in a single division with a staff of eight full time employees and budgeted growth to 12 in 2013.
- One person in the International Affairs and European Integration division has AML/CFT responsibilities.
- The AML/CFT division communicates with insurance supervision divisions on inspection plans and findings and holds regular semi-annual meetings.
- The AML/CFT division expects to cover about 10 percent of life insurers annually through on-site inspections or company visits.
- Insurance supervision staff are expected to notify the AML/CFT division of relevant control weaknesses detected during on-site activities.
- Supervisors receive AML/CFT training through the FMA Academy training program and ad hoc seminars.

### Conclusions and policy recommendations
- The FMA is making progress addressing vulnerabilities of life insurance companies to the low-rate environment; a recent FMA study was a first step.
- The FMA is engaging the insurance industry, monitoring closely, and encouraging higher provisions.
- Industry would benefit from further consolidation, particularly of remaining companies focused solely on life insurance.
- The FMA and government need to remain consistent and convergent with the overall European approach for a solvency framework; the FMA has been actively involved in Solvency II development and preparation.

Specific recommendations (listed in source order):
- The FMA should continue to prepare itself—and take steps to ensure that the industry is prepared—to effectively implement Solvency II.
- The FMA will have to update its entire risk assessment process under Solvency II, adopt a structured system for the internal review of risk assessments, and increase the use of risk ratings in planning supervisory activities.
- Legislation should be revised to reinforce the operational independence of the FMA by requiring that the reasons for the dismissal of any member of its boards be publicly disclosed.
- Legislation should be revised to include explicit suitability requirements for key persons in control functions, as consistent with EIOPA guidelines.
- Legislation should be revised to require non-life insurers to establish an actuarial function and to appoint a responsible actuary.
- Legislation should be revised to require that the responsible actuary and the head of internal audit either report directly to the supervisory board or guarantee their access to it.
- The FMA should require all insurers to report solvency margins at a frequency consistent with EIOPA guidelines.
- Legislation should be revised to require insurers to promptly report any material changes or incidents that could affect their condition or customers.
- The FMA should enhance its standard stress tests by widening the range of risks tested, including more refined stress scenarios (such as a shift in the yield curve), and encouraging use of internal models.
- The FMA should increase the frequency of on-site inspections to ensure significant activities and control functions of each entity are inspected within a period reasonable in relation to its risk profile and supervisory risk rating.
- The FMA should continue to strengthen training on AML/CFT issues for supervisors of life insurance companies.
- The Ministry of Finance should enter into additional MoUs, as necessary, to facilitate participation of insurance supervisors in all jurisdictions where Austrian insurance groups have significant operations in relevant supervisory colleges.
- The FMA should provide input on establishment of cross-sector macroprudential supervision responsibilities and participate on an ongoing basis, including establishing a process for assessing potential systemic importance of insurers.
- The FMA should require insurers to maintain contingency plans and procedures based on their specific risk for use in a going- and gone-concern situation.
- Legislation should be revised to strengthen prudential requirements to enhance observance of the ICPs, consistent with EIOPA guidelines, which might include:
  - enacting revisions to the VAG;
  - revising the liability valuation approach to take fuller account of emerging experience and anticipated future experience;
  - requiring consistent provisioning for guarantees, both those provided by the originating insurer or pension company and those backed by a third party; and
  - issuing a minimum standard on enterprise risk management, and developing a methodology for assessing capital adequacy that considers a wider range of risks than Solvency I (such as a factor-based system or a stress testing-based approach).
- Legislation should be revised to increase fines imposed in case of illicit activity by an intermediary.

### Financial Soundness Indicators for the Insurance Industry (selected series, values preserved)
- Life insurance — Total premimums (euro millions): 2006 7,136 2007 7,157 2008 7,317 2009 7,356 2010 7,467 2011 6,928
- Life insurance — Pre-tax earnings/net premium: 2006 4.7 2007 3.4 2008 -1.7 2009 2.3 2010 4.2 2011 3.0
- Life insurance — Loss ratio: 2006 105.9 2007 103.4 2008 79.6 2009 117.3 2010 115.9 2011 96.6
- Life insurance — Expense ratio: 2006 15.1 2007 14.7 2008 14.2 2009 13.3 2010 14.1 2011 15.6
- Life insurance — Investment income/investment assets: 2006 4.7 2007 4.1 2008 2.6 2009 3.0 2010 3.4 2011 2.8
- Life insurance — Equity/total assets: 2006 8.4 2007 8.1 2008 4.3 2009 4.8 2010 4.2 2011 4.1
- Life insurance — Equity and related assets/total assets: 2006 11.2 2007 10.9 2008 9.7 2009 9.0 2010 8.6 2011 7.3
- Life insurance — Fixed income securities/math Reserves: 2006 54.5 2007 55.9 2008 58.6 2009 59.3 2010 60.9 2011 60.3
- Life insurance — Equity/math Reserves: 2006 9.2 2007 8.9 2008 4.8 2009 5.2 2010 4.6 2011 4.4
- Life insurance — Alternative investments/math Reserves: 2006 0 2007 2.1 2008 1.8 2009 1.3 2010 1.1 2011 0.8
- Life insurance — Solvency ratio: 2006 160.1 2007 163.9 2008 206.8 2009 211.6 2010 210.1 2011 178.1

- Health insurance — Total premimums (euro millions): 2006 1,445 2007 1,491 2008 1,543 2009 1,598 2010 1,645 2011 1,704
- Health insurance — Pre-tax earnings/net premium: 2006 5.0 2007 2.7 2008 3.9 2009 5.3 2010 7.3 2011 4.9
- Health insurance — Loss ratio: 2006 72.1 2007 71.5 2008 71.0 2009 69.7 2010 68.5 2011 67.6
- Health insurance — Expense ratio: 2006 14.4 2007 14.2 2008 14.5 2009 13.2 2010 14.2 2011 15.1
- Health insurance — Investment income/investment assets: 2006 4.1 2007 3.0 2008 2.3 2009 2.9 2010 3.7 2011 3.0
- Health insurance — Solvency ratio: 2006 396.6 2007 380.0 2008 354.8 2009 389.7 2010 400.3 2011 430.4

- Non-life insurance — Total premimums (euro millions): 2006 8,912 2007 9,220 2008 9,200 2009 9,102 2010 9,685 2011 10,387
- Non-life insurance — Pre-tax earnings/net premium: 2006 11.0 2007 11.6 2008 7.1 2009 7.9 2010 10.3 2011 11.0
- Non-life insurance — Loss ratio: 2006 67.6 2007 67.1 2008 68.7 2009 73.2 2010 65.2 2011 63.9
- Non-life insurance — Expense ratio: 2006 27.4 2007 27.9 2008 27.8 2009 27.4 2010 27.4 2011 27.9
- Non-life insurance — Combined ratio: 2006 95.0 2007 94.9 2008 96.5 2009 100.6 2010 92.7 2011 91.8
- Non-life insurance — Investment income/investment assets: 2006 7.1 2007 6.2 2008 3.7 2009 3.8 2010 3.9 2011 4.1
- Non-life insurance — Solvency ratio: 2006 361.2 2007 438.6 2008 551.7 2009 578.4 2010 619.2 2011 592.5

*International Monetary Fund*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1414.pdf_