“The interest rate environment remains the big challenge for insurers”

Jug: When you assess the situation of Austrian insurance companies as a whole, what is your summary and what developments do you expect in the coming years?

Korinek: The low and negative interest rate environment remains a major challenge for insurance companies. In addition, there is the climate change and the digitalization. The Austrian insurers have a relatively high capitalization compared to other European countries, but there are also compensating effects due to long-term guarantee and transition measures. And not to be forgotten: the uncertainty caused by the Covid-19-consequences. The insurers must also prepare themselves for the risks that will hit them when the government aid programmes expire. In this challenging situation, maintaining capital resources is essential.

Jug: You made a recommendation to restrict dividend payments, how was this dealt with?

Korinek: It is true that the European Insurance Supervisory Authority EIOPA and the FMA, have recommended refraining from dividend payments for 2019 and 2020, in view of the economic crisis in order to strengthen resources. The listed companies complied to varying degrees. Basically, they maintained the dividend ranges they communicated to the capital market.

Jug: In part, we observe premium increases with a reduction in the insurance capacities offered. Do insurance companies have to build up more reserves because of the changed circumstances?

Korinek: Basically, we have been observing increased pressure on commercial and industrial insurers for several years, which is reflected in premium increases and risk exclusions. On one hand, this is due to higher volatility in areas such as transport, fire and business interruption. On the other hand, efforts are being made to increase profitability in non-life. However, there is some expectation of price increases in the reinsurance market. All these developments are likely to be further exacerbated by the Corona crisis.

Jug: Another question about Covid-19: A direct consequence are business interruptions, where the cover was rejected by many insurance companies. How much do you estimate the insurers will have to pay?

Korinek: As of the cut-off date of 31 August 2020, insurers have estimated the benefits from Covid-19-related business interruptions at EUR 117 million. The exact estimates depend on the further development of the pandemic and the outcome of pending legal proceedings.

Jug: Keyword climate change. Where do you see the greatest risks for the insurers here?

Korinek: On one hand, climatic changes cause catastrophe losses to increase and are thus an actuarial challenge; on the other hand, transition risks can affect the investments of insurance companies. The FMA is therefore continuing its portfolio screenings in 2021 and is collaborating on a stress test regarding climate risks.

Jug: According to a study by the FMA, individual insurers have invested up to 50% of their assets in “climate-relevant” sectors. What do you understand by this?

Korinek: This asset screening was not based on a differentiation between “climate-friendly” and “climate-damaging” sectors. Rather, it identifies those assets that are invested in the fossil fuel, energy-intensive real estate, utilities or transport sectors. The sum of these assets is called “climate-relevant”. For about 20% of them, the performance towards a more CO2-neutral economy is exposed to a transition risk.

Jug: Keyword cyber resilience. What measures has the Austrian insurance sector taken for cyber security compared to other financial service providers?

Korinek: It is important that the security measures of the insurance companies take enough account of the sector-specific characteristics. For example, the protection of data confidentiality is particularly important for insurance companies, as they have a large pool of sensitive data and these represent an attractive target for cyber criminals. Data integrity is the basis or prerequisite for ensuring data confidentiality.

In order to be able to make a sound assessment of cyber security, the FMA developed its own “Cyber Maturity Level Assessment Tool” in 2019. This showed that the insurers have taken significant measures for cyber security. However, the large discrepancy between the technical and organizational maturity level was striking: In some cases, security measures have already been taken in practice that have not yet been fully considered in the control, documentation and processes. Our digitalization study showed that about one third of the insurance companies, banks and asset management companies insure themselves against the costs of cyber-attacks. We will update the study this year.

Jug: Do you see any other risks in digitalization?

Korinek: Besides the much-discussed cyber risks, we increasingly see outsourcing and concentration risks. For example, central aspects of IT systems such as infrastructure maintenance, further development and updating of applications or securing the company network against hacker attacks are often taken over by external IT service providers. While outsourcing can improve security and performance, it can also be associated with dependencies and concentration risks.

Jug: What trends do you expect in the coming years?

Korinek: We expect a greater weighting of non-life and health business at the expense of life business. In addition, we expect digitization and standardization to have a greater impact on both products and the entire value chain of insurance companies. We expect to see greater integration of insurance customers (self-service) and other partners (point of sale insurance) both in sales and in overall processing. We also expect a trend toward greater consolidation in back-office processes.

Jug: What do customers complain about most? And are there any changes to be observed here?

Korinek: The number of complaints has remained relatively constant over the past years. Most recently, the industry had to deal with a good 10,000 complaints, of which about 25 % each concerned motor vehicle insurance and household insurance and 13 % each life insurance and health insurance. The most frequent reasons for complaints came from the area of “cancellation/contract amendments and extensions” with a share of 25 %, followed by “advertising/consulting/application acceptance” and “claims processing/delays” with about 20 % each. An increase in complaints was also observed for the right of withdrawal in life insurance. In property-casualty insurance for industrial companies, significant capacity reductions and massive premium increases were observed in some cases.

Jug: How do you see the insurability of Austrian industry in the coming years?

Korinek: In their product policy, insurance companies must constantly take macroeconomic, technological, demographic, regulatory and climate-related developments into account and evaluate the changed parameters as well as the new risks. For the supervisory authority, the focus here is particularly on the issues of pricing, risk measurement and transparency. In view of the still very low level of information, adequate pricing of risks in cyber, digitalization, data protection and climate change is particularly challenging.

Thank you for the interview!

Mag. Dr. Stephan Korinek
Head of Department
T +43 1 249 59 2200
stephan.korinek@fma.gv.at

Korinek started his professional career as a university assistant with Professor Fenyves and then he joined CMS Strommer Reich-Rohrwig Karasek Hainz as an articled clerk before moving to the legal department of E-Control GmbH in 2001. Since 2002 he has been head of the department “Regulatory Supervision of Insurance Companies and Pension Funds” and deputy head of the Insurance Supervision and Pension Fund Supervision Division at the Financial Market Authority. Korinek is a lecturer at various universities. In 2016, he was appointed as a member of the Regulatory Commission of E-Control.

Financial market supervision in Austria
As an integrated supervisor, the FMA, founded in 2002, combines the supervision of all major providers and functions under one roof. On one hand, the FMA supervises banks, insurers, pension funds, occupational pension funds, securities firms and securities services companies, investment funds, financial conglomerates and stock exchange companies. On the other hand, it supervises that legal requirements, fairness and transparency are observed in the trading of listed securities; that comprehensive prospectuses adequately present the opportunities and risks of the investment to the public when securities are offered to the public; that the principles of good corporate governance and proper advice are observed; that unauthorized offering and provision of financial services is prevented and punished; and that all financial institutions have appropriate facilities that act preventively against money laundering and terrorist financing.