The Vienna Insurance Group calculates its underwriting reserves using recognised actuarial methods and assumptions. These assumptions include estimates of the long-term interest rate trend, returns on capital investments, the allocation of capital investments among equities, interest rate instruments and other categories, net income participations, mortality and morbidity rates, cancellation rates and future costs. The Group monitors actual experience relating to these assumptions and adjusts its long-term assumptions where changes of a long-term nature occur.
Guaranteed minimum interest rates
The Vienna Insurance Group also has a considerable portfolio of policies with guaranteed minimum interest rates, including annuity and endowment insurance. On existing policies, Wiener Städtische guarantees a minimum interest rate averaging just below 3% p.a. If interest rates fall below the guaranteed average minimum rate for any length of time, the Vienna Insurance Group could find itself forced to use its equity to subsidise reserves for these products.
Claims and benefits
In accordance with normal industry practice and accounting and supervisory requirements, Vienna Insurance Group work together with the Group actuarial department to independently form reserves for claims and claims handling expenses arising from property and casualty insurance business. The reserves are based on estimates of the payments that will be made for these claims and related claims handling expenses. These estimates are made both on a case by case basis in the light of the facts and circumstances available at the time the reserves are formed, as well as for losses that have already been incurred but which have not yet been reported to Vienna Insurance Group (“IBNR”). These reserves represent the expected costs required for final settlement of all known pending claims and IBNR losses.
Loss reserves, including IBNR reserves, may vary depending on a number of variables that affect the total costs of a claim, such as changes in the legal framework, the outcome of court cases, changes in processing costs, repair costs, loss frequency, claim size and other factors such as inflation and interest rates.
Interest rate fluctuations
The Vienna Insurance Group is exposed to market risk, that is, the risk of suffering losses as a result of changes to market parameters. For the Vienna Insurance Group, interest rates are the most relevant parameters for market risk. Ignoring investments held for the account of and at the risk of policyholders, the Vienna Insurance Group’s investments consist largely of fixed-interest securities. The majority of these securities are denominated in Euro. As a result, interest rate fluctuations in the Euro zone have a significant effect on the value of these financial assets.
Stock price risk
The Vienna Insurance Group has an equity portfolio which, even including shares held in funds, constitutes less than 11% of investments. The Vienna Insurance Group’s equity holdings include, inter alia, interests in a number of Austrian companies and positions in other companies whose shares trade primarily on the Vienna Stock Exchange or stock exchanges in the Central and Eastern European region. Should stock markets move down, reported values might need to be adjusted.
Aspects of tax law environment affecting earnings
Changes to tax law changes could negatively affect the attractiveness of certain Vienna Insurance Group products currently enjoying tax advantages. Thus, the introduction of laws to reduce the tax advantages of the Group’s old-age retirement products or other life insurance products could considerably diminish the attractiveness of those products.
Developments in Central and Eastern Europe
The expansion and development of business operations in the countries of Central and Eastern Europe that do not yet belong to the EU is a core component of the Vienna Insurance Group’s strategy. The Vienna Insurance Group’s goal is to achieve an even stronger presence in these target markets. As part of the strategy pursued in this region, the Vienna Insurance Group has made acquisitions and established new companies. Political, economic and social conditions in these countries have changed rapidly in recent years. Far-reaching political and economic reforms have led to a situation where in which political and economic change can take place as new democratic and market-oriented systems are being constructed.
Risks due to acquisitions
To date, the Vienna Insurance Group has acquired a series of companies in countries of Central and Eastern Europe, or has acquired interests therein.
Acquisitions often bring challenges in terms of corporate management and financing, such as:
- The need to integrate the infrastructure of the acquired company, including management information systems, and risk management and controlling systems;
- Settlement of open questions of a legal, supervisory, contractual or labour law nature raised by the acquisition;
- Integration of marketing, customer support and product lines; and
- Integration of different corporate and management cultures.
Cross-border acquisitions in Central and Eastern Europe can present a major challenge, due to differences in national cultures, business practices and legal systems.
Climate change
The environmental catastrophes that have been becoming increasingly common in recent years, such as floods, pile-ups of flood debris, landslides, storms, etc., may be the result of general climate change. It is possible that the number of claims thus caused may continue to rise in the future.
Credit risk from investments
In managing risks related to credit quality, a distinction must be made between “liquid” or “marketable” risks (exchange-listed bonds and shares) and “bilateral” risks, such as, for example, time deposits, OTC derivatives, loans, private placements and securities custodial accounts/depositories. Risks relating to the former are limited at the portfolio levels by means of rating and diversification limits.
Consideration is only given to those issuers or contracting parties whose credit quality or reliability can be assessed by Wiener Städtische, whether on the basis of an analysis performed by Wiener Städtische, credit assessments/ratings from recognised sources, unambiguous guarantees or the possibility of recourse to reliable mechanisms for safeguarding investments.
Credit risk due to reinsurance
The Vienna Insurance Group follows a policy of ceding a portion of assumed risks to reinsurance companies. This transfer of risk to reinsurers does not, however, relieve Vienna Insurance Group of its obligations to policyholders. The Vienna Insurance Group is therefore exposed to the risk of insolvency on the part of reinsurers.
Currency risks
To diversify its portfolio, the investment area also makes use of international capital markets and, to a very small extent, foreign currencies. Foreign exchange risk in the investment area does not represent a significant risk.
Concentration risk
Concentration risk is a single direct or indirect position or an associated group of positions with the potential to significantly endanger the insurance company, core business or key performance measures. Concentration risk is caused by an individual position, a collection of positions with common owners, guarantors or managers, or by sector concentrations.
Regulatory environment
Vienna Insurance Group is subject to (insurance) regulations in Austria and abroad.
These regulations govern such matters as:
- Capitalisation of insurance companies and groups;
- Admissibility of investments as security for underwriting reserves;
- Licences of the various companies of the Vienna Insurance Group;
- Marketing activities and the sale of insurance policies; and
- Cancellation rights of policyholders.
Changes to the statutory framework could make restructuring necessary, thereby resulting in increased costs.
