Topic Investments of insurance companies Investments of primary insurers
Content
Article from the Annual Report 2016 of the BaFin
Overview1
As at 31 December 2016, the carrying amount of the aggregate investment portfolios managed by German primary insurers under BaFin's supervision amounted to €1,467.8 billion (previous year: €1,408.8 billion), as shown in Table 18. Aggregate investments grew by 4.2% (+€59.0 billion) in 2016. Broken down by insurance segments, health insurers (+5.6%) and Pensionskassen (+5.0%) recorded the largest percentage increases. Only the funeral expenses funds recorded a slight decline in investments compared with the prior-year figure.
As in previous years, investments continued to focus on fixed-income securities and promissory note loans. There were minor shifts in fixed-rate investments. For example, the share of directly held listed bonds rose by 12.5% to €235.6 billion in the year under review, while the share of investments at credit institutions declined year on year.
Explanatory notes
With the introduction of Solvency II, insurance undertakings are subject to the requirements of a new reporting system which also covers investments. In view of the absence of comparative figures and since the figures for 2016 were only available at a late stage, the insurers' investments are presented in this Annual Report, probably for the last time, on the basis of Statement 671 (report on the carrying amounts and market values of investments and the coverage of technical liabilities).
Since 1 January 2016, reinsurance undertakings have been exempt from the requirement to submit Statement 671 and they are therefore not included in the table below.
In addition, disclosures relating to the composition of the risk asset ratio and the share of total investments attributable to selected asset classes are also not provided, since from 1 January 2016 the relevant statements no longer need to be submitted.
Indirect investments held by insurance undertakings via collective investment undertakings again recorded above-average growth in 2016, rising by +8.6%, and – as in the previous year – now account for over one-third of the aggregate investments of all primary insurers at €504.7 billion. As in previous years, the assets acquired via collective investment undertakings consist mostly of listed securities.
Aggregate direct investments in property rose by 0.8% year on year to €32.9 billion.
Table 18 Investments of primary insurers
Investments of primary insurers
The figures are based on the primary insurers' quarterly reports for the fourth quarter of 2016 and are only preliminary.
Source: BaFin
Government bonds
Treatment of risk under Solvency II
In 2016 Insurance Supervision addressed the treatment of sovereign risk under Solvency II. BaFin worked together with the industry in a symposium and a workshop to develop good practice approaches which individual undertakings can use as guidance for their own treatment of sovereign risk.
Background
In the past, government bonds and loans to member states of the European Economic Area (EEA) or Organisation for Economic Co-operation and Development (OECD) were essentially classified as risk-free. At least since the European sovereign debt crisis, however, this approach has been subject to a fundamental rethink. It has become clear that government bonds are also exposed to credit or even default risk.
Nevertheless, these risks are not currently reflected in the regulations on the capital charge under Europe's Solvency II supervisory system. Insurers that calculate their solvency capital requirement (SCR) using an internal model must take material sovereign risks into consideration. By contrast, when calculating the SCR using the standard formula, government bonds are only included in interest and currency risk and not spread or concentration risk.
Treatment of risk within Pillar II
Insurers must therefore thoroughly address the question of sovereign risk. This is clear from the new Insurance Supervision Act (Versicherungsaufsichtsgesetz as amended) and various guidelines issued by the European Insurance and Occupational Pensions Authority (EIOPA).
The undertakings must take account of the relevant risks in particular in the context of Pillar II, i.e. the requirements for the system of governance. The legislature explicitly envisages dealing with risks within the governance system in application of the prudent person principle pursuant to section 124 of the Insurance Supervision Act, within the risk and solvency assessment (ORSA) under section 27 of the Insurance Supervision Act2 and as part of the own credit risk assessment in accordance with section 28 (2) of the Insurance Supervision Act in conjunction with the Credit Rating Regulation.3 Undertakings need to address the issue of sovereign risk comprehensively and thoroughly in these three areas in particular.
Risk types
Interest rate risk: interest rate risk denotes the risk of changes in the term structure of interest rates, or in the volatility of interest rates.
Currency risk: currency risk denotes the risk of changes in the level or in the volatility of currency exchange rates.
Spread risk: spread risk is the risk of changes in the level or in the volatility of credit spreads, i.e. the yield margin above the risk-free interest rate term structure.
Concentration risk: concentration risk stems either from a lack of diversification in the investment portfolio or from a large exposure to the risk of default by a single issuer of securities or a group of related issuers.
BaFin symposium and workshop
On 21 June, BaFin held a symposium in Bonn on the topic of government bonds in the guarantee assets (Sicherungsvermögen) of insurers. BaFin Chief Executive Director Dr Frank Grund and other BaFin experts held discussions with representatives of the insurance industry and the Deutsche Bundesbank on how to assess sovereign risks for which no capital charge is currently stipulated under the standard formula.
The industry representatives outlined how they invest in government bonds and manage the associated risk. The German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft – GDV) and the Bundesbank detailed the impact of the low interest rate environment on investment policy, while representatives of BaFin discussed the treatment of government bonds from a supervisory standpoint.
The undertakings and BaFin agreed that insurers holding government bonds in their portfolios must review these exposures and the associated risks.
Against this background, the Insurance Supervision Directorate continued its dialogue with the industry and organised a related workshop in October.
Footnotes:
- 1 For details of the investments of the individual insurance classes and the Pensionsfonds, see State of the insurance sector.
- 2 See ORSA in the management of undertaking.
- 3 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:146:0001:0033:EN:PDF.
