The following figures for 2016 are only preliminary. They are based on the interim reporting as at 31 December 2016.

It should also be noted that, in accordance with section 45 of the Insurance Supervision Act, BaFin has exempted certain undertakings falling within the scope of the Solvency II Directive from elements of the interim reporting requirements.¹

Life insurers

Business trends

New direct life insurance business in 2016 remained at the same level as in the previous year with approximately 5.0 million new policies. At the same time, the total value of new policies underwritten rose by 4.7% to around €264.2 billion compared with €252.2 billion in the previous year.

The share of the total number of new policies accounted for by term insurance policies increased year on year from 33.1% to 34.1%. The share accounted for by endowment insurance policies was roughly unchanged in the same period at 10.1%, while the share attributable to pension and other insurance contracts fell by 0.9 percentage points to 55.8%.

Early terminations of life insurance policies (surrender, conversion to paid-up policies and other forms of early termination) declined from 2.4 million contracts in 2015 to 2.3 million contracts in the year under review. The total sum insured of policies terminated early fell accordingly to €98.1 billion compared with €99.0 billion in the previous year. The proportion of early terminations of endowment policies declined from 22.3% in the previous year to 20.2%, and the proportion of the total sum insured decreased from 12.5% to 11.1%.

There were a total of approximately 84.5 million direct life insurance contracts at the close of 2016, representing a 2.0% decrease compared with the previous year. By contrast, the sum insured increased by 2.1% to €3,014 billion. Term insurance policies recorded a decrease in the number of contracts from 13.4 million to around 13.0 million, although the sum insured rose from €739.3 billion to €781.4 billion. Pension and other insurance policies continued their positive trend, with the number of contracts growing from 50.9% to 52.6% as a proportion of the total. The share of the total sum insured rose from 53.5% to around 54.5%.

Gross premiums written in the direct insurance business of the German life insurers amounted to €84.5 billion in the year under review (previous year: €86.6 billion). This represented a 2.4% decline.

Investments

Aggregate investments increased in the year under review by 3.9% from €851.5 billion to €885.1 billion. Since the level of interest rates on the capital market declined once again, net hidden reserves at the year-end rose to €152.5 billion compared with €132.1 billion in the previous year. This corresponds to 17.2% of the aggregate investments, following 15.5% in the prior year.

Preliminary figures put the average net investment return at 4.3% in 2016, and thus down slightly as compared to the prior-year figure of 4.5%. The reason for the high net return is that the insurers have again liquidated valuation reserves in order to fund the high cost of establishing the Zinszusatzreserve (additional interest provision introduced in response to the lower interest rate environment).

Projections

BaFin again prepared projections for the life insurers in 2016. BaFin uses the projections primarily to analyse how four different capital market scenarios it has assumed affect the insurers' performance for the current financial year (see info box "Life insurance projections").

The analysis of the projections confirmed BaFin's assessment that the life insurers would be able to satisfy their contractual obligations in the short term. However, should interest rates remain low, it is to be expected that the economic position of the undertakings will deteriorate further. BaFin will therefore continue to monitor the insurers closely to ensure that they analyse their future financial development in a continued low interest rate environment at an early stage and in a forward-looking and critical manner. It is essential that the life insurers introduce appropriate measures in good time and make the relevant preparations.

Solvency II

On 9 August 2016, BaFin published the first figures for the individual insurance classes under the new Solvency II reporting system.² In 2016, a total of 77 of the 84 life insurers under BaFin’s supervision used the standard formula and seven undertakings used a partial internal model when calculating the solvency capital requirement (SCR). None of the life insurers used undertaking-specific parameters.

Of the total of 84 life insurers, 46 applied the volatility adjustment in accordance with section 82 of the Insurance Supervision Act and the transitional measure for technical provisions under section 352 of the Insurance Supervision Act. 14 life insurers used only the transitional measure for technical provisions, while nine undertakings employed the volatility adjustment as the only measure. One undertaking applied the transitional measure for risk-free interest rates in accordance with section 351 of the Insurance Supervision Act, i.e. the transitional discount curve, in combination with the volatility adjustment. In total, therefore, 56 life insurers applied the volatility adjustment, 60 life insurers the transitional measure for technical provisions and one life insurer the transitional discount curve (see info box "Transitional measures").³

SCR coverage

All of the life insurance undertakings were able to demonstrate adequate SCR coverage on the introduction of Solvency II as at 1 January 2016 (Day 1). The industry's SCR ratio (eligible own funds in relation to the SCR) amounted to 283%. The arithmetic mean of the SCR ratios of all undertakings was 364%. The coverage ratios deteriorated during the first part of the year as a consequence of changes in the capital market and the interest rate environment. But the ratios recovered with a significant increase at the year-end thanks to a slight improvement in the interest rate environment, the rise in the equity markets and a further decline in spreads in the fourth quarter of 2016.

Figure 6 "Development of SCR coverage ratios" shows the SCR coverage ratios of the sector over time. Only a limited comparison can be made between the data on Day 1 and on the quarterly reporting dates, since BaFin has exempted some undertakings from elements of the interim (quarterly) reporting requirements in accordance with section 45 of the Insurance Supervision Act. This relates to the disclosures for the fourth quarter, since they are still based on the quarterly reports and not the annual reports.

Figure 6 Development of SCR coverage ratios

Development of SCR coverage ratios

*Q stands for quarter. Source: BaFin

Composition of the SCR

The SCR for life insurance undertakings subject to the interim reporting requirements amounted to €35.9 billion as at 31 December 2016. The life insurers are primarily exposed to market risk. For those applying the standard formula, this represented on average 78% of the capital requirements on Day 1 – before taking the effects of diversification into account. Moreover, a significant proportion of the SCR on Day 1 related to underwriting risks for life (29%) and health (19%) insurance. In contrast, counterparty credit risks were generally less important. Other highly significant factors in the SCR calculation were diversification effects and the loss-absorbing effects of technical provisions and deferred taxes.

Composition of own funds

The own funds eligible for the SCR of the life insurance undertakings subject to the interim reporting requirements amounted to €111.2 billion as at 31 December 2016. On Day 1, 95% of that amount was attributable to the highest category of own funds (Tier 1). Just under 1% of the eligible own funds were represented by ancillary own funds. Basic own funds represented the remainder of the own funds. On average, the reconciliation reserve accounted for approximately 61% of the industry's basic own funds, while surplus funds accounted for around 30%. Other noteworthy components at the reporting date were share capital including issuing premiums (5%) and subordinated liabilities (3%).

Remediation plans

Undertakings that apply a transitional measure and would be reporting inadequate coverage of the SCR without that measure must submit a remediation plan in accordance with section 353 (2) of the Insurance Supervision Act. In the plan, the undertaking must set out the step-by-step introduction of measures planned to generate sufficient own funds or to reduce its risk profile, so that compliance with the solvency capital requirements is ensured without the use of transitional measures at the latest by the end of the transitional period.

During the year under review, 29 life insurance undertakings were required to submit a remediation plan, since they were unable to guarantee adequate SCR coverage without employing transitional measures. BaFin is in close contact with these undertakings in order to ensure that the SCR is complied with on a long-term basis at the latest following the end of the transitional period on 31 December 2031. The undertakings in question are required to comment on the development of the measures in their annual progress reports.

Falling discretionary benefits in the low interest rate environment

Because interest rates for new investments are still very low, many life insurers have further reduced their discretionary benefits for 2017. The current total return, i.e. the sum of the guaranteed technical interest rate and the participation in the interest surplus, for the tariffs available in the market for endowment insurance contracts is an average of 2.5% for the sector. This figure was 2.8% in 2016 and 3.1% in 2015.

Development of the Zinszusatzreserve (ZZR)

Since 2011, life insurers have been required to build up an additional interest provision, the Zinszusatzreserve (ZZR), to prepare for lower investment income in the future on the one hand and the guarantee obligations on the other, which remain high. The expense for this in 2016 was well over €12.0 billion. The cumulative ZZR at the end of 2016 amounted to €44.1 billion. The reference interest rate used to calculate the ZZR was 2.54% at the end of 2016.

The expectation is that a substantial expense will also be required in the next few years to build up the ZZR. BaFin will follow future developments at industry and undertaking level very closely, and review whether the ZZR is appropriately calibrated.

New products in life insurance

Long-term contracts with guaranteed interest represent a major area of new business at German life insurers. The most significant product category of this type in recent years was deferred annuity insurance. Typical versions of these products feature interest equal to the applicable maximum technical interest rate (2016: 1.25%, from 2017: 0.90%), guaranteed for the life of the policyholder, and annual increases in the guaranteed payments as a result of participation in profits. In the current low interest rate environment, it is becoming clear that these kinds of guarantees pose a significant risk to life insurers. Accordingly, a growing trend has been observed in recent years towards products with new types of guarantee mechanisms. For example, the guarantees are based to a greater extent on a bullet payment at maturity. Alternatively, guarantees applying at the start of the pension may also be recalculated or, instead of a fixed guarantee of interest equal to the relevant maximum technical interest rate, only the total of the contributions paid in is guaranteed as an endowment benefit. Nevertheless, annuity insurance products with traditional guarantee mechanisms continue to represent a very important part of life insurers' new business.

EIOPA Stress Test 2016 focusing on the low interest rate environment

EIOPA once again carried out a stress test for insurers across the EU in 2016. The stress test was based on the Solvency II valuation rules and was aimed in particular at those insurance undertakings considered to be most vulnerable in a persistent low interest rate environment.

From Germany, 20 large, medium-sized and small life insurance undertakings covering 75% of the market took part in the stress test. The objective was to identify and assess potential risks for the insurance sector that might arise from unfavourable market developments. The analysis was based in particular on comparisons across the EU and for specific national markets. Individual results were not published as the test was not concerned with the passing or failing of individual undertakings.

For the purposes of the stress test, undertakings had to prepare calculations for a baseline scenario and two stress scenarios as well as provide answers to qualitative questions. The assumptions for the baseline scenario were the same as those for Day 1 reporting (reporting date: 1 January 2016). For the low-for-long stress scenario, EIOPA recalibrated the relevant risk-free yield curve taking into account historical lows and simulated a significant lowering of the yield curve, particularly for longer maturities. In the double-hit stress scenario, a decline in low risk-free interest rates was combined with a fall in the value of almost all asset classes. This scenario can be regarded as a combination of extremely rare and unfavourable circumstances which has never been historically observable.

The results of the stress test confirm BaFin's assessment over recent years that a persistent low interest rate environment continues to represent a challenge for the German life insurance industry. This is because the reaction of the German life insurers included in the test to the low-for-long scenario was particularly sensitive compared with the European average.

Private health insurers

Business trends

The 46 private health insurers supervised by BaFin generated premium income totalling around €37.1 billion in 2016. This is equivalent to an increase of approximately 1.2% compared with 2015. The growth in premiums was therefore somewhat higher than in the previous year. One particular reason for the continued low rate of premium growth is that comprehensive health insurance has not experienced any significant increases due to the fact that new business remains weak.

Nevertheless, comprehensive health insurance, with around 8.8 million persons insured and premium income of €26 billion and thus 71% of the total premium income, continued to be the most important business line by far for the private health insurers in 2016. Together with the other types of insurance, such as compulsory long-term care insurance, daily benefits insurance and the other partial health insurance types, the private health insurance undertakings insure approximately 40.6 million people.

Investments

The health insurers increased their investment portfolio by 5.7% to approximately €261 billion in the year under review. Investment remains focused on fixed-income securities. Pfandbriefe, municipal bonds and other bonds accounted for approximately 16% of all investments. Listed bonds accounted for a further 18%, while promissory note loans and registered bonds issued by credit institutions accounted for 15%. The health insurers invested around 28% of their portfolio in collective investment undertakings. BaFin did not identify any significant shifts between the asset classes.

The main macroeconomic factor affecting private health insurers is currently the low interest rate environment, strongly influenced by measures taken by the ECB. During the year under review, interest rates remained at an extremely low level. The health insurers' reserve situation therefore remains comfortable, especially in light of high valuation reserves in fixed-income securities. At 31 December 2016, net hidden reserves in investments amounted to just under €44 billion, or roughly 17% of investments (previous year: 16%).

Preliminary figures put the average net investment return at around 3.7% in the year under review, and therefore at the same level as in the previous year.

Solvency

Since Solvency II came into effect on 1 January 2016, Solvency I now applies only to the few health insurers qualifying as small insurance undertakings within the meaning of section 211 of the Insurance Supervision Act. Preliminary figures indicate that all of these undertakings will comply with the solvency rules as at 31 December 2016.

At the close of 2016, 40 of the total of 46 health insurers were subject to the reporting obligations of Solvency II, while six fell within the scope of Solvency I. The large majority of health insurers apply the standard formula for calculating the SCR. Four undertakings use a partial or full internal model. None of the undertakings used undertaking-specific parameters.

Of the 40 health insurers, three applied the volatility adjustment in accordance with section 82 of the Insurance Supervision Act and the transitional measure for technical provisions pursuant to section 352 of the Insurance Supervision Act. Two health insurers used only the transitional measure for technical provisions, while four undertakings employed the volatility adjustment as the only measure. The health insurers do not apply the transitional measure for risk-free interest rates pursuant to section 351 of the Insurance Supervision Act. Undertakings that apply a transitional measure and would be reporting inadequate coverage of the SCR without the use of that transitional measure must submit a remediation plan in accordance with section 353 (2) of the Insurance Supervision Act. None of the undertakings was required to submit a remediation plan of that type.

All of the undertakings demonstrated more than adequate coverage of the SCR at 31 December 2016 – as well as on Day 1 and at all the quarterly reporting dates in 2016.
The chart below (Figure 7 "Development of SCR coverage ratios") shows the SCR coverage ratios of the sector.

Figure 7 Development of SCR coverage ratios

Development of SCR coverage ratios

*Q stands for quarter. Source: BaFin

Only a limited comparison can be made between the data on Day 1 and at the quarterly reporting dates, since some undertakings were exempted from elements of the interim reporting requirements in accordance with section 45 of the Insurance Supervision Act. The variations in the coverage ratios were mainly caused by changes in the interest rate environment and in own funds, in particular the surplus fund.

The sector SCR for all health insurers subject to interim reporting obligations amounted to €5.5 billion as at 31 December 2016. The health insurers are primarily exposed to market risk. This represented approximately 84% of the capital requirements weighted by gross premiums written for those using the standard formula on Day 1. Around 35% of the capital requirements on Day 1 related to the underwriting risk for health insurance.

The eligible own funds for all health insurers subject to interim reporting obligations amounted to approximately €23.1 billion as at 31 December 2016. The health insurers report the majority of eligible own funds in the reconciliation reserve. On Day 1 the proportion was approximately 60%. The surplus fund is another major component of own funds, accounting for around one-third. Other own funds components such as share capital including the attributable issuing premium were comparatively unimportant.

Health insurers in the low interest rate environment

The health insurers also prepared projections in 2016 that were submitted to BaFin. The objective of the exercise was to simulate the effects of unfavourable developments in the capital market on their performance and financial stability (see info box "Health insurance projections").

39 insurers took part in the projection exercise. BaFin exempted just eight insurers that offer Non-SLT health insurance from participating. The undertakings involved do not have to establish a provision for increasing age and do not have to generate a specific technical interest rate.

The overall conclusion is that even a persistent low interest rate environment would be tolerable for the health insurers from an economic perspective. As expected, the data generated show that in a low interest rate scenario the risk attaching to new investments and reinvestments continues to arise and that investment returns decline. This demonstrates the necessity of lowering the technical interest rate gradually by means of premium adjustments.

The health insurers base the determination of the technical interest rate on the actuarial corporate interest rate (ACIR) (see info box).

For the first time, the current ACIR figures for the 2017 financial year are below the maximum technical interest rate of 3.5% stipulated in the Health Insurance Supervision Regulation (Krankenversicherungsaufsichtsverordnung) throughout the sector. In some cases, they have even fallen significantly faster than in previous years as a result of the ever growing impact of the low interest rate environment. The relevant technical interest rates used for the purposes of premium rates will therefore have to be reduced further in most cases.

Almost 70% of insureds are affected by the premium adjustments for comprehensive health insurance pending in 2017. The average premium adjustment for the sector amounts to approximately 8%. Of that figure, the reductions in the technical interest rate are responsible for around three percentage points, while the remaining increases are predominantly due to the development of claims. The health insurers have used a total of approximately €2.8 billion of the provisions for bonuses to limit the increases in premiums.

Property and casualty insurers

Business trends

Property and casualty insurers recorded a 2.7% year-on-year increase in gross premiums written in the direct insurance business in 2016 to €71.0 billion (previous year: €69.2 billion).

Gross expenditures for claims relating to the year under review declined by 2.0% to €23.1 billion (previous year: €23.6 billion). Gross expenditures for claims relating to prior years rose by 6.5% to €17.9 billion. Provisions recognised for individual claims relating to the year under review amounted to €19.1 billion, compared with €18.4 billion in the previous year; provisions recognised for individual claims relating to prior years amounted in total to €58.3 billion, compared with €56.3 billion in the previous year.

With gross premiums written amounting to €25.4 billion, motor vehicle insurance was by far the largest insurance class. This represented growth of 3.0% over the previous year. As in the previous years, the increase is attributable both to a rise in the number of policies and to higher average premiums. Gross expenditures for claims relating to the year under review increased by 3.7% year on year, while gross expenditures for claims relating to previous years were up 3.1%. Overall, gross provisions recognised for individual claims relating to the year under review were higher by 3.0% year on year, while they increased by 3.5% for outstanding claims relating to 2015.

Property and casualty insurers collected premiums of €9.4 billion (+1.8%) for general liability insurance. Claims relating to the year under review declined by 1.7% in comparison with the previous year to €960 million. Property and casualty insurers paid out €3.2 billion for claims relating to earlier years (previous year: €2.9 billion). Gross provisions for individual claims, which are particularly important in this insurance class, rose by 1.0% to €2.9 billion for outstanding claims relating to the year under review. Gross provisions for outstanding individual claims relating to the previous year rose by 3.5% to €18.6 billion.

Insurers recorded gross fire insurance premiums written of €2.2 billion (+2.0%). Gross expenditures for claims relating to the year under review fell sharply by 16.9% to €571.4 million.

Insurers collected premiums for comprehensive residential buildings insurance and comprehensive contents insurance contracts of €9.5 billion (+5.8%). Expenditures for claims relating to the year under review declined by 7.7% year on year. By contrast, provisions for individual claims rose by 8.7%. Expenditures for claims relating to prior years were almost unchanged compared with the previous year, recording a marginal decline of 0.3%. Provisions for claims relating to previous years increased slightly by 2.0%.

Premium income for general accident insurance contracts rose by 2.0% year on year to €6.5 billion. Gross expenditures for claims relating to the year under review amounted to €412.2 million. €2.3 billion was reserved for outstanding claims relating to the year under review (+0.4%), almost the same amount as in the prior year.

Solvency I

At 311%, the solvency margin ratio for property and casualty insurers at the end of 2015⁴ was slightly lower than the previous year's figure of 319%. The decline reflected two mutually offsetting developments: on the one hand, higher solvency margins were required in view of the overall increase in undertakings' business volumes and higher claims expenditures. On the other hand, the insurers recorded growth in their own funds due to capital contributions by shareholders and profits retained. This growth was slightly lower than the increase in solvency margins required, causing the solvency margin ratio to fall slightly overall.

Only one property and casualty insurer did not comply with the Solvency I requirements as at 31 December 2015. BaFin immediately took appropriate steps to restore the solvency margin coverage. However, the sector's own funds are still at a very high level and significantly higher than the minimum capital requirements.

Solvency II

The new Solvency II supervisory regime came into force on 1 January 2016. Solvency I now only applies to around 11% of property and casualty insurers which constitute small insurance undertakings within the meaning of section 211 of the Insurance Supervision Act.

Those German property and casualty insurers falling within the scope of Solvency II had eligible own funds amounting in total to €94.9 billion on Day 1. That figure amounted to €93.7 billion as at 31 December 2016. Of total eligible own funds, 98% (31 December 2016: 98%) were attributable to the highest category of own funds (Tier 1). The property and casualty insurers report the majority of eligible own funds in the reconciliation reserve. As at 1 January 2016, this proportion was approximately 83% of basic own funds.

The SCR as at 1 January 2016 amounted to around €34.2 billion (31 December 2016: €34.1 billion). This resulted in an average coverage ratio of 277.7% (31 December 2016: 289.0%).

The chart below (Figure 8 shows the SCR coverage ratios of the sector over time. Only a limited comparison can be made between the data on Day 1 and on the quarterly reporting dates, since BaFin has exempted some undertakings from elements of the interim reporting requirements in accordance with section 45 of the Insurance Supervision Act.

Figure 8 Development of SCR coverage ratios

Development of SCR coverage ratios

*Q stands for quarter Source: BaFin

The relatively unchanged coverage ratio – in comparison with the life insurance sector, for example – mainly reflects the fact that property and casualty insurers do not issue long-term guarantees and that the average term of their investments is shorter. They are therefore considerably less sensitive and volatile in response to movements in the capital markets.

As at the 1 January 2016 reporting date, three out of 186 insurance undertakings reported that they did not have adequate coverage of the required SCR under the new Solvency II supervisory regime. At 31 December 2016, all insurance undertakings reporting on a quarterly basis complied with the requirement.

Of the 186 property and casualty insurers within the scope of Solvency II and subject to reporting requirements as at the 1 January 2016 reporting date (Day 1), 173 calculated their SCR using the standard formula. This represents approximately 93% of all property and casualty insurers subject to reporting requirements under Solvency II. Six insurance undertakings calculated the SCR using a partial internal model while seven used a full internal model. Seven insurers took up the statutory option of incorporating undertaking-specific parameters into the calculation of the SCR. Almost all of them were legal expenses insurers.

The most important risk drivers by far were market risk and non-life underwriting risk. These two accounted for 59% and 55%, respectively, of the total capital requirement. Health underwriting risk (7%) and counterparty credit risk (4%) were much less significant. The diversification effect reducing the capital requirements amounted to 26%.

Reinsurers

Business trends

Claims expenditures for the reinsurers in 2016 were within the expected range, but were nevertheless significantly in excess of the very low figures for the previous year. Natural disasters caused total economic losses amounting to US$175 billion worldwide. While this amount was substantially higher than the prior-year figure of US$103 billion, it was only slightly above the 10-year average of US$154 billion.⁵ Losses amounting to US$50 billion were insured. This amount also significantly exceeded the previous year's figure of US$32 billion, but it too was only slightly higher than the 10-year average of US$45 billion. This was due in particular to mild hurricane season. The US American mainland has not been hit by a very strong hurricane for more than ten years now.

The biggest single event for the insurance industry in 2016 was an earthquake in Japan in April. Insured losses amounted to around US$6 billion, but the overall losses to the economy were significantly higher at over US$30 billion. Italy also experienced earthquakes on more than one occasion in 2016. An earthquake in August claimed 299 lives. The rebuilding costs are estimated to be approximately US$5 billion. Storms and flooding at the end of May and the beginning of June 2016 represented the most expensive natural disaster in Germany. Overall losses to the economy across Europe amounted to US$6 billion, of which about half was insured.

The reinsurance market continues to suffer from excess capacity. The more or less average level of claims expenditures worldwide in 2016 intensified the soft market. This applied in particular to the coverage of natural disaster risks, which was reflected in a further fall in prices. The rate of decline in prices was slower, but it appears that the low point has still not been reached. Another major factor putting pressure on reinsurance premiums, in addition to the lack of claims affecting the market, was the continuing inflow of alternative capital.

Hedge funds and Pensionsfonds are increasingly investing in catastrophe bonds and collateralised reinsurance. The market for catastrophe bonds (insurance-linked securities – ILS) remained at a high level in 2016 with an issue volume of over US$7 billion. The total amount of catastrophe bonds in circulation even reached a record high of US$26.8 billion.⁶ The relatively handsome returns in the ILS market are increasingly attracting investors whose search for yield – intensified by the continuing low interest rate environment – does not stop at new and unfamiliar market segments. The next rise in interest rates and future natural disasters causing heavy losses will show whether these investors are committed for the long term.

Overall, competitive pressure in the reinsurance market continued to increase. The combination of continuing capital inflows into the reinsurance market, below-average claims expenditures and declining investment income due to the persistent low interest rate phase increased the pressure on profitability in the reinsurance business. The challenge for reinsurers during the forthcoming renewals is to maintain prices at a level that is adequate to cover the risks insured and to resist downward pressure on prices at the expense of returns.

Solvency I

33 reinsurance undertakings were subject to financial supervision by BaFin in 2016, as before. They had own funds amounting to €74.3 billion as at 31 December 2015 under the old Solvency I supervisory regime (previous year: €72.9 billion). As at the same date, the solvency margin was €8.8 billion (previous year: €8.4 billion). The coverage ratio declined to 846.3% (previous year: 865.9%).

Solvency II

30 reinsurance undertakings are subject to the new Solvency II supervisory regime. They had own funds amounting to €183.6 billion as at 1 January 2016 under the new supervisory regime. At the same date, the solvency capital requirement amounted to €56.4 billion. This represented an average coverage ratio for the SCR of 325.7%, higher than the insurance industry average of approximately 305%. The SCR coverage ratio rose slightly to 336.0% at the end of the fourth quarter of 2016.

The average coverage of the SCR under Solvency II amounts to around two-fifths of the ratio under the previous Solvency I supervisory regime. The reason for this is that some reinsurers also function as the holding company of an insurance group or financial conglomerate. In such cases, the reinsurance activities are frequently secondary to the holding company function. Since under Solvency I only the reinsurance activities gave rise to a capital requirement, the SCR coverage ratio under Solvency I was correspondingly high. Under Solvency II, however, the holding of investments now also requires capital backing for possible market risks, resulting in significantly lower coverage ratios.

24 of the Solvency II reinsurance undertakings calculated their SCR using the standard formula, one of them applying undertaking-specific parameters. This represents 80% of the Solvency II reinsurance undertakings; the figure for the insurance industry as a whole is 90%.

The most important risk driver for users of the standard formula by far was market risk, accounting for 72% of the basic SCR. This reflects the holding company function of many reinsurers. Other significant risks were non-life underwriting risk representing 33%, and life underwriting risk accounting for 11%. The benefit from the effects of diversification amounted to -26%.

Pensionskassen

Business trends

According to the projection as at the 2016 reporting date, the amount of premium income for all Pensionskassen in 2016 rose year on year. Premiums earned amounted in total to approximately €6.7 billion in the year under review, a year-on-year increase of around 1.5%. In 2015, they had fallen by 1.6%.

Premium income for the stock corporations newly formed since 2002, which offer their benefits to all employers, declined slightly to approximately €2.6 billion. In the case of mutual associations (Vereine auf Gegenseitigkeit) funded largely by employers, premium income trends depend on the headcount at the sponsoring company. The premium income of these Pensionskassen rose year on year. It amounted to around €4.1 billion, as compared with €3.9 billion in the previous year.

Investments

The aggregate investment portfolio of the Pensionskassen supervised by BaFin increased by 5.0% in 2016 to €155.1 billion (previous year: €147.7 billion). The dominant investment types are still investment units, bearer bonds and other fixed-income securities, as well as registered bonds, notes receivable and loans.

Given that in 2016, interest rates, which have been low for years, continued to remain at a very low level, the valuation reserves in the industry changed only slightly year on year. Based on preliminary figures, the Pensionskassen reported hidden reserves across all investments of approximately €24.1 billion at the end of the year (previous year: €21.6 billion). This corresponds to roughly 15.5% of the aggregate investments (previous year: 14.6%). The hidden liabilities were negligible at 0.4% overall.

Projections

BaFin prepared a projection for the Pensionskassen as at 30 September 2016. Undertakings were asked to estimate their results for the financial year under four equity and interest rate scenarios. As in the previous year, the projections also encompassed the four following financial years in view of the continuing low level of interest rates.

The Pensionskassen are not subject to the new Solvency II regime. The projections revealed that the SCR coverage ratio was lower than the prior-year level. As a general rule, the undertakings are able to meet the solvency requirements; the sector's short-term risk-bearing capacity therefore seems to be assured as before. Based on the projections, the net return on investment for all Pensionskassen was approximately 3.9% in 2016, the same as in the previous year. The persistently low interest rates are also posing particular challenges for the Pensionskassen (see info box). The projections clearly reveal that the gap between the current return on investments and the average technical interest rate for the premium reserve is narrowing. If it should be necessary for individual Pensionskassen to reinforce their biometric actuarial assumptions or reduce the technical interest rate, it will become increasingly difficult for these Pensionskassen to finance increases in reserves that then prove to be necessary.

Solvency

According to the projection as at the 2016 reporting date, the solvency margin ratio for the Pensionskassen was an average of 131% as at the 2016 balance sheet date, the same level as in the previous year. According to the estimates, two Pensionskassen were unable to meet the solvency capital requirement in full as at 31 December 2016. They have already taken steps to improve their risk-bearing capacity and comply with the capital requirements once again in the future.

Pensionsfonds

Business trends

Pensionsfonds recorded gross premium income of €2.7 billion in 2016. The figure for the previous year was €2.2 billion. The fluctuations in premium income are attributable in particular to the fact that, in the case of Pensionsfonds, the premiums are often paid as a single premium, depending on the type of commitment agreed.

The total number of beneficiaries rose in the year under review to 917,632 persons compared with 889,247 persons in the prior year. Of those, 579,943 were vested employees who were members of defined contribution pension plans while 42,646 vested employees were members of defined benefit plans. In the case of non-insurance-based benefit commitments under section 236 (2) of the Insurance Supervision Act, the employer is obliged to pay premiums in the payout phase as well. Benefit payouts increased marginally from €1,643 million to €1,691 million in the year under review. The payouts were made to 290,750 persons who drew benefits.

Investments

Investments for the account and at the risk of Pensionsfonds grew from €2,190 million to €2,440 million in the year under review. This corresponds to an increase of 11% in investments (previous year: 23%). Pensionsfonds portfolios were dominated by contracts with life insurers, bearer bonds, other fixed-income securities and investment units. As at 31 December 2016, net hidden reserves in the investments made by Pensionsfonds amounted in total to approximately €168.1 million (previous year: €127.5 million).

Assets administered for the account and at the risk of employees and employers grew only slightly in 2016, from approximately €29.4 billion in the previous year to €31.7 billion. Roughly 93% of these investments consisted of investment units. These investments are measured at fair value in accordance with section 341 (4) of the Commercial Code.

All 29 Pensionsfonds supervised by BaFin at the end of the 2016 reporting year were able to cover their technical provisions in full. The technical provisions for the account and at the risk of employees and employers are recognised retrospectively in line with the assets administered for the account and at the risk of employees and employers. This means that balance-sheet cover for these technical provisions is guaranteed at all times.

Projections

BaFin also prepared projections in 2016 for all 29 Pensionsfonds (see info box). The particular focus of the projections was the expected profit for the year, the expected solvency and the expected valuation reserves at the end of the current financial year.

The assessment of the projections indicated that the 29 Pensionsfonds included are able to withstand the defined scenarios financially.

The obligations recognised by the Pensionsfonds in their financial statements are to a large extent not guaranteed by the Pensionsfonds, and the guarantees are covered by congruent reinsurance in some cases. Nevertheless, BaFin considers it necessary for the Pensionsfonds also to address the potential medium- and long-term ramifications of a low interest rate phase that persists over the long term. For the purposes of the projections, the Pensionsfonds therefore also had to estimate their expense for the Zinszusatzreserve (additional interest provision) for the four financial years following the current financial year. They also had to indicate whether they expected to be able to cover the expense with corresponding income, and whether they would be able to comply with the solvency requirements in accordance with the Regulation on the Supervision of Pensionsfonds (Pensionsfonds-Aufsichtsverordnung) in the future as well. Of 21 Pensionsfonds which operate insurance-based business, only 14 were required thus far to establish a Zinszusatzreserve. These 14 Pensionsfonds are currently financed through congruent reinsurance cover or through current income.

Solvency

According to the 2016 projection, all Pensionsfonds supervised had sufficient own funds. They therefore complied with BaFin's solvency requirements. At around two-thirds of the Pensionsfonds, the level of own funds required by supervisory law was equal to the minimum capital requirement of €3 million for stock corporations and €2.25 million for mutual Pensionsfonds. The individual solvency capital requirement for these Pensionsfonds is below the minimum capital requirement. This is due either to the relatively low volume of business engaged in or the type of business concerned.

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