Overview

As at 31 December 2017, the carrying amount of the aggregate investments managed by German primary insurers under BaFin's supervision amounted to €1,517.1 billion (previous year: €1,467.8 billion), as shown in Table 18¹. Aggregate investments grew by 3.4 percent (+€49.3 billion) in 2017. Broken down by insurance classes, Pensionskassen (+5.8 percent) and health insurers (+4.8 percent) recorded the largest percentage increases. Only the funeral expenses funds recorded a slight decline in investments compared with the prior-year figure.

Focal area

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 13.7 percent to €267.9 billion in the year under review, while the share of investments at credit institutions declined year on year.

Indirect investments held by insurance undertakings via investment funds again recorded above-average growth in 2017 (+7.4 percent), and – as in the previous year – now account for over one-third of the aggregate investments of all primary insurers at €542.1 billion. As in previous years, the assets acquired via investment funds consist mostly of listed securities. Aggregate direct investments in property rose by 6.5 percent year on year to €35.1 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 2017 and are only preliminary. BaFin

Search for Yield

Towards the end of 2016, BaFin carried out a survey on behalf of EIOPA into insurers' investment behaviour.² BaFin added its own questionnaire³ to this survey. The aim was to investigate the "search for yield" behaviour (see the info box "Search for yield" on page xy) of the German insurance industry. The 35 insurers (insurance undertakings and groups, Pensionsfonds and Pensionskassen) participating in the survey were asked to what extent they had changed the structure of their investment portfolios between 2011 and 2015 in pursuit of higher yields. They were also invited to provide a forecast for the period from 2016 to 2018.

Findings

The survey found that insurers had been moderate in their search for yield over the past five years and intended to continue this approach going forward, albeit to a lesser extent. Between 2011 and 2015, the search for yield was characterised by longer maturities of new investments, shifts in the primary investment classes (for instance from fixed income securities to equities) and a higher share of infrastructure investments. Looking to the future, it is becoming clear that infrastructure investments will be a focal area for the insurance undertakings.

Climate change

As providers of insurance products, insurers are affected by the direct consequences of climate change, for example in the form of natural disasters such as floods, storms and heatwaves, to an ever greater extent. However, also from an investor's perspective climate change is increasingly drawing the attention of insurers.⁴

Transformation risks

Undertakings that do not attach importance to sustainability criteria are exposing themselves to risks. For example, the shift from CO2-intensive to climate-friendly business activities could result in substantial falls in value in the case of oil, gas and coal enterprises. In particular, investors with long-term strategies such as life insurance undertakings and pension funds should therefore know the related risks.

Present regulatory framework

Regulation by European and German legislators currently attaches great importance to transparency requirements relating to aspects of sustainability, known as environmental, social and governance (ESG) criteria. Directive 2014/95/EU⁵ provides that, as of the financial year starting in 2017, certain undertakings and groups are required to include in their group management report a statement containing information relating to non-financial key performance indicators, such as environmental aspects.

Consideration of environmental issues

Life insurers that perform services related to occupational retirement provision must inform their customers at the beginning of the insurance relationship how they take environmental issues into consideration in applying the contributions paid in. Insurers subject to the requirements of Solvency II must take into consideration the features of their investment portfolios, including sustainability, for the purposes of the regular review of their investment principles in accordance with EIOPA Guideline 29⁶ on system of governance.

IORP II Directive

The IORP II Directive⁷, which came into effect in January 2017, provides that the member states shall allow institutions for occupational retirement provision to take into account the potential long-term effects of their investment decisions on environmental and social factors as well as on factors relating to corporate governance.

Article 30 of the IORP II Directive enables the member states to ensure that IORPs prepare a written statement of those principles of their investment policies that take account of environmental, social and governance factors.

Implementation of sustainability in practice

Supervisory discussions between BaFin and individual undertakings show how insurers deal with the topic of sustainability in practice: in the third quarter of 2017, for example, a number of undertakings demonstrated the importance attached to ESG criteria in their investments. In some cases, the undertakings presented comprehensive processes for integrating sustainability criteria.

Bail-ins

As of 1 January 2017 unsecured debt instruments may also be used in the event of insolvency, ranking directly after the owners' equity. The basis for this is a tool for involving creditors in sharing losses known as a "bail-in".⁸

This issue is of great importance for the insurance sector. Most German insurers and IORPs are invested in bank securities, in particular in equities, Pfandbriefe and unsecured debt instruments. Investment in unsecured debt instruments issued by banks in recent years has been in the high tens of billions. Insurers therefore need to deal with the new regulatory environment and the associated risks in the context of the supervisory requirements. This need is reinforced by the fact that individual credit institutions have got into financial difficulties in the recent past.

Own credit risk assessment

Pursuant to section 28 (2) of the Insurance Supervision Act in conjunction with Article 5a(1) of the European Credit Rating Regulation⁹, insurance undertakings and institutions for occupational retirement provision must carry out their own credit risk assessments. They may not rely exclusively or automatically on external ratings for the purposes of assessing the creditworthiness of a company or a financial instrument. Against the background of continuing low interest rates and the associated poor yields, avoiding a credit default and thus preserving the nominal value is even more important for insurers. The own credit assessment therefore plays a decisive role in insurers' investment activities, independently of the statutory regulations. Some undertakings have already put in place extensive and complex rating procedures.

For the assessment of the credit risk of bank debt instruments, qualitative criteria must be addressed along with quantitative considerations such as balance sheet data. Insurers should also analyse the extent to which support measures resulting from statutory or voluntary deposit guarantee schemes are still in place. The credit institution's non-performing loans may also provide indications about its credit risk.