The following figures for 2017 are only preliminary. They are based on the interim reporting as at 31 December 2017.

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 2017 with approximately 4.9 million new policies remained just below the previous year's level of 5.0 million. At the same time, the total value of new policies underwritten rose slightly by 0.6 percent to around €265.8 billion compared with €264.2 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 34.1 percent to 35.4 percent.
The share attributable to pension and other insurance contracts declined marginally from 55.8 percent to 55.5 percent over the same period. The proportion of endowment life insurance policies also fell by 1.0 percentage points to 9.1 percent.
Early terminations of life insurance policies (surrender, conversion to paid-up policies and other forms of early termination) recorded a small reduction from 2.3 million contracts in 2016 to 2.2 million contracts in the year under review. However, the total sum insured of policies terminated early rose slightly to €98.5 billion compared with €98.1 billion in the previous year.

There were a total of approximately 83.7 million direct life insurance contracts at the close of 2017, compared with 84.5 million in the previous year. By contrast, the sum insured increased by 2.9 percent to €3,102 billion. Term insurance policies recorded a marginal decrease in the number of contracts from 13.0 million to around 12.9 million, although the sum insured rose significantly from €781.4 billion to €827.9 billion. Pension and other insurance policies continued the positive trend of recent years, with the number of contracts growing from 52.6 percent to 54.4 percent as a proportion of the total. The share of the total sum insured rose from 54.5 percent to around 55.6 percent.

Gross premiums written in the direct insurance business of the German life insurers remained almost unchanged at €85.6 billion in the year under review (previous year: €85.7 billion).

Investments

Aggregate investments increased in the year under review by 2.7 percent from €882.6 billion to €906.1 billion. In particular, since the level of interest rates on the capital market recovered slightly, net hidden reserves at the year-end declined to €132.6 billion compared with €152.5 billion in the previous year. This corresponds to 14.6 percent of the aggregate investments, following 17.2 percent in the previous year.

Preliminary figures put the average net investment return at 4.4 percent in 2017, the same level as in the previous year. One reason for the high net return could be that the insurers have again realised valuation reserves in order to fund the high cost of establishing the Zinszusatzreserve.

Projections

BaFin again prepared projections for the life insurers in 2017. BaFin uses the projections primarily to analyse how two 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 to medium term. However, should interest rates remain low, it is to be expected that the economic position of the undertakings will deteriorate. 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

For the purpose of calculating the solvency capital requirement (SCR) at the close of 2017, a total of 73 of the 84 life insurers under BaFin’s supervision employed the standard formula while 11 undertakings used a partial internal model. None of the life insurers used undertaking-specific parameters.

Of the total of 84 life insurers, 45 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. 14 life insurers used only the transitional measure for technical provisions, while 9 undertakings employed the volatility adjustment as the only measure. 1 undertaking applied the transitional measure for risk-free interest rates pursuant to section 351 of the Insurance Supervision Act, i.e. the transitional discount curve, in combination with the volatility adjustment. In total, therefore, 55 life insurers used the volatility adjustment, 59 life insurers the transitional measure for technical provisions and 1 life insurer the transitional discount curve.

SCR coverage

All of the life insurance undertakings were able to report adequate SCR coverage as at 31 December 2017. The SCR ratio of the undertakings not exempted from elements of interim (quarterly) reporting pursuant to section 45 of the Insurance Supervision Act (eligible own funds of the sector in relation to the SCR of the sector) amounted to 382.1 percent compared with 316.3 percent in the previous year.

Figure 4 ("Development of SCR coverage ratios") shows the SCR coverage ratios of the life insurance undertakings subject to interim reporting obligations over time.

Figure 4 Development of SCR coverage ratios

Development of SCR coverage ratios

* Q stands for quarter. BaFin

Composition of the SCR

As at 31 December 2017, the SCR of the life insurance undertakings subject to interim reporting obligations declined to €31.7 billion compared with €36.0 billion in the previous year. Measured by the gross basic SCR, 76 percent on average of the capital requirements of the undertakings applying the standard formula in 2016 was attributable to market risk (excluding diversification effects). In addition, a significant proportion of the SCR related to underwriting risks for life (29 percent) and health (21 percent) insurance. By contrast, counterparty default risks (2 percent) were generally less important. The percentages quoted add up to more than 100 percent because diversification effects, which reduced the gross basic SCR, have not yet been included. They amounted to 28 percent.

The SCR required to be covered is calculated on the basis of the gross basic SCR, taking other variables into account. In this context, the loss-absorbing effects of technical provision (65 percent) and deferred taxes (9 percent) reduced the figure, while operational risk (3 percent) resulted in a slight increase.

Composition of own funds

The own funds eligible for the SCR of the life insurance undertakings subject to the interim reporting requirements amounted to €121.1 billion as at 31 December 2017. In the previous year, 98 percent of the eligible own funds were accounted for by basic own funds and 2 percent by ancillary own funds. 96 percent of the eligible own funds were attributable to the highest class of own funds (Tier 1) and the majority of the remainder to the second-highest class (Tier 2). On average, the reconciliation reserve accounted for 64 percent of the industry's basic own funds, while surplus funds accounted for 29 percent. Other noteworthy components at the reporting date were share capital including issuing premiums (4 percent) and subordinated liabilities (3 percent).

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 on 31 December 2031.

27 insurers affected

Since the introduction of Solvency II, 27 life insurance undertakings have been required to submit a remediation plan because 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. The undertakings concerned are required to comment on the stage of development of the measures in the annual progress reports, even if adequate SCR coverage has been restored in the meantime without the application of transitional measures.

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 2018. 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 2.3 percent for the sector. This figure was 2.5 percent in 2017 and 2.8 percent in 2016.

Development of the Zinszusatzreserve

Since 2011, life insurers have been required to build up an additional interest provision, the Zinszusatzreserve (ZZR), to prepare for 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 2017 was well over €15.0 billion. The cumulative ZZR at the end of 2017 therefore amounted to €59.5 billion. The reference interest rate used to calculate the ZZR was 2.21 percent at the end of 2017.

The expectation is that the undertakings will continue to incur a substantial expense for the next few years to build up the ZZR. BaFin is therefore monitoring future developments at the level of the industry as a whole and of the individual undertakings very closely.²

Private health insurers

Business trends

The 46 private health insurers supervised by BaFin generated premium income totalling around €39 billion in 2017. This represents an increase of 4.8 percent over 2016. The growth in premiums was therefore higher than in the previous year. The growth in premiums was due firstly to the fact that there was no further erosion of the portfolio as seen in recent years. It was also attributable to new business, especially in supplementary insurance, and to premium adjustments.

Comprehensive health insurance, with around 8.8 million persons insured and premium income of €27 billion – representing 70 percent of total premium income – continued to be the most important business line by far for the private health insurers in 2017. Including 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 41.4 million people.

Investments

The health insurers increased the carrying amount of their investment portfolio by 4.9 percent to approximately €273 billion in the year under review. Investment remained focused on fixed-income securities. BaFin did not identify any significant shifts between the asset classes.

The main macroeconomic factor affecting private health insurers is still the low interest rate environment. During the year under review, interest rates did rise slightly but they remain at an extremely low level. The health insurers' reserve situation remains comfortable, especially in light of high valuation reserves in fixed-income securities. At 31 December 2017, net hidden reserves in investments amounted to around €41 billion, or roughly 15 percent of investments (previous year: 17 percent).

Preliminary figures put the average net investment return in the year under review at around 3.5 percent, and therefore below the level of the previous year (3.7 percent).

Solvency

Since Solvency II came into effect on 1 January 2016, Solvency I has applied only to six health insurers qualifying as small insurance undertakings within the meaning of section 211 of the Insurance Supervision Act. Preliminary figures indicate that all six undertakings will comply with the solvency rules applicable to them as at 31 December 2017.
The remaining 40 health insurers were subject to the Solvency II reporting obligations at the end of 2017. The majority of these health insurers apply the standard formula to calculate the SCR. Four undertakings use a partial or full internal model. None of the undertakings used undertaking-specific parameters.

Transitional measures

In the year under review, one health insurer 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 discount curve, i.e. 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 report a shortfall without that measure must submit a remediation plan in accordance with section 353 (2) of the Insurance Supervision Act. None of the health insurers has so far been required to submit a remediation plan of that type.

All of the undertakings demonstrated more than adequate coverage of the SCR at 31 December 2017 – as well as at all the quarterly reporting dates in 2017. Figure 5 "Development of SCR coverage ratios" shows the SCR coverage ratios of the sector.

Figure 5 Development of SCR-coverage ratios

Development of SCR-coverage ratios 

* Q stands for quarter. BaFin

As at 31 December 2016, the SCR coverage ratio amounted to 432 percent.³ Only a limited comparison can be made between this figure and the data for the quarterly reporting dates, however, 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 are mainly caused by changes in the interest rate environment and in own funds, in particular the surplus funds.

The sector SCR for all private health insurers subject to interim reporting obligations amounted to €5.5 billion as at 31 December 2017. The health insurers are primarily exposed to market risk. This was responsible for around 78 percent of the capital requirements for users of the standard formula at the close of the previous year. Around 41 percent of the capital requirements at that date related to the underwriting risk for health insurance.

The eligible own funds for all health insurers subject to interim reporting obligations amounted to approximately €27.2 billion as at 31 December 2017. The health insurers report the majority of their own funds in the reconciliation reserve. At the end of the previous year, the proportion was approximately two-thirds. The surplus funds are another major component of own funds, accounting for around one-third. Other own-fund items such as share capital including the attributable issuing premium were comparatively unimportant.

Projections

BaFin also carried out a projection exercise for health insurers in 2017 in order to simulate the effects of unfavourable developments in the capital market on their performance and financial stability (see info box "Health insurance projections").38 insurers took part in the projection exercise. Only nine undertakings were exempted from taking part by BaFin. These were mainly insurers offering Non-SLT health insurance. These undertakings do not have to establish a provision for increasing age and do not have to generate a specific technical interest rate.

38 insurers took part in the projection exercise. Only nine undertakings were exempted from taking part by BaFin.⁴ These were mainly insurers offering Non-SLT health insurance. These undertakings 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 point of view. 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 that the technical interest rate must be gradually brought down by means of premium adjustments.

ACIR and technical interest rate

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

The ACIR figures calculated in the 2017 financial year are below the maximum technical interest rate of 3.5 percent stipulated in the German 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 continuing 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.

Revision of ACIR procedure

The Board of the DAV approved a revised version of the ACIR guideline on 27 November 2017. It replaces the guideline of the same name dated July 2012 and applies for the first time to the calculation of the ACIR in April 2018. Calculations dated prior to that date and which have already received consent from the trustee are not affected by the new directive.

The purpose of the revised guideline, as before, is to establish an appropriate procedure for reviewing the maximum technical interest rate set for a private health insurance undertaking from an actuarial point of view. For the actuaries, a procedure is set out for reviewing the sustainable long-term return an individual health insurance undertaking is capable of achieving. A method is also demonstrated whereby the responsible actuary and the actuarial trustee involved in the premium adjustment can determine an appropriate and reliable technical interest rate for the entity under consideration (in accordance with the guideline "Aktuarielle Festlegung eines angemessenen Rechnungszinses für eine Beobachtungseinheit" published by the DAV in 2016).

Around half of insureds are affected by the premium adjustments for comprehensive health insurance pending in 2018. The average premium adjustment for the sector amounts to approximately 6.8 percent. The health insurers have used a total of approximately €2.1 billion of the provisions for bonuses to limit the increases in premiums.

Property and casualty insurers

Business trends

Property and casualty insurers recorded a 6.9 percent year-on-year increase in gross premiums written in the direct insurance business in 2017 to €76.0 billion (previous year: €71.0 billion). This above-average increase – in comparison to earlier years – was the result of two special factors. Firstly, the calculations included the new authorisation of a larger insurance undertaking for the first time. Secondly, one insurer experienced a significant rise in premiums. Excluding these two special items, the 3.1 percent growth in premiums for all property and casualty insurers was slightly above the previous year's level.

Gross expenditures for claims relating to the year under review rose by 5.5 percent to €24.4 billion (previous year: €23.1 billion). Gross expenditures for claims relating to prior years also rose by 5.5 percent to €18.9 billion. Provisions recognised for individual claims relating to the year under review amounted to €21.1 billion, compared with €19.1 billion in the previous year; provisions recognised for individual claims relating to prior years amounted in total to €63.5 billion, compared with €58.3 billion in the previous year.

Motor vehicle insurance

With gross premiums written amounting to €27.5 billion, motor vehicle insurance was by far the largest insurance class. This represented growth of 8 percent 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 7.3 percent year on year, while gross expenditures for claims relating to previous years were up 10.7 percent. Overall, gross provisions recognised for individual claims relating to the year under review were higher by 17.5 percent year on year, while they increased by 7.8 percent for outstanding claims relating to 2016.

General liability insurance

Property and casualty insurers collected premiums of €9.8 billion (+3.9 percent) for general liability insurance. Claims relating to the year under review rose by 4.0 percent in comparison with the previous year to €1.0 billion. Property and casualty insurers paid out €3.1 billion for claims relating to prior years (previous year: €3.2 billion). Gross provisions for individual claims, which are particularly important in this insurance class, rose by 7.8 percent to €3.2 billion for outstanding claims relating to the year under review. Gross provisions for outstanding individual claims relating to prior years rose by 9.7 percent to €20.4 billion.

Fire insurance

Insurers recorded gross fire insurance premiums written of €2.3 billion (+7.6 percent). Gross expenditures for claims relating to the year under review fell sharply by 13.9 percent to €491.9 million.

Residential buildings and contents insurance

Insurers collected premiums for comprehensive residential buildings insurance and comprehensive contents insurance contracts of €10.1 billion (+5.6 percent). Expenditures for claims relating to the year under review grew by 1.8 percent year on year. Gross provisions recognised for individual claims relating to the year under review increased by 14.1 percent. Expenditures for claims relating to previous years increased by 4.1 percent. Provisions for claims relating to previous years rose by 8.5 percent.

Accident insurance

Premium income for general accident insurance contracts amounted to €6.5 billion, the same level as in the previous year. Gross expenditures for claims relating to the year under review amounted to €431.5 million. €2.4 billion was reserved for outstanding claims relating to the year under review (+3.7 percent).

Solvency I

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

At 349 percent, the solvency margin ratio of German property and casualty insurers subject to Solvency I at the end of 2016⁵ was significantly higher than the previous year's figure of 311 percent. The reason for the increase was the smaller population of property and casualty insurers still falling within the scope of Solvency I.

Solvency II

As at 31 December 2017, 89 percent of property and casualty insurers were subject to supervision in accordance with Solvency II. 92 percent of all property and casualty insurers subject to reporting obligations under Solvency II used the standard formula to determine their solvency capital requirement (SCR). Six insurance undertakings calculated the SCR on the basis of an internal model while nine used a partial 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.

All property and casualty insurers were able to report adequate SCR coverage as at 31 December 2017. The SCR coverage ratio for the industry amounted to 284 percent.

The SCR of the property and casualty insurers for 2017 was €34.6 billion. The minimum capital requirement (MCR) for the industry as a whole amounted to €11.5 billion. The most important risk drivers by far for property and casualty insurance were market risk and underwriting risk for non-life insurance. These represented 61 percent and 53 percent, respectively, of the basic solvency capital requirement. Underwriting risk for health insurance (7 percent) and counterparty default risk (4 percent) were much less significant. The diversification effect reducing the capital requirements amounted to 26 percent, while the loss-absorbing effects of deferred taxes represented 20 percent of the basic solvency capital requirement.

Those German property and casualty insurers falling within the scope of Solvency II had eligible own funds for the purposes of SCR coverage amounting in total to €98.3 billion as at 31 December 2017. Of total eligible own funds, around 98 percent were attributable to the highest category of own funds (Tier 1). The share of Tier 2 own funds was 2 percent. The property and casualty insurers report the majority of eligible own funds in the reconciliation reserve. As at 31 December 2017, this proportion was approximately 87 percent of basic own funds.

Figure 6 Development of SCR-coverage ratios

Development of SCR-coverage ratios 

* Q stands for quarter. 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. The undertakings are therefore considerably less sensitive and volatile in response to movements in the capital markets.

Reinsurers

Business trends

Claims expenditures for the reinsurers in 2017 were significantly higher than the long-term average as a result of the hurricane season. Following 12 years in which the US mainland had not been hit by a powerful hurricane, three hurricanes rated as category 4 and higher reached the United States at the same time in August and September. According to the estimates so far, Harvey, Irma and Maria caused insured losses amounting to around US$92 billion in the United States and the Caribbean, which made the 2017 hurricane season the most costly since 2005 with Katrina, Wilma and Rita.

The full valuation of the insured losses has not yet been completed. The overall economic losses caused by Harvey, Irma and Maria, however, will significantly exceed the insured losses. This is because a large proportion of the flood damage caused by Harvey in Texas and the extended loss of power in Puerto Rico following Maria are uninsured as is the increase in prices following the repair of the damage.

Natural disasters are estimated to have caused total economic losses amounting to US$330 billion worldwide in 2017. This amount was substantially higher than the previous year's figure of US$184 billion and above the 10-year average of US$170 billion. Of the total economic losses from natural disasters in 2017, losses amounting to US$135 billion were insured. This amount also significantly exceeded the previous year's figure of US$51 billion and the 10-year average of US$49 billion. Over two-thirds of all insured losses were accounted for by hurricanes Harvey, Irma and Maria with US$92 billion. Further significant losses were caused by forest fires in California and earthquakes in Mexico, which also occurred in the second half of the year.

The high level of losses in the second half of 2017 had a severe impact on the underwriting results of some reinsurers. The extent to which there will be a trend change in the reinsurance market in response is uncertain. Prices in the regions and lines of business affected by natural disasters will undoubtedly rise. But, in view of the quantity of excess capital looking for investment opportunities as a result of the low interest rate environment on the financial market, it is doubtful whether there will be sustainable price increases on a broad front. In the light of the oversupply of capacity, it seems likely that the soft market environment will continue after one or two rounds of renewals.

Developments in the alternative reinsurance market are also contributing to the pressure on prices. The inflow of alternative capital observed in the fourth quarter of 2017 at least made up for the collateral frozen as a consequence of the natural disasters. The alternative capital inflow does not seem likely to diminish over the long term.

Solvency II

Of the 33 German reinsurance undertakings subject to financial supervision by BaFin, 30 are required to comply with the Solvency II reporting obligations. They had own funds amounting to around €209.4 billion as at 31 December 2016 (previous year: €183.6 billion). At the same date, the solvency capital requirement (SCR) amounted to around €61.2 billion (previous year: €56.4 billion). This represented an average SCR coverage ratio of around 342 percent (previous year: 326 percent), slightly higher than the industry average (approximately 330 percent). The minimum capital requirement (MCR) coverage amounted to 981 percent on average at the reporting date (previous year: 930 percent).

The range of the coverage ratios within the reinsurance sector is considerable, especially with respect to the MCR. As at 31 December 2016, the reinsurers reported SCR coverage ratios between 70 percent and 550 percent, and MCR coverage ratios between 104 percent and 2,200 percent. Only one reinsurance undertaking reported inadequate capital coverage as at 31 December 2016, which was rectified in 2017.

Heterogeneous market

The wide range of the coverage ratios reflects the heterogeneous nature of the reinsurance sector. In addition to undertakings with regional and international operations, the sector also includes captive insurers, run-off platforms and some reinsurance undertakings that also perform the function of a holding company for an insurance group or a financial conglomerate (see info box "BaFin hosts an exchange of information on captives"). In such cases, the reinsurance activities are frequently subordinated to the holding company function and this is reflected, among other things, in more than adequate capital resources from the point of view of the reinsurance activities. Even though reinsurance undertakings represent only 8.8 percent of all insurers in terms of numbers, they nevertheless accounted for around 45.5 percent of the own funds of the entire insurance industry.

The average SCR coverage ratio declined by 6 percentage points to around 336 percent at the end of the fourth quarter of 2017. This was mainly due to the increase in the solvency capital requirement for one large reinsurance undertaking. Reinsurers with global activities together account for almost two-thirds of all technical provisions. The own funds of the reinsurance undertakings rose to a total of €212.2 billion as at 31 3December 2017, while the solvency capital requirement recorded a small increase to €63.2 billion.

Pensionskassen

Business trends

According to the projection as at the 2017 reporting date, premium income for all Pensionskassen in 2017 rose year on year. Premiums earned amounted in total to approximately €7.4 billion in the year under review, a year-on-year increase of around 7.2 percent. In 2016, they had risen by 4.1 percent.

Premium income for the stock corporations newly formed since 2002, which offer their benefits to all employers, was slightly below the previous year's level at approximately €2.6 billion.
In the case of mutual associations (Vereine auf Gegenseitigkeit) funded largely by employers, premium income rose in comparison with the previous year. It amounted to around €4.7 billion, as compared with €4.2 billion in the previous year. The increase is attributable mainly to special contributions by employers.

Investments

The aggregate investment portfolio of the Pensionskassen supervised by BaFin grew by 6.1 percent in 2017 to approximately €163.5 billion (previous year: €154.1 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 2017 interest rates once again remained 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 €23.7 billion at the end of the year (previous year: €23.9 billion). This corresponds to roughly 14.5 percent of the aggregate investments (previous year: 15.5 percent). The hidden liabilities were negligible at 0.4 percent overall.

Projections and impact of the low interest rate environment

BaFin also prepared a projection for the Pensionskassen as at 30 September 2017. It asked the undertakings to estimate their results for the financial year under four equity and interest rate scenarios. In view of the continuing low interest rate environment, the projection also covered the four following financial years, as in the previous year.

As the projections demonstrated, the coverage ratio for the solvency capital requirement for the 2017 financial year is around the previous year's level, although the Pensionskassen are not subject to the new Solvency II framework. 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 percent in 2017, the same as in the previous year.

The persistently low interest rates are also posing particular challenges for the Pensionskassen. The projections reveal clearly 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 the necessary increases in reserves from surpluses.

The results of the most recent EIOPA stress test have confirmed that the low level of interest rates has represented a particular burden for the Pensionskassen (see info box "Pensionskassen and Pensionsfonds in the EIOPA stress test" on page xy). BaFin therefore continues to monitor and support the Pensionskassen closely so that they can maintain and strengthen their risk-bearing capacity as far as possible even in a long-term low interest rate environment.

The Pensionskassen took action at an early stage to preserve their risk-bearing capacity. This is confirmed by the results of the 2017 projection: in almost all cases, the Pensionskassen recognised additional provisions. However, it is becoming clear that if the low interest rate environment persists, certain Pensionskassen will require additional funds from third parties. For Pensionskassen in the form of mutual insurance associations (Versicherungsvereine), it would then be appropriate for their owners to make funds available. Stock corporations (Aktiengesellschaften) would turn to their shareholders.

As a rule, Pensionskassen with the legal form of stock corporations belong to guarantee schemes in accordance with section 223 of the Insurance Supervision Act. If an employer appoints a Pensionskasse to be responsible for occupational retirement provision for its employees, the employer is obliged to pay the benefits to the employees itself if necessary, in accordance with its subsidiary liability under the German Occupational Pensions Act (Betriebsrentengesetz). This gives the beneficiaries and pensioners additional security.

Solvency

According to the projection as at the 2017 reporting date, the solvency margin ratio in accordance with the German Capital Resources Regulation (Kapitalausstattungs-Verordnung) applicable to the Pensionskassen was an average of 131 percent, roughly the same level as in the previous year. Three Pensionskassen were unable to meet the solvency capital requirement in full as at 31 December 2017, according to the estimates. In these circumstances, Pensionskassen are required to take steps to ensure that they comply with the own funds requirements again.

Pensionsfonds

Business trends

Pensionsfonds recorded gross premium income of €2.4 billion in 2017. The figure for the previous year was €2.7 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 942,782 persons compared with 924,074 persons in the previous year. Of those, 596,923 were vested employees who were members of defined contribution pension plans, while 55,385 vested employees were members of defined benefit pension plans. The payouts were made to 291,165 persons who drew benefits.

Investments

Investments for the account and at the risk of Pensionsfonds grew from €2,440 million to €2,690 million in the year under review. This corresponds to an increase in investments of 10 percent (previous year: 11 percent). Pensionsfonds portfolios were dominated by contracts with life insurers, bearer bonds, other fixed-income securities and investment units. As at 31 December 2017, net unrealised gains in the investments made by Pensionsfonds amounted in total to approximately €139.5 million (previous year: €168.1 million).
Assets administered for the account and at the risk of employees and employers grew only slightly in the year under review, from approximately €31.7 billion in the previous year to €34.2 billion. Roughly 91 percent of these investments, which are measured in accordance with section 341 (4) HGB at current market value, consisted of investment units.

Projections and impact of the low interest rate environment

BaFin prepared projections in 2017 for 29 Pensionsfonds (see info box "Projections for Pensionsfonds"). 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 technical provisions for the account and at the risk of employees and employers are generally recognised retrospectively in accordance with the assets administered for the account and at the risk of employees and employers. If this process indicates that the amount of the investments falls short of a minimum premium reserve which may be calculated on a prospective basis, the difference must be made up by supplementary contributions from the employer. The projections showed that supplementary contributions had become due as at 31 December 2017 for two Pensionsfonds. This ensures that cover for these technical provisions recognised in the financial statements is guaranteed at all times.

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 even longer. As part of the projection exercise, the Pensionsfonds were therefore also asked to estimate the expenses for the Zinszusatzreserve (additional interest provision) over the next four financial years. They also had to indicate whether they expected to be able to cover the expenses with corresponding income, and whether they would be able to comply with the solvency requirements in accordance with the German Regulation on the Supervision of Pensionsfonds (Pensionsfonds-Aufsichtsverordnung) in the future as well. Of 21 Pensionsfonds which operate insurance-based business, 18 have so far been required to establish a Zinszusatzreserve. These 18 Pensionsfonds are currently financed through congruent reinsurance cover, or through current income or surpluses.

A number of Pensionsfonds also participated in the EIOPA stress test for IORPs (see info box "Pensionskassen and Pensionsfonds in the EIOPA stress test"). The results indicate that a persistent low interest rate environment could generate additional financial burdens for the employers, who may have to pay supplementary contributions to the Pensionsfonds.

Solvency

According to the preliminary figures, 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.