iva ivanković, hanfa zagreb, november 2019....1. lir environment–global 2 decades since adoption...
TRANSCRIPT
LIR Environment – Supervisor perspective
Iva Ivanković, HANFA
Zagreb, November 2019.
Agenda
1. LIR environment – Global & Local
2. LIR environment – Insurance sector pressure points
A. Insurers solvency
B. Insurers profitability
C. Insurers business model / investment behavior
3. LIR environment – Insurance supervisory strategies
4. LIR environment in EU – EIOPAs’ activities
5. LIR environment in EU\{Croatia} – NSAs’ activities
6. LIR environment in Croatia – HANFAs’ activities
1. LIR environment – Global
� 2 decades since adoption of the first zero rate� Investors have been shifting to riskier assets from government bonds, such as
Equities, Investment funds, Overseas securities
Source: Bloomberg, Bank of Japan
� 09/2019 - ECB announced cutting of interest rate for deposits by 10 bp (to –0,5%) and keep them on that level until the inflation outlook improves
Source: Twitter
Source: ECB
1. LIR environment – Global
Source: Refinitiv & Allianz Research, Allianz SE
� The implosion of European interest rates
1. LIR environment – Global
� Sovereign bonds yields by maturity
Source: Bloomberg, November 2019
EU, EURO area EU, Non-EURO area
Other
1.
LIR e
nv
iron
me
nt –
Loca
l
-2,0
0
0,0
0
2,0
0
4,0
0
6,0
0
8,0
0
10
,00
2006-01
2006-05
2006-09
2007-01
2007-05
2007-09
2008-01
2008-05
2008-09
2009-01
2009-05
2009-09
2010-01
2010-05
2010-09
2011-01
2011-05
2011-09
2012-01
2012-05
2012-09
2013-01
2013-05
2013-09
2014-01
2014-05
2014-09
2015-01
2015-05
2015-09
2016-01
2016-05
2016-09
2017-01
2017-05
2017-09
2018-01
2018-05
2018-09
2019-01
2019-05
2019-09
EU
RIB
OR
ZIB
OR
Sou
rce: ECB
, HN
B
2. LIR environment – Insurance sector pressure points
Interest ratesInterest rates
Capital resources
(If duration of assets and
liabilities mismatched)
Capital resources
(If duration of assets and
liabilities mismatched)
Fixed income returns Fixed income returns
Demand for insurance
(Due to lower discounting, Life
premiums will increase)
Demand for insurance
(Due to lower discounting, Life
premiums will increase)
Insurers
Revenue
Insurers Profit
Insurers
Solvency
Insu
rers P
rofit
2.
Tech
nica
l Pro
visio
ns
Insu
rers
So
lve
ncy
27%
26%
26%
25%
25%
25%
100%
100%
100%
98%
99%
99%
21%
21%
20%
19%
19%
19%
68%
67%
67%
67%
68%
68%
88%
90%
98%
98%
98%
98%
73%
72%
72%
72%
72%
73%
5%
7%
7%
8%
7%
7%
11
%9
%5
%7
%8
%9
%9
%9
%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100
%
YE 2016
YE 2017
YE 2018
Q1 2019
Q2 2019
Q3 2019
YE 2016
YE 2017
YE 2018
Q1 2019
Q2 2019
Q3 2019
YE 2016
YE 2017
YE 2018
Q1 2019
Q2 2019
Q3 2019
YE 2016
YE 2017
YE 2018
Q1 2019
Q2 2019
Q3 2019
TP in
dex-lin
kedan
d u
nit-lin
ked
TP Life (exclu
din
gin
dex-lin
ked an
du
nit-lin
ked)
TP N
on
-Life
HR
Ma
rke
tN
on
-LifeLife
Co
mp
osite
Insurers Profit
2. Technical ProvisionsInsurers
Solvency
Insurers Profit2. RFR effect –> Technical provisions Insurers
Solvency
-0,500%
0,000%
0,500%
1,000%
1,500%
2,000%
2,500%
3,000%
3,500%
4,000%
4,500%
5,000%
1 3 5 7 9 1113151719212325272931333537394143454749
EIOPA's RFR - HRK
YE 2015 YE 2016 YE 2017
YE 2018 Q3 2019 31.10.2019
-0,500%
0,000%
0,500%
1,000%
1,500%
2,000%
2,500%
3,000%
3,500%
4,000%
4,500%
5,000%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
EIOPA's RFR - EUR
YE 2015 YE 2016 YE 2017
YE 2018 Q3 2019 31.10.2019
Sensitivity test:
� QRT S.13.01 Data (Gross BE CFs) as of
YE 2018 discounted with Q3 2019 RFR
���� Discounted BE CFs increased 14%!Source: EIOPA Term structures
Insurers ProfitInsurers
Solvency
HR Market
2. RFR --> Technical provisions --> EPFP
80
0.5
51
71
9.1
03
63
0.8
71
55
2.4
95
62
8.5
23
61
1.6
00
57
5.7
53
58
1.5
19
73
7.5
68
75
2.4
15
73
0.1
76
53
1.9
51
47
3.2
79
40
2.6
04
20
2.3
47
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
900.000
1.000.000
Q12016
Q22016
Q32016
YE2016
Q12017
Q22017
Q32017
YE2017
Q12018
Q22018
Q32018
YE2018
Q12019
Q22019
Q32019
Expected profits included in future premiums (EPIFP) - Non-life business
Expected profits included in future premiums (EPIFP) - Life business
Amounts in 1000 HRK
Insurers ProfitInsurers
Solvency
HR Market
2. RFR --> Technical provisions --> OF
Amounts in 1000 HRK
11
.58
6.9
45
11
.82
4.7
63
11
.66
1.5
77
11
.32
7.7
06
11
.67
7.8
28
11
.52
0.4
99
11
.56
8.9
97
11
.62
0.6
57
11
.55
7.8
13
11
.75
6.3
02
11
.63
5.6
07
11
.35
2.1
38
11
.51
4.6
27
11
.40
3.5
48
11
.19
7.6
61
10.800.000
11.000.000
11.200.000
11.400.000
11.600.000
11.800.000
12.000.000
-1,000%
0,000%
1,000%
2,000%
3,000%
4,000%
5,000%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49
EIOPA's RFR - HRK
YE 2015 YE 2016 YE 2017
YE 2018 Q3 2019 31.10.2019
234%241% 229%
191% 196% 201%188%
196% 186%
256%266%
246%
0%
50%
100%
150%
200%
250%
300%
0
2.000.000.000
4.000.000.000
6.000.000.000
8.000.000.000
10.000.000.000
12.000.000.000
14.000.000.000
YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018
OF
SCR
SCRRatio
HR Market Non-Life Life Composite
Insurers
Solvency2. SCR Ratio
Source: QRT Data
74% 77% 76% 73% 74% 74%93% 92% 91%
72% 76% 75%
-60,0%
-40,0%
-20,0%
0,0%
20,0%
40,0%
60,0%
80,0%
100,0%
120,0%
140,0%
YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018
Diversification
Non-Life UW Risk
Health UW Risk
Life UW Risk
Counterpartydefault risk
Market risk
HR Market Non-Life Life Composite
Insurers
Solvency2. SCR decomposition
Source: QRT Data
HR Market Non-Life Life Composite
22% 13% 13% 3% 2% 1%14% 12% 8%
30%19% 19%
33%33% 28% 45% 42% 37%
33% 33% 33%
28%30% 23%
12%12% 17% 10% 15% 15%
11% 9% 10%
12%12% 18%
31% 33% 37%
43% 38% 39%
33% 25% 29%27%
32% 38%
-100%
-50%
0%
50%
100%
150%
YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018 YE 2016 YE 2017 YE 2018
Diversification
Currency risk
Concentration risk
Property risk
Spread risk
Equity risk
Interest rate risk
LIR impact
Insurers
Solvency2. SCR Market module decomposition
Source: QRT Data
HR Market Non-Life Life Composite
38
%
44
%
45
%
44
%
43
%
43
%
21
%
25
% 34
%
34
%
34
%
33
%
67
%
71
%
73
%
73
%
73
%
73
%
16
%
17
%
15
%
17
%
19
%
19
%
55
%
55
%
40
%
36
%
31
%
31
%
75
%
79
%
82
%
82
%
83
%
82
%
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
80,0%
90,0%
100,0% Other investments
Deposits other than cashequivalents
Derivatives
Collective InvestmentsUndertakings
Bonds
Equities
Holdings in relatedundertakings, includingparticipationsProperty (other than forown use)
Insurers Profit
2. Investments overview
� Other than assets held for index-linked and unit-linked contracts
[88% of total HR Market investments as of Q3 2019]
Source: QRT Data
HR Market
Non-Life
Life
Composite
Insurers Profit2. Investments overview
Source: QRT Data
10% 10% 10% 10% 10% 10%
8% 9% 6% 6% 6% 6%
82% 82% 84% 84% 84% 84%
Contributions in Investments [other than assets held for IL and UL]
HR Market Non-Life Life Composite
96
%
97
%
95
%
95
%
95
%
95
%
86
%
82
%
87
%
86
%
88
%
86
% 95
%
98
%
96
%
96
%
95
%
95
%
97
%
97
%
95
%
95
%
95
%
95
%
4% 3% 5% 5% 5% 5%
14
%
18
% 13
%
14
%
12
%
14
% 5% 2% 4% 4% 5% 5% 3% 2% 4% 4% 5% 5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Collateralised securities
Structured notes
Corporate Bonds
Government Bonds
Insurers Profit2. Bonds overview
Source: QRT Data
Insurers Profit
2. Bonds overview
HR Market
Non-Life
Life
Composite
Source: QRT Data
Issued by / Segment
Insurers Profit
Source: HNB
2. Bonds overview
0,00
10,00
20,00
30,00
40,00
USD_5 years USD_10 years EUR_5 years EUR_10 years
EUR*_5 years EUR*_10 years HRK_5 years HRK_10 years
� Yields to maturity on the selected bonds of the Republic of Croatia
By the end of 2022., Croatian Government
bonds amounting approximately 36,5
billions HRK will mature [coupons in range
5 – 7% ].
What will be the reissued couponamounts?
Source: Škunca, F.; Analiza ulaganja osiguratelja u SII svijetu; 2019.
Insurers Profit
2. Maturity matching of assets to cover technical
provisions with liabilities arising from mathematical
provisions
HR Market
Maturity < 1 Year 1-3 Years 3-5 Years 5-10 Years 10-15 Years 15-20 Years > 20 Years Total
[A] Assets to cover mathematical reserve 3.131.049.846 4.696.266.853 2.123.381.105 5.451.363.558 2.249.751.324 435.360.656 890.403.050 18.977.576.392
[B] Liabilities arising from mathematical reserve, net
of reinsurance1.882.340.602 3.098.449.476 2.940.322.116 4.320.610.281 2.164.657.201 1.406.659.007 1.231.607.443 17.044.646.126
[A] - [B] 1.248.709.244 1.597.817.377 -816.941.010 1.130.753.277 85.094.123 -971.298.351 -341.204.394 1.932.930.266
10% 16% 15% 23% 11% 7% 6%
YE 2017
HR Market YE 2018
Maturity < 1 Year 1-3 Years 3-5 Years 5-10 Years 10-15 Years 15-20 Years > 20 Years Total
[A] Assets to cover mathematical reserve 3.796.950.372 2.847.319.642 1.996.705.152 5.949.959.429 2.813.354.695 547.404.899 1.030.828.517 18.982.522.706
[B] Liabilities arising from mathematical reserve, net
of reinsurance2.086.224.737 3.357.473.066 2.996.719.566 4.239.167.305 2.089.343.969 1.399.634.217 1.189.894.913 17.358.457.773
[A] - [B] 1.710.725.634 -510.153.424 -1.000.014.413 1.710.792.123 724.010.727 -852.229.318 -159.066.396 1.624.064.933
11% 18% 16% 22% 11% 7% 6%
Source: GIDO HR Market data – 2017 & 2018
2. Insurance business model / Investment behavior
Insurers Profit
Insurers
Solvency
Insurers
Revenue
The most effective insurers actions:� Reducing investment guarantees and
� Improving asset-liability management
� Reducing or removing policy benefits including investment guarantees;
� Increasing technical provisions and/or capital;
� Hedging investment guarantees;
� Shifting to other product lines that are less sensitive to interest rates
Other useful actions:� Monitoring profitability;
� Regularly repricing products;
� Diversifying assets
4. LIR environment – Insurance supervisory strategies
� When supervisors should start worrying?
� Supervisory strategies need to take into account:
� Nature of products (guarantee levels & options)
� Business in force / New business
� Solvency position
� Risk management capabilities
� Investment environment
� Supervisory actions categorization:
� Business activity restrictions
� Reinforcement of financial position (e.g. requiring additional Technical Provisions)
� Supervisors need to exercise sound judgement by searching for the fairest possible outcomes for policyholders!
Source: Financial Stability Institute
4. LIR environment – Insurance supervisory strategies
� Supervisory powers – ranking of timeliness
Source: Financial Stability Institute
4. LIR environment – Insurance supervisory strategies
� Supervisory tools:
� Stress tests
� Long-term solvency projections
� Early warning indicators:
� Asset – Liability duration mismatch
� Difference between actual investment returns (possibly net of
expenses and/or taxes) and guaranteed interest rates;
� Changes in capital required for interest rate risk exposure;
� Changes in asset composition, separately identifying the proportion
of risky assets
� …
Source: Financial Stability Institute
4. LIR environment – Insurance supervisory strategies
� Case when insurer breached Solvency requirements due to LIR:
Actions by insurers� Capital injection from
parent
� Higher reserves to address
Asset – Liability mismatch
� Management change
� Enhanced risk management
Actions by supervisors� Require more capital and/or
higher TP
� More intense supervision
� Require recovery plans
4. LIR environment in EU – s’ activities
� Continuous monitoring of interest rates development
� LIR is ranked as a top risk in EIOPA’s Risk assessment
� Stress test performed in 2014:
� Market risk scenarios
� Underwriting risks scenarios
� Low yield scenarios
� Stress test performed in 2016:
� Low for long scenarios
� Double hit scenarios
Source: Qualitative EIOPA Autumn 2019 Survey
4. LIR environment in EU – s’ activities
5. LIR environment in EU\{Croatia} – NSAs’ activities
� No limitations
for technical
interest rate
� Maximum of
0,5% p.a.
technical
interest rate
for new
business
� Products sold
mostly have
0% guarantee
� The maximum
allowed technical
interest rate is
0,9% and it is
regularly
evaluated
� Due to a
significant
reinvestment risk
� Introduction of
Zinszusatzreserve
(ZZR)
� The companies define
the interest rate to be
used in the valuation of
the technical provisions
of the contracts in
force on the basis of
prudential criteria, and
the relative value
cannot in any case
exceed the value of the
corresponding TAR
6. LIR environment in Croatia – s’ activities
� Participation in EIOPA’s 2014 stress test:
� Market risk scenarios
� Underwriting risks scenarios
� Low yield scenarios
� Participation in EIOPA’s 2016 stress test:
� Low for long scenarios
� Double hit scenarios
� 2016 – changes in limits of technical
interest rates
� 2018 – changes in limits of technical
interest rates
Source: Škunca, F.; Analiza ulaganja osiguratelja u SII svijetu; 2019.
6. LIR environment in Croatia – s’ activities
6. LIR environment in Croatia – s’ activities
Thank you for your attention!