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Inside magazine issue 12 | Part 03 - From a corporate perspective Where is the excess of capital in the insurance market allocated? The evolution of the solvency margin shows that the insurance industry is currently in a phase of surplus capital. Although the industry’s Solvency II ratios have not yet been disclosed to the public, the evolution of the Solvency I ratio is an indicator of the high levels of capital in the market. In Q2-2015, the median on solvency levels rose to 254.4 percent and 198 percent for non-life and life business respectively. Nevertheless, compared with Q4-2014, the solvency ratios have started to decrease. SOLVENCY I RATIO, INTERQUARTILE RANGE AND 10 TH AND 90 TH PERCENTILE Figure 1: Life insurance business 450,0% 400,0% 350,0% 300,0% 250,0% 200,0% 150,0% 100,0% 50,0% 0,0% Although the panorama changes slightly when comparing the results with the Solvency Capital Requirement (SCR) introduced by the Solvency II regulation, the non-life industry is still overcapitalized under this framework. This is due to the low level of losses in non-life insurance business throughout the industry in recent years. 2010-Q2 2010-Q4 2011-Q2 2011-Q4 2012-Q2 Figure 2: Non-Life insurance business 700,0% 600,0% 2012-Q4 2013-Q2 2013-Q4 2014-Q2 2014-Q4 2015-Q2 Under Solvency I, the solvency margin does not fully consider the movement of the financial markets. Keeping this in mind, due to the low interest rate environment and the negative duration gap that is characteristic of the life insurance business, under Solvency II we expect a strong deterioration of the solvency ratios for life insurance business in the coming years. 500,0% 400,0% 300,0% 200,0% 100,0% 0,0% 2010-Q2 2010-Q4 2011-Q2 2011-Q4 2012-Q2 2012-Q4 2013-Q2 2013-Q4 2014-Q2 2014-Q4 2015-Q2 Source: EIOPA Financial Stability Report December 2015 (sample based on 32 large insurance group in EU and Switzerland) Under Solvency II we expect a strong deterioration of the solvency ratios for life insurance business in the coming years. 122
Inside magazine issue 12 | Part 03 - From a corporate perspective What are the main factors for the current low margins in the insurance business? The insurance market in 2015 shows stable but low profitability, which, in fact, conceals a major disparity between life and non-life insurance business, as reflected in the last stock market performance: The persistency of the low yield environment, which is close to its lowest levels, has a negative impact on the profitability of the insurance market, mainly life insurance business. At the same time, non-life insurance and reinsurance undertakings delivered a positive return, due to the fact that short-term business is less sensitive — but not invulnerable — to the economic environment and due to the lower levels of claims that would normally arise from catastrophic events. 1 Figure 3: Market Returns 1M 3M 6M 12M 3Y Life 3.7% -6.8% -10.9% 0.4% 59.9% Non-Life 10.5% 8.7% 15.8% 33.0% 60.1% Composite 6.7% 0.0% -1.5% 12.2% 65.8% Reinsurance 12.3% 8.0% 13,1% 37.6% 67.2% DJ STOXX INSURANCE 7.9% 1.3% 1.6% 18.9% 74.2% Source: EIOPA Financial Stability Report December 2015 Figure 4: European Central Bank: euro area yield curve Yield in % 3.0 The low interest rate environment increases pressure on profitability The prolonged low interest rate phase further increases the risk of reinvestment for the (re)insurance business, as maturing assets are reinvested either in low-return assets, pushing down profitability margins further, or in non-core (presumably riskier) assets. 2.5 2.0 1.5 1.0 0.5 31.12.2012 30.12.2015 01.03.2016 The graph on the right (figure 4) shows how the spot rate for AAA bonds in the euro area has decreased between 2012 and today: In life insurance business, due to the mismatch in duration between the technical provisions and the asset portfolio, the effect of the current low interest rate environment has had a negative impact on the expected profitability margin. This is even more pronounced for savings portfolios in Europe, where insurance undertakings still have longterm guaranteed rates up to 4 percent or 5 percent, without the possibility of changing the contract terms. This situation makes it very tempting for life insurance undertakings to consider M&A as one of the best ways to diversify the risk or get rid of unprofitable blocks of fixed-rate savings and annuity business, even if such deals could be very expensive. 0.0 -0.5 -1.0 0 5 7Y 10 15 20 25 30 Residual maturity in year In life insurance business, due to the mismatch in duration between the technical provisions and the asset portfolio, the effect of the current low interest rate environment has had a negative impact on the expected profitability margin. 1. http://www.wsj.com/articles/ace-agrees-to-buy-rival-insurer-chubb-1435748869 123
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Inside Triannually insights from De
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Inside magazine issue 12 | Contents
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Inside magazine issue 12 | Foreword
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Inside magazine issue 12 | Part 01
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Page 72 and 73: Inside magazine issue 12 | Part 02
Page 144 and 145: Inside magazine issue 12 | Contacts
Page 146: Our expert authors, who are brimmin
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