Industry-specific environment

For the international (re)insurance industry the environment in 2017 remained challenging. Faced with the protracted low level of interest rates, insurers continued to focus on preserving the value of their investments and generating stable returns.

Following the successful roll-out of the European insurance supervision regime Solvency II in 2016, some 350 German and several thousand European insurance undertakings published their Solvency and Financial Condition Report (SFCR) for the first time in the year under review. Insurers are required to give an account of all aspects relevant to their business activities and risk position: the underwriting result and investment result, the governance system including the risk management system and the internal control system, the risk profile of the undertaking, the valuation made for solvency purposes and the organisation’s capital management. The planned launch of a new risk-based solvency system in South Africa, known as Solvency Assessment and Management (SAM), was postponed again and is now scheduled for 2018.

Another significant development in the year under review was the publication of the new international accounting standard IFRS 17 by the International Accounting Standard Board (IASB). IFRS 17 replaces the interim standard IFRS 4, which has been in force since 2005, and makes it easier to compare insurers through a consistent worldwide basis for the recognition of insurance contracts. The new measurement model is expected to bring particularly far-reaching changes for the accounting of long-duration contracts. It is still too early to foresee what implications the implementation of IFRS 17 will ultimately have for the comparability and volatility of business results. The new financial reporting standards come into effect starting 1 January 2021, although they are only mandatory for the consolidated financial statements of capital-market-oriented insurance companies.

In the United Kingdom the insurance industry was adversely impacted by the decision of the UK government to lower the “Ogden rate” used for discounting compensation payments in connection with personal injury claims from 2.5% to -0.75% effective March 2017. This means, for example, that severe personal injuries from a motor vehicle accident can lead to higher payments under liability covers. In view of the fact that this change affects not only future claims but also outstanding claims that have still to be run off, insurers and reinsurers were compelled to set aside substantial additional reserves.

In Argentina the opening up of the reinsurance market effective 1 July 2017 prompted some lively activity. The market liberalisation now enables local insurers to cede up to 50% of their business to foreign admitted reinsurers. The quota is to be raised progressively to 75% by 2019.

In Germany the statutory requirement for life insurance companies to build up an additional reserve for the interest rate risk (“Zinszusatzreserve”) as security for legacy contracts with guaranteed high returns remains a major challenge. The significance of this issue is further underlined by calls for policymakers to take supportive actions to slow down the accumulation of this additional interest provision.

Digital transformation and progressive digitalisation continued to be a topic of growing importance to the (re)insurance industry in 2017. The focus for insurers was on developing new products, delivering more innovative customer support as well as optimising internal cost structures and business processes. At the same time, increased involvement in and cooperation with start-ups and insurtechs was evident. This trend is expected to continue over the coming years.

Property and casualty reinsurance was once again fiercely competitive in 2017. The capital position of primary insurers remained strong, enabling them to continue running high retentions. What is more, the inflow of capital from the ILS sector into the reinsurance market was sustained, as a consequence of which the supply of capacity in the market comfortably outstripped demand – hence keeping up the pressure on prices and conditions. In the second half of the year signs of a trend reversal could be detected. The three severe hurricanes, combined with the earthquakes in Mexico and forest fires in California, left the (re)insurance industry facing exceptionally heavy loss expenditure. Against this backdrop, indications that the rate level was beginning to pick up could already be discerned by the end of the year.

In the context of advancing digitalisation, the market for insurance against cyber risks showed further strong growth in 2017. Against a backdrop of increasingly widespread cyber attacks, including for example those on the US financial services provider Equifax in May 2017, the surge in demand for covers offering protection against cyber risks was sustained. It remains the case that the vast bulk of the worldwide insurance premium is generated in the United States, but interest in such products continued to grow in Europe too.

The protracted low interest rate environment similarly had implications for life and health reinsurance in the area of traditional life insurance products: not only have they now lost a considerable part of their appeal, they have also to some extent been supplanted by new policies which have been adapted to the changed interest rate situation. Demand for solvency-oriented reinsurance solutions remained robust following the implementation of Solvency II and – especially for longevity business – the associated more exacting capital requirements. On a global scale the progressive demographic shift and increasing ageing of the population continue to drive stronger demand for retirement provision products – on the reinsurance as well as the insurance side. Lifestyle products, which primarily offer risk coverage tailored to protecting the policyholder’s specific life situation, are also enjoying a surge in demand. These include, in particular, policies under which the premium is linked to the insured’s health-related behaviour (e. g. fitness, nutrition). Although the purchasers of such products have hitherto tended to be in Anglo-Saxon and Asian markets, a tangible interest in this trend can now also be detected in Europe.