Iva Ivanković, HANFA Zagreb, November 2019....1. LIR environment–Global 2 decades since adoption...

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


Source: Refinitiv & Allianz Research, Allianz SE

� The implosion of European interest rates


� 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%


Diversification

Non-Life UW Risk

Health UW Risk

Life UW Risk

Counterpartydefault risk

Market risk


Insurers

Solvency2. SCR decomposition

Source: QRT Data


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%


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


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]


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


� 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


� Supervisory powers – ranking of timeliness



� 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

� …



� 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

Thank you for your attention!

[email protected]

Iva Ivanković, HANFA Zagreb, November 2019....1. LIR environment–Global 2 decades since adoption...

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