Industry-specific environment

The international (re)insurance industry was once again faced with a challenging environment in 2018.

The US tax reform passed by the administration at the end of 2017 came into effect in the United States on 1 January 2018. This put in place new tax regulations, include a general cut in corporate taxes from 35% to 21%, the implementation of a 30% interest expense deduction limitation as well as the elimination of the so-called “alternative minimum tax”. Likewise, special new regulations applicable to the insurance industry in the US were implemented with far-reaching implications. Furthermore, the legislative package included the roll-out of the base erosion and anti-abuse tax (BEAT) regime and hence disadvantageous tax arrangements for Group-internal Retrocessions with entities considered foreign from the US perspective. In this context, the tax assessment base also includes premiums for ceded insurance risks within a corporate group. Thus, for example, premiums were initially taxed at a rate of 5% in 2018; from 2019 to 2026 they will be taxed at 10% and thereafter at 12.5%. The tax reform prompted market players to make adjustments to cession strategies and corporate structures.

The ongoing arduous negotiations between the EU and the UK following the outcome of the British population’s Brexit vote led to continuing uncertainty in the insurance industry. No agreement had been reached by year-end and markets were preoccupied with the risk of a “hard Brexit” on 31 March 2019. The lack of clarity surrounding the definitive shape of future economic and trade relations between the EU and UK as well as regarding freedom of movement for workers is, however, also generally detrimental to the national economies of the remaining EU member states since it impacts planning reliability and the readiness of companies to invest.

In the year under review, not long after the reform of European insurance supervisory law by the Solvency II Directive in 2016, the European Commission initiated the first review of the standard formula used to calculate the regulatory Solvency Capital Requirement. Among the key topics addressed were simplifications to the standard formula as well as the calibration of the interest rate risk, the premium and reserve risk in non-life insurance, the deferred taxes and the risk margin. In this regard the European Insurance and Occupational Pensions Authority (EIOPA) submitted technical advice on the delegated regulation to the European Commission in the year under review. These recommendations were based on the experience of national regulators and insurance companies themselves in the preparatory phase and early years of application of Solvency II. The Solvency II review conducted by the European Commission ran until 31 December 2018. The first comprehensive review of the Solvency II Directive by the European Commission is scheduled for 2020.

The planned adoption of the new international accounting standard IFRS 17 by the International Accounting Standards Board (IASB) continued to be an important concern in the year under review. IFRS 17 replaces the interim standard IFRS 4, which has been in force since 2005, and is intended to make 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 volatility of business results. At a meeting in November 2018 the IASB provisionally decided to postpone the effective date of IFRS 17 by one year. The new financial reporting standards will thus likely come into effect starting 1 January 2022, although they are only mandatory for the consolidated financial statements of capital-market-oriented insurance companies. In this context the IASB also decided to extend the temporary exemption for insurers from applying the new financial instruments standard, IFRS 9, by one year until 2022 so as to require all insurers to first apply IFRS 9 and IFRS 17 at the same time.

In Germany the government changed the formula used to determine the reference interest rate for the additional reserve for the interest rate risk (“Zinszusatzreserve’) in October, a reform that benefited both insureds and insurers. The requirement to establish this provision was adopted in 2011 to provide security for legacy contracts with high guaranteed returns in order to ensure that life insurers can still generate the interest guarantees promised to their customers even in times of sustained low interest rates. The calculation had come to be regarded as overly rigorous since it imposed an onerous burden on life insurers. The safeguarding role played by the additional reserve for the interest rate risk has been preserved even after recalibration of the calculation method; however, an interest rate corridor now prevents excessive swings in the reserve – in either direction. In this way, the expenses associated with building up the provision and the income generated from its release are better harmonised with current investment income and interest guarantee requirements. According to calculations made by the rating agency S & P, the change will bring considerable financial relief for the insurance sector.

The insurance industry in the United Kingdom continued to be impacted in the year under review by the UK government’s decision in 2017 to lower the rate used for discounting compensation payments in connection with personal injury claims (Ogden rate) from 2.5% to -0.75%. 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 the 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 this connection additional rate increases running well into double-digit percentages were again obtained for the motor liability line in the year under review, although they fell short of expectations. The basis for another adjustment to the Ogden rates was established with the passing of the Civil Liability Act 2018 on 20 December 2018. The adjustment will be made in the course of the year, which means that the reserves set aside by the various insurers and reinsurers can be corrected in 2019.

In India the IRDAI (Insurance Regulatory and Development Authority of India) approved a new reinsurance regulation in December 2018 that was already implemented on 1 January 2019. The regulation provides for a reform of the so-called “order of preference” for non-life reinsurance. Foreign reinsurers represented by a branch in India are now able to write non-life reinsurance on equal terms with other Indian reinsurers, provided this business was not previously placed with a local reinsurer entitled to preferential treatment. The order of preference does not apply to retrocessions.

The market environment in worldwide property and casualty reinsurance remained challenging. The enormous natural catastrophe losses of the previous year prompted increases in reinsurance rates in the impacted regions and programmes, albeit on a smaller scale than anticipated. Rates for programmes that had been spared losses tended to stabilise in the year under review. This development can be attributed to unchanged intense competition, with the associated implications for pricing. At the same time, most primary insurers still enjoyed a healthy capital position, which was reflected in a correspondingly high retention and adversely impacted demand for reinsurance. As a further factor, there was no change in the considerable capacities made available by the insurance-linked securities (ILS) market in 2018, as a consequence of which supply outstripped demand and the pressure on conditions and prices remained undiminished. As the year progressed, however, a cooling could be felt in industry sentiment. As had been the case in 2017, the first half of 2018 saw a moderate large loss experience – followed by an elevated large loss incidence in the second six months. After hurricanes Harvey, Irma and Maria had left their mark on 2017, the picture in the second half of 2018 was dominated by typhoons in Japan, hurricanes and forest fires in California.

The protracted low interest rate environment in Germany 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. The issue of “digitalisation” is attracting growing attention. Requests for process optimisations and the – to some extent associated – deployment of automated underwriting systems are increasingly prevalent. Power of innovation is called for here in order not only to keep pace with the competition but also to stay one step ahead.

Digitalisation continued to be a topic of growing importance to the insurance industry in 2018. The focus was on developing new products, delivering more innovative customer support and optimising internal cost structures as well as business processes. Participations in and cooperative ventures with start-ups and insurtechs saw another sharp increase. This trend is expected to be sustained in the coming years.

In the context of advancing digitalisation, the market for insurance against cyber risks continued to expand rapidly in 2018. The premium volume has risen substantially in recent years, although the same is true of claim numbers. Similarly, premium volumes continue to grow in Germany, although the level here is still low compared to other European countries. The vast bulk of the worldwide insurance premium was still generated in the United States, but interest in such products continued to grow in Europe, too.