Standard & Poor's non-life insurance rating outlook

Standard & Poor's non-life insurance rating outlook
Continued weak earnings in the Austrian non-life insurance sector has led rating agency Standard & Poor's to establish a negative outlook for that market, indicating that the financial strength ratings of Austrian insurers are more likely to be downgraded than remain the same.

The Austrian insurance market is saturated with four dominant groups holding about 65% of market share. Meanwhile, a lack of consolidation has left the lower end of the market very fragmented. Consequently, competition has driven rates down.

Although Austria's life insurance sector lends a positive feature to the market, it is unlikely to stabilise it. Most Austrian insurers are composites and, with moderate premium rate increases year-on-year, the life market has helped support the non-life results. However, the fluidity of capital between the businesses is not sufficient to maintain insurers' overall ratings in the long-term and the outlook remains negative.

To compound the situation, Austria's image as a stepping-stone to enter central and eastern European markets has yet to pay off. The markets there have yet to mature and those insurers that have invested in the region have seen few tangible returns so far.

Many Austrian companies perceive going east as a way out of the saturation of their home market, but it is a long-term strategy and those companies that have risked entering the volatile emerging markets have only had moderate success at best, though none has yet been forced to withdraw.

Increased earnings for Austrian insurers from central and eastern Europe remain a long way off. Few insurers expect the Austrian insurance market to become profitable in the short term, with one leading company describing the market as “catastrophic”, while reporting a 50% reduction in its earnings last year.

Any near-term rate improvements are most likely to start in the motor sector, which is suffering from extreme competition and a high claims ratio. As yet, however, there is little sign of this happening. With 2000 seeing increased claims across the board from, for example, hail storms and the ski-train fire at Austria's Kaprun resort, to improve earnings insurers need to start looking less at maintaining their market share and more at improving their premium rates.

The insurance market
Four of the five largest non-life insurers in Austria are owned by foreign insurance groups. Allianz owns the largest, Allianz Elementar, while Generali owns the other three. Zurich and Axa also have significant positions in the market.

Mergers and acquisitions
Generali Versicherung AG was previously known as Erste Allgemeine until June 1998, when the company adopted its current name following the transfer of the life portfolio of Generali Allgemeine Lebenversicherung AG.

Generali Holding Vienna writes reinsurance mainly for group companies and is the holding company for Generali operations in central and eastern Europe. Previously known as EA-Generali AG, in June 1998 the company changed its name to Generali Holding Vienna following a group restructuring.

UNIQA Versicherungen changed its name from Versicherungsanstalt der Österreichischen Bundesländer Vers. AG during 1999. This followed a merger with the former parent BARC Versicherungs-Holding AG, itself formed in 1997 by the merger of Bundesländer's former parent, the Raiffeisen Banking group, with the Austria Collegialität group. UNIQA Versicherungen is now the quoted group holding company and writes reinsurance primarily for group members. The UNIQA Group is the largest insurance group in Austria, after taking into account its life operations.

In August 2000, it was announced that Volksfürsorge-Jupiter was to be merged with Wüstenrot Versicherungs-AG. This was agreed in April 2001 and was effective from January 1, 2001.

Market features
Companies underwriting both non-life and life business – composites – predominate in Austria and the life business has helped to support sometimes unprofitable non-life business.

Between 1988 and 1999, mutual associations registered in Austria fell from 13 to five. This was a result of sections 61a to 61c of the Insurance Supervisory Act (VAG) that, in 1991, allowed insurance mutuals to move their business into public limited companies. There are six “holding mutuals” remaining, which are exclusively engaged in the management of their holdings in their joint stock insurers.

In addition to domestic insurers, Austria has a large number of small mutual associations, which have historically developed from farmers' relief funds. As stipulated in the VAG, there is a limit on membership and the scope of activities (both in terms of insurance classes and area) of these small mutuals, which are particularly active in rural areas. In 1999, there were 64 small mutuals active in Austria, the majority of which represented fire insurance and small livestock insurance.

Workmen's compensation is a state monopoly as part of the social security system.

Compulsory insurance
Third-party liability insurance is legally required for the following :

  • motor vehicles
  • aircraft
  • pipeline operators
  • accountants
  • notaries
  • hunters
  • lawyers
  • freight forwarders
  • nuclear reactors.

    Product liability insurance is required for pharmaceutical manufacturers.

    The main insurance association in Austria is the Verband der Versicherungsunternehmen Österreichs (Austrian Association of Insurance Companies) which is situated at:

    Schwarzenbergplatz 7
    1030 Vienna
    tel: +43 1 711 56 0
    fax: +43 1 711 56 270

    Insurance regulation and supervision
    Social insurance (definition below) is regulated by the Bundesministerium für Soziale Verwaltung (Federal Ministry for Social Administration) and private insurance and insurers by the Versicherungsaufsichtsbehörde (VAB) (Insurance Supervisory Authority), part of the Bundesministerium für Finanzen (Federal Ministry of Finance):

    Federal Ministry of Finance, Dept. V/D,
    Johannesgasse 14,
    1015 Vienna,
    tel: +43 1 512 4678,
    fax: +43 1 512 1785,
    email: ,

    Besides several other decrees and acts, the main legal basis for supervisory activities is the Insurance Supervisory Act, Versicherungsaufsichtsgesetz (VAG), of October 18, 1978, Federal Law Gazette No. 569, as last amended in 1999 by Federal Law Gazette I No. 124. The act covers all aspects of control, accounting, reporting and technical insurance matters. The most recent amendments of the VAG focus on the following :

  • implementation of the Insurance Accounts Directive (formally adopted by the EC on December 19, 1991), which is concerned with the presentational and valuation aspects of information to be disclosed in the shareholders' accounts
  • first and second insurance directives of the EU, providing for the freedom of establishment and the freedom of services
  • third insurance directives of the EU, which provide for a single European insurance licence, allowing insurance undertakings established within member states to set up branches within other member states subject only to the control of the home state.

    The cost of insurance market supervision must be borne by the insurance companies.

    Insurance law
    Much of the historical development of insurance law in Austria lies in the occupation of Austria during the Second World War by the German Reich. Unification of German and Austrian insurance regulation was achieved through a law passed on December 19, 1939. Following independence, insurance law was “Austrianised” in 1958, although parallels between German and Austrian law still remained. Although case law developed aspects differently, the similarity between German and Austrian regulation remained until the insurance law reform in 1994. Thus one of the elements of insurance law is the same in Germany, that of the distinction between social insurance and private insurance.

    Social insurance law
    Social insurance is a governmental institution offering basic insurance protection to the population in the case of sickness, invalidity, unemployment, old age and death. The General Act on Social Insurance has seen more than 50 legislative changes and a multitude of additional acts that support it. Special provisions also apply, such as the following:

  • Act on Social Insurance for craftsmen and farmers
  • health and accident insurance for civil servants
  • maternity protection
  • unemployment
  • self-employed professionals.

    Private Insurance Law
    The Insurance Contract Act, which is divided into six parts, is an important source of private insurance law:

  • part one essentially covers policyholders disclosure, the legal effect when the risk is increased, premium payment provisions and the regulation of insurance agents
  • part two covers indemnity insurance such as hail, fire, transport and legal representation
  • part three covers life
  • part four covers health
  • part five covers personal accident
  • part six covers the scope of application of the act. Maritime insurance and reinsurance are excluded.

    Marine insurance is generally regulated in the Austrian Commercial Code, (dating back to 1939), although the General Austrian Terms and Conditions for Marine Transport (1975) supersede this.

    Under the Motor Vehicle Third-Party Liability Insurance Act (Kraftfahrzeughaftpflichtversicherungsgesetz), the owner of a motor vehicle is required to hold third-party liability insurance. The government's control over premium rates for this business was eliminated in 1987.

    The Insurance Supervisory Act (VAG), October 18, 1978, as amended, is also of key importance in regulating the government's supervision of the industry. According to the VAG, three forms of insurance entities are permissible:

  • Joint-stock companies ktiengesellschaften (AG)
  • Mutuals ersicherungsvereine auf Gegenseitigkeit (VVaG) or Wechselseitige
  • Branches of foreign companies – EU and non-EU

    Specifically, stock companies are governed by the Austrian Act on Stock Companies (Aktiengesetz), while mutual insurance entities are governed by the VAG. Branches of foreign entities within the EU are supervised by their country of domicile, whereas branches of foreign entities outside the EU require a licence to operate in Austria from the VAB.

    The VAG requires any entity wishing to operate in the Austrian insurance market to obtain a licence from the federal government (through the VAB) for which special knowledge, experience and financial ability is necessary. In addition, the VAG covers the regulation of insurance companies' capital and reserves, a percentage of which must be considered liquid and held in low-risk, high-yielding investments. In addition, a trustee must be appointed under whose sole consent these funds should be accessed.

    Companies that write direct business may also write reinsurance business. Austrian professional reinsurance companies generally are only subject to the provisions of accountability in the VAG. There are only four domestic companies writing reinsurance business alone.

    Legislation provided that insurance companies must not engage in any business other than in the field of insurance by contract and businesses closely connected thereto. However, the VAG recently incorporated an amendment (in force, August 15, 1998), which stated that intermediary activities may, under certain circumstances, be considered as an activity, which directly arises out of insurance business and may therefore be transacted by an insurance company.

    The application for approval to do business must contain a business plan, which is also subject to approval by the VAB. Authorisation to do business is restricted according to the business plans presented. Legislation requires insurers to produce annual financial statements in a format specified by the VAB. The financial statements have to be audited by an independent certified auditor and the auditor's opinion has to state whether the financial statements give a true and fair view of the company's financial position. Separate balance sheets and profit and loss accounts are required for life, health (sickness) and all other non-life insurance, even if they are conducted within one company. An actuary has to confirm that certain accruals were calculated in accordance with the business plan.

    Both the auditors and the actuary are elected by the board of management (which must consist of at least two people) and must also be approved by the VAB.

    Companies have to file the following within seven months of the year-end:

  • financial statements, including notes and management reports
  • the auditor's report
  • the shareholders' resolution on the financial statements
  • documentation showing that the financial statements were published.

    The financial statements are also published in the Wiener Zeitung newspaper. In addition to the audit report, the auditors must report directly to the VAB. Any reports prepared specifically for the VAB are not available to the public.

    The activities of insurance brokers are governed by the Trade Regulations (Gewerbeordnung) in connection with the Brokerage Act (Maklergesetz), which came into effect in 1996. Brokers are not restricted to any specific insurer, unlike insurance agents, which represent only one insurance company. The Trade Code was amended during 1997/98 to deal with the proof of the professional capacity of insurance agents. Consumer protection is addressed under the General Civil Code, the Consumer Protection Act and the Insurance Contract Act.

    The Republic of Austria has a population of approximately 8.1 million and covers a total land area of 32,369 sqm (83,858 sqkm) which is divided into nine independent federal states (Länder): Burgenland, Carinthia, Lower Austria, Salzburg, Styria, Tyrol, Upper Austria, Vienna and Vorarlberg. The capital city is Vienna. The currency is the Austrian Schilling (ATS), but with the move to economic and monetary union adopted by 11 EU countries in January 1999 (Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain), the currency will become the Euro (e) in January 2003. The agreed central rate is ATS 13.76 = e 1.00. £1.00 = ATS22.4, at August 1, 2001.

    Parliamentary elections: Last: October 1999, Next: by December 2003
    Presidential elections: Last: April 1998, Next: by April 2004
    President Thomas Klestil is head of state.

    The last elections in October 1999 saw a breakdown of the coalition between the SPÖ-ÖVP (Social Democratic Party-Conservative People's Party) and a subsequent formation of a coalition government between the Conservative People's Party and the far right Freedom Party (ÖVP-FPÖ) on February 4, 2000. This new center-right coalition, led by Chancellor Wolfgang Schüssel and his Conservative People's Party, ended 30 years of Social Democrat-led government, but received heavy criticism and condemnation at home and abroad, due to the inclusion of the Freedom Party (then led by Jörg Haider) in Austria's new government.

    The ratings on the Republic of Austria are supported by:

  • a stable, diversified, export-oriented and internationally competitive economy that grew at an average annual rate of 3% between 1998 and 2000, and maintained unemployment at 4% in the same period
  • improvements in fiscal performance, leading to general government debt ratios that have slowly declined to 63% of GDP in 2000 from 69% of GDP in 1995 and 1996, and
  • stable democratic institutions and a wealthy population, with per capita income estimated about $25,000 (£17,500) in 2001.

    Austria has been a remarkably stable economy over the past two decades. Employment and inflation have been in line with other very highly rated sovereigns, but growth has been somewhat lower. Austria began to seriously tackle its longstanding fiscal imbalances in the second half of the 1990s. The general government deficit fell to 1.5% of GDP in 2000. This is slightly below the level in 1997 (1.7% of GDP), correcting the fiscal loosening in 1998 and 1999, which set in once Austria had qualified for EMU. The government has again tightened its medium-term fiscal programme since 2000: it now foresees the eradication of the deficit by 2002, but does not plan for surpluses in the subsequent years. While the slowing economy (Austria is expected to grow by about 2% in 2001 and 2002) makes the official deficit goal look ambitious, a further reduction of general government debt to 56% of GDP in 2004 from an estimated 61% in 2001 is feasible, assuming an acceleration of privatisation. This trend should be accompanied by a modest decline of the size of general government to about 49% of GDP in 2004 from 52% in 2000.

    In the medium term, Austria's ratings should remain secure against practically all foreseeable downside economic and political risk. The sovereign's strong credit standing is underpinned by a growing national consensus in favor of fiscal consolidation and the gradually decreasing public debt burden. While Austria has fallen behind its EMU peers in fiscal consolidation, the government has stepped up its stabilisation efforts. In the longer term, the government's declared fiscal strategy will need to be reinforced, however, to enable Austria to confront very significant future demographic pressures. Without further fiscal retrenchment and a more comprehensive reform of public pension and health regimes, the trend of falling deficits and debt levels will be sharply reversed in the longer term.

    July 2001 Austria insurance analyst contacts:
    Jonathan Bint London +44 20 7847 7071
    Karin Clemens Frankfurt +49 69 138709 7356
    Ashley Gill London +44 20 7847 7077
    Wolfgang Rief Frankfurt +49 69 138709 7350

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