Despite challenges, Austria’s life insurance is on the road to recovery

26 Jan 2016

Over the review period (2010-2014), life insurance premiums in Austria fell from €7.5billion ($9.9 billion) to €6.7 billion ($8.9 billion), with the government’s regulatory measures not being beneficial to the growth prospects of the sector. However, there are reasons for optimism in the industry due to its high growth potential, according to the recent study by Timetric.

Regulation deters consumers creating difficulties for insurers

In 2011, the minimum lock in period for tax-free insurance contracts was raised from 10 to 15 years and a notable decline in single-premium products followed. In addition, government subsidies were cut on life insurance products such as the Prämienbegünstigte Zukunftsvorsorge (PZV) life insurance products and the Austrian Financial Market Authority (FMA) cut the maximum guaranteed interest rates for life insurance and subsidised pension schemes from 1.75% to 1.5%. This maximum rate will be reduced further to 1.0% from the 1st September onwards.

"Under the Solvency II regime the cost of offering life insurance products with guaranteed returns will increase, as these products will be subject to higher capital requirements, As a result, insurers may have to offer less attractive returns on their guaranteed products and this could deter consumers from purchasing these products," comments Timetric's Analyst Jay Patel.

Low interest rates challenge insurers' investment plans

Low interest rates in the Eurozone are likely to persist for a significant portion of the forecast period (2015-2019), especially in light of Mario Draghi's recent announcement of the extension of the ECB's asset purchase programme into March 2017. As a result, life insurers may struggle to maintain the returns they are used to receiving on their investments, as higher yielding assets expire in an environment where the risk adjusted returns of assets are much lower than before.

Life insurance is set to recover in the next five years

Austria's life insurance penetration was 2.0% in 2014 - a level of penetration that is well below that of similarly wealthy economies such as the UK and Sweden. This indicates that there is significant room for growth in the industry. With the economy expected to grow at a faster rate than in the previous years, as well as the Austrian Insurance Association (VVO) working to increase consumer awareness of life insurance, there are signs the industry will perform better the next five years.

In addition, not all regulatory changes have negative effects on the industry. The FMA reduced the insurance premium tax rate from 11.0% to 4.0% last year, for people over the age of 50 purchasing a single life premium policy that has a term longer than ten years. As a result, this is expected to significantly boost purchases of these insurance products.

All information is based on the Timetric report: 'Life Insurance in Austria, Key Trends and Opportunities to 2019'.

Source: Company Press Release