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Interview of the week


Peter BRAUMULLER, Director Insurance and Pension Supervision, FMA - Austrian Financial Market Authority

Until few years ago, the Romanian market was outside the EU borders and has - since then - made serious efforts to satisfy the European requirements. Obviously, Romania is a very large market and there is still room for further development and growth.

XPRIMM: Austria is, at the moment one of the most important investors on the Romanian market, and without any doubt the most significant player in the insurance industry. How can you explain this phenomenon?
It is difficult for a supervisor to answer this question but I suppose they are looking for opportunities of development, especially in the insurance market, which has potential. Until few years ago, the Romanian market was outside the EU borders and has - since then - made serious efforts to satisfy the European requirements. Obviously, Romania is a very large market and there is still room for further development and growth.
As a supervisory authority, we are monitoring the financial indicators, the economic figures and insurance data and we analyze whether the groups' strategies are in line with the legal frame and the economic environment.

XPRIMM: The Austrian insurance players are among the most significant investors in CEE markets. Do you think that this trend will continue or we are going to assist to a stabilization of the market?
P. B.:
This trend is obvious and I assume that a main reason for Austrian insurance companies' important position in Central, Eastern and South Eastern Europe is the fact that they were among the first who entered these markets and gradually worked on strengthening their position. Regarding the speed of these investments, this is depending on the actual investments opportunities. Generally speaking, I consider that the general trend will continue, but at the same time we will also see more consolidation and stabilization. VIG, UNIQA and GRAWE are major players on the Austrian market who have discovered new business opportunities and they will certainly continue their strategy.

XPRIMM: Do you consider that applying Solvency II will offer you the power to supervise these groups?
P. B.:
We have had group supervision in the EU since the entry into force of the Insurance Groups Directive. Solvency II will further strengthen group supervision and extend the regime to completely new areas like joint approval procedures for internal models and the group support regime. In this matter, the supervisory authorities periodically organize meetings of the coordination committees, and CEIOPS provides guidance on the functioning of those coordination committees. In addition, bilateral meetings are held between the group supervisor and the relevant solo supervisors in order to exchange views and opinions and to improve the mutual knowledge on insurance markets, legal frameworks and supervisory practices.

XPRIMM: Recently, VIG and ERSTE have surprised the market by announcing the transfer of the bank's insurance operations to VIG. How do you comment on the fact that banks give up their insurance business? Is this aspect related to the fact that Solvency II and Basel II are not well connected?
P. B.:
One of the issues CEIOPS is looking into is the consistency between Basel II and Solvency II in order to avoid regulatory arbitrage. It is a crucial concern of supervisors that that bad or risky assets are not shifted from a bank to an insurance company or vice versa, because capital charges are lower there. As a supervisor, I would not like to assess companies' business strategies. However, one should keep in mind that participations are not the only way by which banking and insurance activities might be linked together. In Austria, more the 50% of the life insurance products are distributed through banks. Therefore, it could be more attractive to sign agreements with banks, rather than to operate through own sales networks or other means. It can also be expected that insurance companies are trying to extend any successful acquisition policy to Central, Eastern and South Eastern Europe as well.

XPRIMM: Can you enumerate some particularities of the Austrian insurance market?
P. B.:
In Austria, there are at present more than 100 domestic insurance companies, more than half of which are small mutual associations. The overall number of insurance undertakings has been slightly decreasing over the last few years, whereas the number of participations of Austrian insurers in foreign insurance companies has significantly increased and the actual number of such foreign companies already exceeds the number of domestic insurers.
The life and non-life sector account for approximately the same share of total insurance business. The growth of life insurance has been very moderate over the last three years. However, unit-linked and index-linked business as well as state-sponsored retirement provision have grown quite strongly, whereas traditional life insurance is less dynamic, especially as concerns single premium contracts. The non-life sector has shown a steady growth in premiums over the last few years of about 4 to 5 percent p.a. In international terms, there still seems to be still some potential of expansion in life insurance. The occupational pension market which has been established in Austria around 18 years ago got new rules through the transposition of the EU IORP Directive some years ago. The investment rules are now based on the prudent person principle, combined with risk management requirements. Traditionally, pension companies are investing a higher proportion of their money in equities which leads to a higher volatility and dependency of their return on market fluctuations. Since the main part of the occupational pensions is defined contribution type schemes, bad investment income might easily result in pension cuts.
We have seen some convergence between the life insurance and pension sector in Austria over the last few years. On the one hand, a new type of insurance was created called "occupational group insurance" which is very similar to pension contracts but offered by insurance companies and both are subject to the same tax treatment. On the other hand, a limited change of beneficiaries within pension schemes was permitted, so that they may be allowed to change twice between different funds (investment and risk sharing groups), but only into those with less risky investment policies.

XPRIMM: Is there any penalty for switching the fund that you already choose?
P. B.:
No, the practical functioning of the system is depending on the agreement between the employer and the pension institution. In most cases, there will be no penalty and they will probably not charge them, because the aim is to foster the private pension system and to make the pension forecast more reliable the nearer the beneficiary comes to the retirement age. The future development of the pension sector is also depending on new profession groups entering the occupational pension system, e.g. public employees.
At present, there are around EUR 13 billion invested in the second Pillar and around EUR 70 billion of assets in life insurance.
Because of the convergence between occupational pension and insurance products the Austrian FMA believes that there should be a new Solvency regime for pensions as well, based on the principles of Solvency II but also taking into account the particularities of the pension sector. In CEIOPS there are different opinions depending on the respective systems, and there are really a lot of differences between the countries, it's a huge puzzle.

XPRIMM: The Romanian life insurance market is on early stage of development and the insurers and supervising authorities are trying to find some solutions in order to stimulate this sector. One of the solutions is some fiscal facilities insurance segment. Do you have in Austria some tax facilities?
P. B.:
In Austria, most people do not want to be obliged to keep money permanently in funds or to be penalized when they take it out at some stage, so products which allow free disposition over your money after 10 or 15 years are well received. In addition, tax incentives are stimulating demand for certain products. As a supervising authority, we should not influence the market development, because this is not our task and we are not better managers than others. I will only tell insurance managers or politicians about the possible risks of certain decisions or strategies. As supervisors, we never recommend what product should be created or promoted, we just form expert opinions on the risks that might occur and the possible impact on the financial situation or development of a company or the market.

XPRIMM: Can you give us some advice in order improve the savings especially in insurance and private pension system in Romania?
P. B.:
Let me again take Solvency II as an example. It is crucial that managers identify, assess and manage risks. In Solvency II, higher risks automatically lead to higher capital charges. If tax laws or other means are used to promote specific forms of private investment it is important for decision makers to fully understand all elements of that decision and in particular the risks involved so that the capital charge is appropriate to the risks. For those who steer market developments by creating incentives to the customers or the companies it is important to understand all possible effects of such a measure. Consequently, the supervisor should be involved in the legislative processes which might impact the insurance market. By the way, this is also foreseen in the international standards on insurance supervision.

XPRIMM: What is the Austrian Supervisory authority opinion regarding the Solvency II project? What about the insurance market opinion?
P. B.:
We have had some discussions with the representatives of the Austrian Insurance Association and industry representatives about Solvency II. In general, they are satisfied, of course, since the new framework will provide more opportunities to the industry. From our point of view, I think it is absolutely the right direction. The possible problem for supervisors is the fact that for some companies it is difficult to understand and implement complex systems. And also for the supervisor, the new system poses a set of challenges. So mainly, we are very positive, and we are working a lot together with the industry, we are organizing many seminars and workshops on that subject. There are still many problems to be debated, but we are optimistic. And we are already adapting our internal structure and processes to the new regime.

XPRIMM: What is your message to the Romanian insurance market?
P. B.:
I can not send any messages about how people should run their business. I am a supervisor, I am not a manager. I do believe that strengthening the market means also strengthening the supervisory authority. Considering that the Solvency II project is crucial for the insurance market and insurance supervision in all our countries, it is extremely important to have an efficient dialogue between the industry and the supervisory authority. One key message of Solvency II is that we need strong supervisors because there are a lot of advantages for the whole market and no market participant should be in a position to gain unfair advantages through violating the rules. An effective supervisor is a prerequisite for good market developments.
| Published on 10.10.2008

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