Industry Attractiveness

The Austrian insurance industry is much more regulated than other European countries, as a result of which, no insurance companies have been declared insolvent for several decades. The Austrian insurance industry posted a weak CAGR of 0.1% between 2008 and 2012, primarily due to the decline in the life insurance segment. The after-effects of the global financial crisis and subsequent sovereign debt crisis, which resulted in rising levels of unemployment and a wage reduction for public sector employees, discouraged Austrian consumers from spending on insurance products.
The Austrian life segment declined by 7.5% and 6.9% during 2011 and 2012 respectively. The situation was further compounded by the decline of single-premium life insurance products by 32.9% in 2011 and 6.4% in, due to changes in tax treatment and increases in the minimum lock-in period for single-premium policies from 10 to 15 years. The industry still provides ample opportunities for insurers looking to capitalize on an underpenetrated market, as penetration levels fell from 5.7% in 2008 to 5.3% in 2012.
The insurance industry in Austria is fairly concentrated, as the seven leading companies collectively accounted for 77% of the industry’s written premiums in 2011. Vienna Insurance Group (VIG) leads the Austrian insurance industry, with a 24.5% share, followed by Uniqa Group with 22.2% and Generali Versicherung with 15.2%. Health insurance had the highest concentration rate, and the three leading health insurers accounted for around 81% of the category in 2011.
Unlike other Western European countries, the non-life segment accounted for the largest share of the Austrian insurance industry in 2012 with 43.7%, which suggests the Austrian life segment has considerable growth potential. Life insurance penetration in Austria decreased from 2.6% in 2008 to 2.1% in 2012, which also indicates growth potential. However, despite favorable demographic factors, including increased life expectancy and an unsaturated employee benefits market, the Austrian life segment declined by 11.7% in terms of gross written premium, from EUR7.4 billion (US$10.8 billion) in 2008 to EUR6.5 billion (US$8.4 billion) in 2012, at a CAGR of 3.1%.
In contrast, the non-life segment grew from EUR6.5 billion (US$9.6 billion) in 2008 to EUR7.1 billion (US$9.2 billion) in 2012, at a CAGR of 2.2%. This growth was mainly supported by rising property prices in Austria’s tier I and tier II cities, and compulsory motor insurance provisions. The low interest rates and growing prosperity of the country supported the growth of property prices in 2012 – house prices in Vienna grew by 13.09% in 2012. Improvements in the performance of the automobile industry, compulsory motor insurance and increased levels of consumer awareness of the benefits of liability, marine, aviation and transit insurance are expected to support the non-life insurance segment.
The personal accident and health insurance segment recorded the fastest growth rate in the Austrian insurance industry, increasing in terms of gross written premium from EUR2.3 billion (US$3.4 billion) in 2008 to EUR2.7 billion (US$3.5 billion) in 2012, a CAGR of 3.6%. This was primarily due to the strong performance of the health and travel insurance categories. Health insurance growth was mainly derived from government efforts to promote private healthcare cover and stimulate expenditure, while travel insurance growth can be attributed to an increase in the number of outbound tourists.
Despite the positive growth potential, a number of challenges are expected to constrain the industry’s development. For example, the slow growth of Austria’s economy may adversely affect the insurance industry. In addition, the growing number of losses due to fraudulent claims may impact profitability and investor confidence. Increasing loss ratios due to rapid growth in the amount of paid claims is likely to become a growth inhibitor.
Solvency II legislation is a fundamental reform of capital adequacy requirement and risk management, which is gaining popularity in the world’s financial markets. EU member states are expected to introduce the new standards in 2015. This is projected to lead to higher capital requirements and improved risk management strategies, which will increase consumer confidence. It could, however, discourage the entry of new competitors. Solvency II is also expected to spark a significant increase in merger and acquisition activity in the Austrian insurance industry.
Also looming for insurers in Europe is the International Financial Reporting Standard (IFRS) for financial instruments. European insurers currently use International Accounting Standard 39 for financial instruments, introduced in 2004. This is to be replaced by IFRS 9 for financial instruments. The International Accounting Standards Board deferred the mandatory date for the use of IFRS9 in December 2011, from January 2013 to January 2015.

Segment Outlook

The Austrian life segment’s industry share fell between 2008 and 2012, making it the second-largest segment behind non-life. The segment’s share fell from 45.3% in 2008 to 39.8% in 2012. The increase in minimum lock-in periods from 10 to 15 years, changes in tax law and reductions in government premiums in government-sponsored pension plans are mainly responsible for the decline. Life insurance premiums fell by 7.5% in 2011 and 6.9% in 2012.
The increase in minimum lock-in periods had an adverse impact on single-premium business, which declined by 32.9% in 2011 and 6.4% in 2012. The life segment’s penetration stood at 2.1% in 2012, which was below the European average of 4.1%. This creates further opportunities for insurance companies to expand their business, and for new insurers to enter the industry.
The life segment recorded a CAGR of 3.1% between 2008 and 2012. This was primarily due to the global financial crisis in 2009 that adversely impacted the nation’s economic development, as well as changes in the tax structure by the Austrian government and the increase in the lock-in period from 10 to 15 years, which affected premium income in 2011. A rapid decline in demand for single-premium products, coupled with an unfavorable business environment, created anxiety among global investors which resulted in negative industrial growth.
The reduction of government subsidies on government-sponsored pension plans reduced demand for life insurance products in Austria. Government subsidies were cut on the life insurance product, Prämienbegünstigte Zukunftsvorsorge (PZV), in 2012, from EUR196.64 to EUR99.02 per policy. The life segment’s written premium declined from EUR6.99 billion (US$9.71 billion) to EUR6.5 billion (US$8.4 billion) during 2011 and2012, a decline of 6.9%.
During times of economic contraction, Austria’s wealthier consumers tend to invest in life insurance products as they cannot afford losses during this period. This is expected to increase demand for long-term investment and savings options, which should increase the purchase of unit-linked and retirement plan products.
Austria’s employee-benefits market is in its developmental phase and both the government and employers have been actively working towards the advancement of this scheme. This underdeveloped market provides positive growth opportunities for private insurers and a chance to position their various pension and retirement benefit schemes.
The International Monetary Fund (IMF) projected stable economic growth for Austria over the up to 2017, despite rising concerns over economic conditions in the eurozone. This is expected to encourage global insurers to open branches in the country. Improving economic fundamentals will also increase consumer demand for life insurance cover. While the segment may be adversely impacted by factors such as lock-in periods, tax structure and the European debt crisis, it is expected to grow from EUR6.5 billion (US$8.4 billion) in 2012 to EUR8.1 billion (US$10.4 billion) in 2017, at a CAGR of 4.5%.

Distribution Channels

The Austrian insurance distribution network predominantly comprises of insurance brokers, direct marketing, bancassurance, agencies, e-commerce and other distribution channels. Low insurance penetration and industry growth led to an increase in the number of brokers and direct marketing channels between 2008 and 2012. These factors are also encouraging foreign intermediaries to enter the Austrian insurance industry.
The share of insurance brokers increased from 61.3% in 2008 to 59.2% in 2012, whereas the share of agencies rose from 31.7% in 2008 to 32.9% in 2012, due to their broad network. The agency channel’s share is expected to fall in terms of new business written premium to 31.5% in 2017.
Insurers’ concerns over premium costs have encouraged them to use direct marketing, the second-largest distribution channel in the Austrian insurance industry. With domestic and international banks establishing a market presence, the Austrian bancassurance channel has also played a key role in distributing insurance in recent years.
Bancassurance dominated Austria’s life insurance distribution network in 2012, followed by insurance brokers and direct marketing. These three channels together accounted for 92.9% of life insurance distribution. The remaining 7.1% was divided among agencies, e-commerce and other distribution channels. Austria’s insurers utilize many alternative distribution channels, such as grocery stores, shopping malls and government agencies, to access potential customers from rural and semi-urban areas.
In most EU member states, including Austria, the bancassurance channel plays a significant role in the growth of the insurance industry. Bancassurance is the largest distribution channel in the Austrian life segment, in terms of written premium new business. In Europe, it is estimated that approximately 50% of insurance products are sold through local banks. However, in the Austrian life insurance segment this figure was 61.2% in 2012, and the number of life policies sold through bancassurance grew from 1.1 million in 2008 to 1.3 million in 2012, at a CAGR of 4.1%.
This growth was mainly attributed to the global financial crisis and ongoing sovereign debt crisis, which drove consumers to purchase insurance products from trusted and cost-effective channels. The number of policies sold through bancassurance is expected to grow at a CAGR of 4.1% to reach 1.6 million in 2017. Leading insurers including Ergo developed partnerships with Austria’s two largest banks, Volksbank and Bank Austria or Unicredit Group, to cross-sell insurance products to the banks’ clients.
Insurance brokers were the second-largest distribution channel in the segment, in terms of total market commissions, and accounted for 16.5% of the Austrian life segment’s total in 2012. Sales through insurance brokers declined due to decreasing domestic demand. The number of policies sold through brokers fell from 366,781 in 2008 to 331,563 in 2012, after recording a CAGR of -2.5%. However, the channel is expected to register a CAGR of 1.3% up to 2017, with the support of the country’s improving economic conditions.
Direct marketing, which accounted for 15.2% of life insurance distribution in 2012, registered a CAGR of 6.8% between 2008 and 2012. This was partially due to a decline in domestic demand and unfavorable economic conditions. The number of policies sold through direct marketing fell from 400,459 in 2008 to 301,344 in 2012. However, IMF forecasts for stable economic growth are expected to increase sales of insurance products through direct marketing, and the channel is expected to record a CAGR of 3.9% between 2013 and 2017.

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