Measures to Consolidate Public Householdes Cause Boom in the Insurance Industry

The record growth in premium revenues in the life insurance business in 1996 (+29.6 percent) reflects the strong reaction of private households to changes in the fiscal incentive system. The reduced deductibility of health and life insurance premiums and the increase in the insurance tax on one-off premiums entailed a wave of pre-emptive and substitutive life insurance contracts. For 1997, the Association of Austrian Insurance Companies expects a corresponding slump in premium revenues of 15.3 percent. The increase in the corporate income tax for insurance companies in 1996 and 1997 has further reduced public support for private old-age provision. The changes implemented by the consolidation package contrast with the recommendations contained in the report on the perspective of the Austrian pension system to the Federal Ministry of Labor, Health, and Social Affairs and further increase the number of special rules for products of retirement income provision. The reduction in the deductibility of life insurance premiums alone has lowered the yield of this insurance product for private households by some 14 percent. Recurring changes in the tax rules for private households make planning for individual old-age income provision very difficult. In 1996, business in the private insurance industry was driven by the changes entailed by the two consolidation packages. Life insurance premiums rose by almost 30 percent over 1995. The remaining insurance branches were characterized by competition among the insurance companies for market shares. In the health insurance sector, lower hospital costs and the (qualified) exemption from the value-added tax for medical doctors and hospitals were passed on to consumers. The decline in prices, however, was lower than expected. With the number of contracts in this category unchanged, premium revenues declined by 1.8 percent in 1996. A further reduction by 2.2 percent is expected by the Association of Austrian Insurance Companies for 1997. In property and accident insurance, a rise in the number of contracts increased premium payments by 4.1 percent. The damage ratio in this category, though still below the long-term average, is again following a slight upward trend. With the leeway for price increases rather limited, the growth prospects of this sector in 1997 are modest (0.75 percent). Foreign insurance companies from the European Economic Area operate in Austria mainly under the provision of the free flow of services and offer property and accident insurance products. In 1995, insurance companies from the EEA (excluding the U.K.) managed to draw insurance premiums totaling more the ATS 1 billion in Austria, implying a market share of 0.7 percent. By contrast, revenues of Austrian insurance companies in other EEA countries amounted to only ATS 33 billion.