DORDA
  November 28, 2007 - Austria

The Austrian Insurance Market - An Overview
  by Andreas Zahradnik (Partner)

Austria has approximately 140 insurance companies (including 52 Austrian insurance companies, 59 Austrian small mutual associations, and 25 branches of EU/EEA-insurers). The Austrian Financial Market Authority (Finanzmarktaufsichtsbehörde – "FMA"), which supervises the sector, provides a list of insurance undertakings containing all insurance companies authorized to conduct insurance business in Austria plus all insurance classes that the respective companies hold a licence for. Austria´s insurance companies offer a great variety of different types of insurance coverage, comprising above all life insurance and operational collective insurance.

1. Provision of services

a) Preconditions for conducting insurance business in Austria

The conduct of contractual insurance business in Austria without an appropriate licence is not permitted. Insurance companies can be divided into the following categories:

Domestic insurance undertakings
Domestic companies, i.e. companies based in Austria, need a licence from the FMA in or-der to be able to conduct contractual insurance business. Principally, the licence is valid in the whole European Economic Area ("EEA"). After going through the notification pro-cedure at the FMA, Austrian insurance companies are allowed to conduct insurance busi-ness in other signatory countries of the EEA Treaty without needing an additional licence (principle of supervision by the home country).

Small mutual associations are also domestic insurers. Legal regulations provide for only a limited number of members as well as limitations with regard to both the location and the field of activities.

EEA insurers
Insurance companies based in another EEA signatory country (EEA insurers) do not re-quire an additional licence in order to conduct business in Austria. Nevertheless, they have to notify their intention to do business in advance at their competent home supervi-sory authority. After this notification, they may immediately carry out insurance business in Austria either by establishing a branch office or under the freedom to provide services. The classification of insurance classes is harmonized in the EEA; in Austria it is stipulated in Annex A to the Insurance Supervision Act.

Third-country insurers
Third-country insurers require a licence from the FMA in order to be able to conduct in-surance business in Austria. Once a licence has been granted, third-country insurers are only allowed to do business in Austria by establishing a branch office. The licence is only granted in cases where the branch is established with a domestic management, consist-ing of at least two natural persons who have their principal domicile within Austria.

b) Licence

Licences are granted by the FMA separately for each insurance class. In each case, the li-cence refers to the entire insurance class unless the insurance undertaking has applied for a licence covering only parts of the risks belonging to the respective insurance class. The classification is given in Annex A to the Austrian Insurance Supervision Act (Versi-cherungsaufsichtsgesetz – "VAG").

Applications for licenses are filed with the FMA. Licences are not granted if
· the members of the management board do not have the required
personal reli-ability and professional qualifications to fulfil
their duties;
· even one member of the management board does not have his/her
principle domicile within the domestic territory, and even one
member of the management board does not have a good command of the
German language;
· according to the business plan, the interests of the insured are
not sufficiently safeguarded, in particular if continued
compliance with the obligations under the insurance contracts
cannot be expected;
· the own funds are below the minimum amount of the guarantee funds
as de-scribed in the VAG;
· the management board does not consist of at least two persons, and
the articles of association do not rule out any power of sole
representation for the entire busi-ness activities;
· persons who hold direct or indirect participating interests of at
least 10 per cent of the share capital or of the voting rights or
who can exert a decisive influence on the management in any other
way, do not fulfil the requirements required in the interests of
sound and prudent management of the insurance undertaking;
· it can be expected that due to close connections of the
undertaking with other natural or legal persons, or legal
requirements and administrative regulations of a country not
belonging to the signatory countries of the EC to which a natural
or legal person closely connected with the undertaking is subject,
or due to difficul-ties in the application of these requirements
and regulations, the FMA is hindered from the proper performance
of its supervisory obligation.

Once granted, licences for insurance classes expire if operation has not been com-menced within one year after the issue or renewal of the licence, or the operation has not been performed continuously for the duration of six months. Furthermore, the licence expires for insurance classes whose operation the insurance undertaking has waived or whose entire insurance portfolio has been transferred to other insurance undertakings.

Licences are revoked by the FMA if the conditions for the issue of the licence are no longer fulfilled.

c) Business requirements for Austrian insurance companies

As pointed out, the operation of the contractual insurance business requires a licence from the FMA. The licence for the operation of life assurance business and the licence for the operation of other insurance classes, with the exception of accident insurance and health insurance, are mutually exclusive. Affiliates are not subject to this exclusion.

Austrian insurance companies have to set up an internal auditing unit for the entire busi-ness (comprising at least two persons) that reports directly to the management and whose sole purpose is to continuously and comprehensively verify that the business and the operation of the insurance undertaking are lawfully, properly and expediently con-ducted. Furthermore, insurance companies have to maintain risk management as well as proper administration and accounting.

2. Financial status and investment restrictions

Insurers in Austria have to undertake to hold at any time own funds to the extent as specified in the VAG (at the very least, amounts that guarantee continued compliance with the obligations arising from the insurance contracts for the entire business). At the time of their computation, the own funds must be clear of any foreseeable tax liability. The Austrian provisions for the solvency margin also apply to branches of foreign under-takings (except for EEA or Swiss insurers).

Insurance undertakings have to establish a risk reserve which has to be shown sepa-rately on the balance sheet.

Austrian insurance companies must always place their funds in accordance with several technical provisions. Assets that belong to the following categories within the limits stipu-lated under Art 22 Sec 1 and Sec 4 of Council Directive 92/49/EEC as well as Art 24 Sec 1 und Sec 4 of Council Directive 2002/83/EC are deemed as appropriate investment assets:
· debt securities and other money and capital market instruments
· shares and other variable yield participations
· units in undertakings for collective investment in transferable
securities (UCITS) and other investment funds
· loans and credits
· land and immovable property rights
· cash at bank and in hand.

If particularly significant reasons exit, the FMA can permit individual insurance undertak-ings to use assets which are not listed above. In the case of unit-linked life assurance, only shares in investment funds shall be used for the coverage. In the case of index-linked life assurance, only assets that constitute the reference for the insurance benefit shall be used as cover. The assets used to cover the technical provisions must be located within the domestic territory or any other EC country. The FMA may permit exceptions provided there are significant reasons. Furthermore, the FMA is entitled to order that it be given prior notification of an investment if it feels this is necessary to facilitate super-vision of its progress.

3. Supervision

Domestic insurance undertakings
The FMA supervises all business practices of insurance undertakings to the extent of the granted licence.

EU/EEA insurers
Insurance companies that conduct insurance business on a cross-border basis into Aus-tria on the basis of a European Passport are subject to home supervision.

Non-EU/EEA insurers
Insurers that solicit insurance business in Austria and have been granted a licence by the FMA, including insurers controlled by parent companies domiciled outside the EU/EEA, are subject to the supervision of the FMA.

4. Marketing practices

Austrian legislation does not provide for specific provisions with regard to the marketing of insurance products. Nevertheless, certain standards and disclosure requirements have to be complied with according to the VAG. At the conclusion of every insurance contract for a risk located within the domestic territory, the policyholder has to be informed in writing of a variety of items: specifically, the name and address of the head office of the insurance undertaking, the applicable law to the contract, name and address of the su-pervisory authority, the term of the insurance contract, the method of payment of the premiums as well as all circumstances under which the policyholder can revoke or cancel the conclusion of the insurance contract. Furthermore, upon the conclusion of a life in-surance contract, the policyholder has to be informed in writing of a number of additional details prior to his contractual declaration.

5. Applicable Legislation

The Austrian insurance sector is largely regulated by the Insurance Supervision Act 1978 (Versicherungsaufsichtsgesetz – "VAG") and the Insurance Contract Act 1958 (Versi-cherungsvertragsgesetz – "VersVG"). With regard to foreign contracts, Private Interna-tional Law is relevant. For insurance contracts, the applicable provisions can be found in the Austrian Act on International Insurance Contract Law for the European Economic Area (Bundesgesetz über Internationales Versicherungsvertragsrecht für den Eu-ropäischen Wirtschaftsraum – "IVVG") as well as in the European Convention on Obliga-tion Contracts (Europäisches Schuldvertragsübereinkommen – "EVÜ"). Its advisable to clarify which law is applicable before entering into a foreign contract. In every case, for Austrian consumers according to the Austrian Customer Protection Act several other pro-visions apply.

6. Taxation

Taxation of Insurance Companies in General
With regard to corporation tax, insurance companies compute their income according to the same principles as other corporations. The corporation tax rate is 25 %. The premi-ums paid by the insured persons to the insurance companies are taxable, and the insur-ance capital paid out to insured persons is deductible from the tax base, unless a provi-sion has been made beforehand. However, according to a special provision in section 17 of the Corporation Tax Act, insurance companies have to pay tax on at least 20 % of their earnings before deduction of payments to insured persons.

The Austrian Corporation Tax Act states in sections 15-17 special rules for insurance companies. Provisions made for the fulfilment of obligations are deductible to the extent that these provisions are necessary according to actuarial principles. Provisions for long-term obligations are deductible only to a certain extent. The disbursement of earnings to insured persons in the context of premium-payback programs is deductible under certain conditions, as are provisions for these purposes.

In Austria certain insurance premiums paid by private individuals are tax deductible as special expenses at the level of the insured person (Sonderausgaben).

Payments from insurance companies to private individuals may be taxable income at the level of the private individual, on the other hand, if the payments fall under the scope of section 27 of the Income Tax Act (capital income). This applies mainly to life insurance and pension payments from insurance companies to private individuals.

Insurance companies are exempt from Value Added Tax, which means that premiums paid to insurance companies are not subject to VAT. However, the insurance company is not allowed to deduct input tax on services rendered to them.

Taxation of Foreign Insurance Companies
Foreign insurance companies that have neither their seat nor their office in Austria are only subject to limited corporation tax liability in Austria. With regard to limited tax liabil-ity, income is only taxed if the income of the corporation has a genuine link to Austria.

Income derived from insurance business is taxable if it is part of Austrian business in-come. Income from a business activity is regarded as Austrian business income (and therefore taxable) if the entity has a permanent establishment or a permanent represen-tative in Austria.

A permanent establishment means fixed assets located in Austria by means of which the business activity is carried out. A permanent representative means a person or entity that serves as an intermediary for the foreign entity to carry out business activity in Aus-tria. The income of a foreign insurance company is computed according to the same rules that apply to domestic insurance companies.

Foreign insurance companies that have no permanent establishment and no permanent representative in Austria are not taxable on their insurance business income, but may be liable for tax following the disposal of real estate located in Austria, or on the disposal of shares of Austrian companies or from any other income which has a genuine link to Aus-tria according to section 98 of the Income Tax Act. However, Austria has concluded tax treaties with (currently) 70 countries, which may apply to the individual case and may reduce the Austrian tax liabilities of foreign companies.

7. Financial services and investment relations

The last decade has witnessed a financial services revolution, which is growing more complex. New investment products and services have been developed. Credit institu-tions, insurance companies and securities brokers offer a wider variety of products and services than ever before.

It is possible under Austrian law to conduct all kinds of financial services within the same financial group. Financial groups are trying to supply customers with a wider variety of financial products. Banking, securities brokerage and insurance are supervised by the same authority, the FMA. The conduct of a financial institution is subject to licences from the FMA.

8. Sanctions

The VAG provides for several penal provisions. Whoever fails to comply with announce-ment or information obligations, or whoever covers additional risks within an insurance class or changes the basics of the reinsurance policy without notifying the FMA in ad-vance, commits an administrative offence and may be fined up to EUR 7,000 by the FMA; unless the offence constitutes a criminal offence falling under the jurisdiction of the courts. Furthermore, violations of the duty of secrecy, protection and anti-money laun-dering provisions as well as violation of orders, unauthorized business activities and sev-eral other breaches of duty will incur fines.