NBS activities in Insurance market... 4 General indicators... 4 Market participants... 7 Insurance portfolio structure...

Transcription

1 INSURANCE SECTOR IN SERBIA 2010 report NBS activities in Insurance market... 4 General indicators... 4 Market participants... 7 Insurance portfolio structure... 8 Balance sheet total and balance sheet structure Performance indicators Conclusion... 16

2 Introduction Pursuant to current legislation, the National Bank of Serbia is in charge of supervising the operations of a major part of the financial sector. In 2010, this sector comprised 33 banks, 26 insurance companies, 17 financial leasing providers and 8 voluntary pension funds. NBS activities in 2010 The strategic objective of the NBS Insurance Supervision Department (ISD) is to create and maintain a safe and sound insurance market with a view to protecting the interests of insureds and insurance beneficiaries and ensuring high-quality and transparent provision of insurance services and products. In line with this objective, in 2010 the ISD continued working simultaneously on several different fronts in order to: maintain stability of the insurance sector by taking appropriate measures and implementing continuous supervision; create conditions for further development of the sector by adopting secondary legislation based on EU directives and international practice, as well as by enhancing the transparency of operations of the NBS and insurance companies; further develop risk-based supervision in accordance with international standards and IAIS principles; license actuaries and implement staff training programmes on an ongoing basis. In 2010, the ISD conducted eight on-site inspections of insurance companies, of which six focused on overall operations and two were follow-up inspections (one checking the implementation of measures ordered by the NBS and another checking data and facts obtained by the NBS after initial supervision). The operations of 17 insurance agents and one insurance broker were also subject to supervision. To ensure removal of illegalities and irregularities detected in the course of the above supervision procedures, the NBS issued five resolutions ordering supervision measures (four to insurance companies, one to insurance agent) and two license revoking resolutions (one insurance agent and one insurance broker). The following pieces of primary and secondary legislation in the field of insurance were issued in 2010: amendments to the Rules on the Contents and Layout of Financial Statement Forms for Insurance Companies and amendments to the Rules on the Chart of Accounts and the Contents of Accounts in the Chart of Accounts for Insurance Companies, amendments to the Decision Specifying Elements of Data Submited by Insurance Companies to the National Bank of Serbia and the Manner and Deadlines for their 2 NATIONAL BANK OF SERBIA 2010 Annual Report

3 Submission, amendments to the Decision on the Submission of Statistical and Other Data by Insurance Companies, Decision on Specific Criteria and the Manner of Calculating Mathematical Reserves and Profit Share Reserves, amendments to the Decision on the Manner of Determining the Level of the Solvency Margin, Decision on the Basic Criteria of the Bonus-Malus System, Data for its Implementation, and Maximum Bonus, Decision on the Content of MTPL Policy Form and Manner of Keeping Records of Issued Policies, and Decree on Compensation to Persons Suffering Damage. Amendments to the Decision Specifying Elements of Data Submited by Insurance Companies to the National Bank of Serbia and the Manner and Deadlines for their Submission and amendments to the Decision on the Submission of Statistical and Other Data by Insurance Companies envisage, inter alia, a shorter timeframe for the submission of annual data. Amendments to the Decision on Specific Criteria and the Manner of Calculating Mathematical Reserves and Profit Share Reserves mark further alignment with EU Directive 2002/83. Thus, the maximum interest rate is now set by the NBS, and insurance companies calculating mathematical reserves by applying gross methods are obligated to show the difference between net and gross mathematical reserves in the notes to their financial statements. Amendments to the Decision on the Manner of Determining the Level of the Solvency Margin set out the manner of calculating the solvency margin for supplemental health insurance under life insurance policies subject to the calculation of mathematical reserves. In accordance with the obligations arising from the Law on Compulsory Traffic Insurance, the NBS issued the Decision on the Basic Criteria of the Bonus-Malus System, Data for its Implementation, and Maximum Bonus, and the Decision on the Content of MTPL Policy Form and Manner of Keeping Records of Policies Issued. The former lays down the basic criteria of the bonus-malus system, data for the implementation of that system and the maximum level of bonus in motor third party liability insurance, where bonusmalus system is understood as a system that adjusts the level of premium paid by a customer according to his individual claim history, while the latter sets out detailed content of a motor third party liability policy and the manner of keeping records of insurance policies issued. The government passed a Decree on Compensation to Persons Suffering Damage to regulate the manner and criteria for the assessment of material and non-material damage, depending on the gravity of bodily injury or affected health condition, and/or depending on the degree of partial disability for work, as well as the persons entitled to compensation and maximum compensation for pain and suffering due to death or serious disability of another person. NATIONAL BANK OF SERBIA 2010 Annual Report 3

4 Insurance market General indicators 1 Declining by 1.6% in real terms in 2009, the world economy experienced what is considered to be the sharpest recession since The drop was markedly steep in advanced economies, while emerging economies saw their growth slowing down. Though emerging economies generally weathered the crisis better than those advanced, substantial differences were observed among them in terms of the crisis impact on the overall economy. For example, most Central and East European countries experienced deep recession. The global economy is expected to recover in the coming period, notably the United States, China and emerging countries. Western Europe, on the other hand, is likely to grow at a sluggish pace due to fiscal consolidation programmes, which is bound to reflect on the recovery of Central and East Europe as well. Global recession caused a decline in inflation, which is expected to remain low until excess supply in labour and commodity markets has decreased. Inflation will be kept at bay also thanks to the cut in government spending geared at reducing large budget deficits. All of this will inevitably lead to slower economic growth. As a result of slower growth in 2009 caused by the economic crisis, total insurance premium recorded a real decline of 0.3%, compared to 4.1% in Global life insurance premium fell by a real 0.8% reflecting a 1.4% decrease in advanced economies and a 4.6% increase in emerging markets. While the economic crisis weighed down on the sale of unit-linked products, especially in advanced economies, the sale of traditional life insurance products increased. Notwithstanding the crisis, non-life insurance business recorded a 0.4% real growth in Non-life premiums fell by a marginal 0.1% in advanced economies, and rose 3.3% in emerging markets. After years of profitability, in 2009 the average combined ratio for non-life insurance came at 102%, despite low natural catastrophe losses. The United States boasted the highest premium at global level in 2009, its share being 28.03%. Together with Japan and United Kingdom, the United States accounted for nearly half of the global insurance market. At the same time, Serbia ranked 70 th by the volume of its insurance premium. 1 Source: Swiss Re, Sigma No 2/ NATIONAL BANK OF SERBIA 2010 Annual Report

5 The Serbian insurance sector is underdeveloped and substantially below the average for EU member states. This is corroborated by insurance market development indicators the ratio of total premium to GDP and total premium per capita. Comparative overview of premium to GDP ratios in 2009 Life Non-life Total United Kingdom Switzerland Germany Slovenia Czech Republic Hungary Croatia Group average Greece Serbia Romania Lithuania Тurkey Namely, Serbia ranked 66 th in the world based on a 1.9% ratio of its premium to GDP in 2009 (vs. 1.6% in 2004), while the same indicator for EU- 27 was as high as 8.43%. However, compared to the Swiss-Re group of countries comprising, among others, Serbia, Slovenia, Czech Republic, Poland, Croatia, Bulgaria and Romania, whose average premium to GDP equals 2.8%, Serbia s position can be considered satisfactory, especially in view of the fact that Greece and Romania recorded nearly the same results, and that countries such as Lithuania and Turkey ranked behind Serbia. In terms of its premium per capita in 2009 USD 110 or EUR 76 (vs. USD 52 or EUR 38 in 2004), Serbia ranked 66 th in the world, while the same indicator for EU-27 measured USD 2,772. The Netherlands came on top with a premium per capita of USD 6,555, followed by Switzerland and Luxembourg. Slovenia was 28 th with USD 1,418 and Croatia 42 nd with USD 402. NATIONAL BANK OF SERBIA 2010 Annual Report 5

6 Per capita premium payment in 2009 in selected European countries in USD Average of emarging markets Ukraine Serbia Hungary Croatia Slovenia Germany France Source: Swiss Re, Sigma No 2/2010 The Serbian insurance market development measured in terms of premium growth showed a positive trend. In 2010 total premium increased by 5.6% relative to 2009 when the year-on-year increase measured only 2.6%. In the overall financial sector (banks, leasing, insurance and voluntary pension funds), insurance ranked 2 nd by its capital and employment levels. Of the total financial sector balance sheet of RSD 2,759 bln in 2010, banks accounted for 91.8% and insurance companies for 4.2%. Share in total financial sector (%) Banks Leasing Insurance VPF Balance sheet total Capital Number of employees NATIONAL BANK OF SERBIA 2010 Annual Report

7 Market participants Insurance companies The number of companies operating in the Serbian insurance market in 2010 remained unchanged from the previous year. Of the 26 companies, 22 engaged in insurance and four in reinsurance. Of the insurance companies, seven engaged in life insurance, nine in non-life insurance and six in both life and non-life insurance. Breakdown by ownership shows that 19 companies were in majority foreign and seven in majority domestic ownership. 100% Ownership structure 80% 60% Majority domestic priv ate ownership 40% 20% Majority state and public ownership 0% Majority foreign ownership Non-lif e insurance premium Lif e insurance premium Total assets Employ ment As a result of successful privatisation in the past period and the entry of foreign companies based on greenfield licences (11 companies since 2005), foreign-owned companies maintained their dominant share in life premiums (92.5%), non-life premiums (61.1%), total assets (66.7%) and employment (65.6%). Other market participants The insurance sales network also included 16 banks licensed for agency erations, 77 legal entities, 117 natural persons entrepreneurs, as well as 11,418 natural persons licensed to engage in insurance agency/brokerage. 2 2 As at 7 April NATIONAL BANK OF SERBIA 2010 Annual Report 7

8 Insurance portfolio structure In 2010, total insurance premium amounted to RSD 56.5 bln (EUR 536 mln or USD 713 mln) 3, up by 5.6% in nominal terms relative to the previous year. Quarterly movements in total premium Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 RSD bln Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Non-life premium accounted for 83.5% of total premium, while the share of life premium rose from 14.7% in 2009 to 16.5% in 2010 thanks to the 18.7% increase in life insurance premium relative to the previous year. Only five types of non-life insurance accounted for 75% of total portfolio (accident insurance, motor insurance, insurance of property against fire and other hazards, other types of property insurance and motor liability insurance). Third party liability, which in 2006 overtook the lead from property insurance, retained its position in 2010 with a 33.3% share in total portfolio. Third party liability was offered by 11 insurance companies in It is expected that the implementation of the new Law on Compulsory Traffic Insurance, as well as secondary legislation regulating the bonus-malus system, will lead to further growth in this particular segment of the Serbian insurance market. The expected effects of the financial crisis manifesting in 2009 as the drop in non-compulsory insurance premium eased in late Namely, the year ended with a nominal increase in property and full coverage motor vehicle insurance premium. 3 At the NBS middle exchange rate as at 31 December NATIONAL BANK OF SERBIA 2010 Annual Report

9 Notwithstanding the 3.7% premium growth, the share of property insurance plunged further down to 22.1% in Along similar lines, full coverage motor vehicle insurance, which recorded the strongest growth rates until end- 2008, saw a 0.3% rise in premium and a drop in share from 14.2% in 2009 to 13.5% in Total premium according to the type of insurance in 2009 and % 14.7% 14.6% 16.5% 14.2% 13.5% % % 34.1% 33.3% In terms of their respective shares in total premium, insurance companies may be classified into three groups. The first comprises three companies accounting for more than 15% of the total, the second includes five companies with a premium share of less than 15%, and the third group includes 14 companies with a premium share of less than 3%. This classification points to a downward trend in portfolio concentration in place since 2007 when the Herfindahl Hirschman index indicated moderate concentration (1,523). In 2010, the Herfindahl Hirschman index equalled 1, Share of insurance companies in total premium by peer group 1) Group Share in % I Number of insurance companies Share in % II Number of insurance companies Share in % III Number of insurance companies 1) Excluding reinsurance companies. Source: National bank of Serbia Property insurance Motor v ehicle insurance Lif e insurance Motor v ehicle liability Other non lif e insurance 4 HHI up to 1000 indicates that there is no market concentration. NATIONAL BANK OF SERBIA 2010 Annual Report 9

10 It is noteworthy that the major part of total non-life insurance premium (67.8%) relates to the first group of companies, whereas the major part of total life insurance premium (47.2%) relates to the second group. Balance sheet total and balance sheet structure Balance sheet total Measured by the balance sheet total of insurance and reinsurance companies, the volume of insurance sector operations reached RSD bln in 2010, up by 18% from a year earlier. Balance sheet total of insurance companies in RSD mln, 2010 AS, 1386 Merkur, 741 Аxa life, 485 Societe G, 282 Globos, 1273 Wiener, DDOR, Wiener Re, 2298 Milenijum, 1627 DDOR Re, 1389 Energoprojekt, 1127 Triglav Kopaonik, 3208 Delta Re, 1653 Takovo, 3908 Alico, 385 Sava, 2793 Basler non-life, 798 Dunav, Sava life, 267 Basler life, 437 Dunav Re, 3001 Uniqa non-life, 4087 AMS, 2485 Delta, Grawe, 9097 Uniqa life, 3282 Structure of assets As at 31 December 2010, current assets kept the dominant share in total assets of insurance companies 60.9% (of which 34.3% referred to short-term financial investments and 9.6% to premium receivables), while fixed assets accounted for 39.1% (of which 20.8% long-term financial investments and 17% property). Comparison with the year 2009 when current assets accounted for 57.4% (with short-term financial investments making up 28.2% and premium receivables 9.7%) and fixed assets for 42.6% (with property making up 19.6% and long-term financial investments 21.8%) shows that the structure of assets remained broadly unchanged, apart from slower growth in property relative to 10 NATIONAL BANK OF SERBIA 2010 Annual Report

11 long-term investments and faster growth in short-term investments relative to receivables. During the last two years, short-term financial investments accounted for the largest portion of assets. On 31 December 2010, their share stood at 34.3%, up by 43.6% from the previous year. Structure of assets as at 31/12/2009 Structure of assets as at 31/12/2010 Remaining 8.2% Cash 12.5% Real estate 19.6% Short term f inancial inv estment 28.2% Long term f inancial inv estments 21.8% Receivables 9.7% Remaining 9.3% Cash 9.0% Real estate 17.0% Short term f inancial inv estment 34.3% Long term f inancial inv estments 20.8% Receivables 9.6% Structure of liabilities On 31 December 2010 technical reserves accounted for 60.7% and capital and reserves for 27.5% of total liabilities. The year 2010 saw continued upward trend in the allocation of funds into technical reserves. Capital rose by 10.5% to RSD 32.2 bln and technical reserves by 17.5% to RSD 71.1 bln. Within technical reserves, the strongest increase was recorded for mathematical reserves (37.1%). Reserves on outstanding claims (10.2%) also went up, though at a somewhat slower pace than in the prior period. Structure of liabilities as at 31/12/2009 Structure of liabilities as at 31/12/2010 Remaining 9.6% Mathematical reserve 18.8% Remaining 11.7% Mathematical reserve 21.9% Capital and reserves 29.4% Technical reserves 61.0% Unearned premiums 19.7% Outstanding claims 20.8% Capital and reserves 27.5% Technical reserves 60.7% Unearned premiums 17.6% Outstanding claims 19.4% Other technical reserves 1.6% Other technical reserves 1.8% NATIONAL BANK OF SERBIA 2010 Annual Report 11

12 Movements in technical reserves and total premium are a significant indicator of the results of insurance market stabilisation and regulation measures. The chart below (with 2004 as the base year) points to a much sharper growth in technical reserves relative to total premium, resulting mainly from the establishment of technical reserves calculation criteria prescribed by the NBS and from strict monitoring of the adequacy of allocations into technical reserves. This enabled a more realistic assessment of these reserves by the insurers and, by extension, better protection of the interests of insureds and insurance beneficiaries. 700 Movements in total premium and technical reserves, 2004= in index points total premium technical reserves Performance indicators Solvency The solvency of insurance companies depends on the ratio of their technical reserves to the volume of obligations assumed, as well as on the adequacy of guarantee reserves to protect insureds in the event of unforeseen losses, by acting as a buffer for losses not covered by technical reserves. On 31 December 2010, the solvency margin was RSD 14.2 bln, and the guarantee reserve RSD 26.9 bln, with growth in guarantee reserves being more pronounced. The ratio of guarantee reserve to solvency margin stood at % for non-life insurance companies and at % for life insurance companies. 12 NATIONAL BANK OF SERBIA 2010 Annual Report

13 The company s ability to absorb the premium price risk, incidental losses and inadequate risk transfer to coinsurance and reinsurance, etc. (insurance risk) is measured, inter alia, by the ratio of retained premium to total capital. In non-life insurance, retained premium represents the approximate value of the risks assumed and should be sufficient for the payment of indemnity and insurance fees. In the event of inadequate assessment of the premium, inadequate risk transfer to coinsurance and reinsurance or inadequate assessment of other insurance risks, total capital and/or parts thereof are used to cover the guarantee. At the level of all non-life insurance companies in Serbia, the share of retained premium in total capital amounted to %, down from % in This change is attributable to faster growth in capital relative to retained premium and to an adequate level of solvency. The ratio of total capital to technical reserves of life insurance companies edged down from 32.27% in 2009 to 29.41% in 2010, but remained stable. The value of the ratio in 2010 points to the existence of a reserve of around 30% available in the event of inadequate assessment of risks assumed by companies (for which in life insurance, technical reserves are a good approximation). Asset quality To stabilise the insurance market that featured in 2004 a lack of investment security and numerous defaults on obligations to the insureds, in addition to permanent supervision of operations, steps were taken to identify criteria for insurance fund investment, primarily with regard to technical reserves and criteria for the assessment of balance sheet items. The share of intangible investments, property, investment in nontradable securities and receivables in total assets of non-life insurance companies stood at 39.31% and 37.03% in 2009 and 2010 respectively, indicating that companies improved their ability to settle obligations and that the above types of investments grew at a slower pace than total assets in As regards life insurance companies, the above share fell from 10.66% in 2009 to 8.87% in 2010 reflecting nominally higher growth in total assets relative to growth in the above types of assets. In addition to ensuring that a company is able to maintain the premium calculation at a level adequate for payment of damages, it is also necessary to provide for premium collection. Otherwise, an insurer may face the possibility of defaulting on obligations to the insureds. Regulations on the assessment of balance sheet items, supervision of payment of damages by the NBS, as well as improved companies business practice (payment of damages rather than compensation of damages with NATIONAL BANK OF SERBIA 2010 Annual Report 13

14 premium outstanding) resulted in a positive ratio of premium receivables to total contracted premium. While this ratio for non-life insurance companies equalled 23.88% in 2004, in 2010 it came at 11.27%. In 2009, it was slightly lower (10.64%) due to the impact of the economic crisis. The share of receivables in total premium for life insurance companies declined from 12.75% in 2009 to 11.67% in Coverage of technical reserves In order to protect the interests of the insureds and third damaged parties and to ensure timely payment of damage claims, insurance companies need not only allocate adequate technical reserves but also base their investment-related decisions on adequate consideration of the schedule of payment obligations, profitability of investment and its dispersion. Relative to 2009, the coverage of technical reserves of non-life insurance companies shows an improvement, evident since Q Namely, based on data submitted by those companies, the coverage of technical reserves by the prescribed types of assets was % in 2010 compared to 94.19% in The coverage of technical reserves by the prescribed types of assets for life insurance companies remained broadly unchanged at %. Overall, non-life technical reserves were for their major part covered by deposits with banks (32%), government securities (24%), cash holdings (14%), insurance premium receivables (9%) and tradable shares (6%). The structure of life insurance technical reserves was dominated by investment in government securities (59%), followed by deposits with banks (30%). Relative to 2009, the share of investment in government securities declined as series of frozen foreign currency bonds fell due for payment. Reinsurance Reinsurance and coinsurance provide for the so-called risk off-setting and the protection of insurers against major or massive losses that may jeopardize insurers operations. As regards the portion of risk retained, the company s capital is used as a buffer for unforeseen events and inadequate premium prices. The share of earned net premium in total earned premium points to the extent of risks transferred to reinsurance and coinsurance. Relative to 2009, this indicator for non-life insurance declined to a lesser degree from 88.49% to 85.89%. In terms of insurance types, the percentage of risk transfer to reinsurance is the largest in aircraft liability insurance and aircraft insurance, followed by 14 NATIONAL BANK OF SERBIA 2010 Annual Report

15 legal costs insurance, financial loss insurance, insurance of property against fire and other hazards and general liability insurance, which corresponds to the nature of operation of those insurance types and the volume of risks assumed. As regards life insurance companies, this indicator revolved around 98%. High values of the indicator were a result of the transfer of a portion of pure risk premium to reinsurance, while the investment portion (as a significantly larger portion of life insurance premium) remained in the insurer s portfolio. Profitability As an indicator of price policy and adequacy, i.e. sufficiency of premiums for the settlement of obligations arising from insurance contracts and adequacy of risk transfer to reinsurance and coinsurance, the earned net loss ratio of the Serbian insurance market (ratio of earned claims retained to earned net pure premium) equalled 73.55% in 2010 and was more favourable compared to 2009 when it stood at 76.65%. Unfavourable net loss retention in 2010 was generated in loan insurance due to a rise in damages in respect of a court verdict on old insurance contracts of one insurance company. Return on assets (ROA) for non-life insurance companies climbed from 0.74% in 2009 to 1.62% as a result of a strong increase in return. Life insurance companies recorded a positive ROA (0.28%) for the first time in Upward trends continued in 2010 and ROA reached 0.89%, driven largely by the growth in returns of companies active in the life insurance business for a longer period of time. The Serbian insurance sector as a whole recorded a positive net result and a positive ROA of 1.44%. Liquidity To be able to settle its liabilities, an insurance company must meet strict asset-liability maturity matching requirements as well as follow marketability standards and maintain the quality of its assets. Given the unpredictability of the size and timing of individual damage claims, a company must carefully plan the structure of its assets for the purpose of meeting not only obligations under damage claims, but other obligations as well. The ratio of short-term assets (current assets less inventories) to short-term liabilities for non-life insurance companies increased from % in 2009 to % in The coresponding ratio for life insurance companies rose from % in 2009 to % in NATIONAL BANK OF SERBIA 2010 Annual Report 15

16 The level of this ratio indicates there are sufficient liquid assets for the settlement of short-term liabilities. High level of short-term assets less inventories is due primarily to life insurance companies investment in securities issued by the government and central bank. Conclusion Comparable indicators show the following changes in the insurance market in 2010 relative to 2009: - Total balance sheet assets of the insurance sector rose by 18% to RSD bln; - Capital increased by 10.5% to RSD 32.2 bln; - Technical reserves gained 17.5% (continuing the trend begun in 2009 higher amount of technical reserves than premium) and were fully covered in both life and non-life insurance; - Total premium went up by 5.6% to reach RSD 56.5 bln; - Non-life insurance continued to account for the major part of total premium (83.5%). Motor third party liability insurance recorded an increase in premium, just as non-compulsory insurance such as property insurance and full coverage motor vehicle insurance, which declined in the previous year under the impact of the global financial crisis; - The share of life insurance in total premium rose from 14.7% in 2009 to 16.5% in 2010, remaining still far below the EU-27 average (around 61% in 2009); - As in 2007, market concentration measured by the Herfindahl Hirschman Index was moderate, with a tendency to decline further; - The number of insurance companies remained unchanged (26), as well as insurance sector employment (11,142). Insurance companies should focus on the following key areas: corporate governance (implying, inter alia, a well-developed system of internal controls), improvement of risk management procedures and investment assessment techniques, promoting transparency, good business practices and fair dealing with clients, as well as education of prospective clients. This will contribute to the strengthening of client trust and the creation of conditions conducive to further development of this segment of the financial system. 16 NATIONAL BANK OF SERBIA 2010 Annual Report