Insights. Turkish Insurance Bulletin. Market statistics

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1 Insights January 212 Turkish Insurance Bulletin Our Turkish Insurance Bulletin keeps senior executives around the world up to date with the developments in the Turkish insurance market a market that is still seen as a high-growth insurance market. In this bulletin, we share: The growth in life and non-life gross written premiums (GWP). How the motor casco, motor TPL, fire and natural disasters, and health branches have performed. The market share and ranks of companies writing life, non-life and pension business. Latest news about Turkish insurers, products and regulations. Highlights from the 21 annual Supervisory Board report. Future issues of this bulletin will be delivered on an ad hoc basis to allow for more detailed reporting of emerging trends and new data. Market statistics Looking at the life insurance market, GWP have continued their strong year-on-year increases into the second quarter of 211, which is % higher than the same quarter in 21, this brings the increase for the first half of the year to 28% compared to the first half of Note: growth rates are shown throughout in terms. Figure 1. GWP life insurance ,9 1,4* Figure 2. GWP non-life insurance ,98,976 6,7* Q1 Q2 Q/4 * Estimate Figure. Non-life GWP motor casco Figure 4. Non-life GWP motor TPL ,27 1,6 1,7* 1,6 1,2 8 1,4 1,27 1,* Source: TSRSB, the Association of the Insurance and Reinsurance Companies of Turkey.

2 Insights January 212 Figure. Non-life GWP fire and natural disasters ,* Figure 6. Non-life GWP health * Q1 Q2 Q/4 * Estimate Figure 7. Non-life GWP other ,87 1,1 1,6* Despite the continued steady increases in the premium production, the non-life industry is still struggling to make profits Source: TSRSB, the Association of the Insurance and Reinsurance Companies of Turkey. For non-life insurance, GWPs increased by 6% between the second quarter of 21 and the same period in 211, bringing the half-year increase to 12%. Despite the continued steady increases in the premium production, the non-life industry is still struggling to make profits, particularly in the high volume motor lines of business, as described in our highlights from the 21 annual Supervisory Board report. Motor casco premiums make up around a quarter of total non-life premiums written during the first half of 211. Premiums in 211 Q2 increased at a rate of 4% compared to the same quarter in 21, which is a substantial reduction over the 2% year-on-year increase seen in the first quarter. Motor TPL premiums made up 21% of non-life premiums written during the second quarter of 211 where the market wrote a similar volume to the same quarter in 21. Fire and natural disasters insurance premium share of total non-life premiums remained at 16% in the second quarter of 211. GWPs increased by 4% compared to the same quarter in 21. Health insurance premium share of total non-life premiums was 12% in the second quarter of 211 which has dropped from its seasonal high of 19% in the first quarter. Health premiums increased by % compared to the same quarter in 21. Premiums from other branches increased by 16% for the quarter compared to the previous quarter in 21. The growth for the first half of 211 compared to the first half of 21 was 24%. Market share The life market continues to be dominated by companies with bancassurance distribution. As usual, Ziraat Emeklilik wrote significant business in the first quarter. Cardif Hayat entered the top 1 list with an increase in market share from 1.4% to 2.% since the first quarter. The market share of other companies stayed similar to the previous quarter with small movements. In the non-life market Allianz and Yapı Kredi were the only companies increasing their rankings in the top 1. The top two companies, Axa and Anadolu, kept their rankings with an increase in their market share. The private pensions market is also dominated by companies with bancassurance distribution. Garanti Emeklilik and Yapı Kredi Emeklilik have been competing for the third rank and are now almost identical in size. 2 towerswatson.com

3 Insights January 212 Figure 8. Top 1 life companies by market share Life insurance companies GWP (m TL) Market share Rank Ziraat Hayat ve Emeklilik 9 6.% 1 Anadolu Hayat Emeklilik % 2 Garanti Emeklilik % Halk Hayat ve Emeklilik % 4 Yapı Kredi Emeklilik 8.4% Vakıf Emeklilik 69 4.% 6 AvivaSA Emeklilik ve Hayat % 7 Finans Emeklilik ve Hayat 8.7% 8 Deniz Emeklilik ve Hayat.2% 9 Allianz Hayat ve Emeklilik 9 2.% 1 Top 1 companies 1, % Total life 1,4 The market share and ranks are as at June 211 based on GWP year to date and compared with the previous quarter. Source: TSRSB, the Association of the Insurance and Reinsurance Companies of Turkey. Figure 9. Top 1 non-life companies by market share Non-life insurance companies GWP (m TL) Market share Rank Axa % 1 Anadolu % 2 Allianz 62 8.% Ak % 4 Groupama % Yapı Kredi 44 6.% 6 Güne s 46.% 7 Eureko 88.% 8 Ergo 4.% 9 Mapfre Genel 247.4% 1 Top 1 companies, % Total non-life 7,7 The market share and ranks are as at June 211 based on GWP year to date and compared with the previous quarter. Source: TSRSB, the Association of the Insurance and Reinsurance Companies of Turkey. Figure 1. Pension companies by market share Pension companies Assets under management Market share Rank Anadolu Hayat Emeklilik 2, % 1 AvivaSA Emeklilik ve Hayat 2,7 2.8% 2 Yapı Kredi Emeklilik 2,17 16.% Garanti Emeklilik ve Hayat 2, % 4 Vakıf Emeklilik % Ing Emeklilik 711.% 6 Groupama Emeklilik % 7 Allianz Hayat ve Emeklilik 2.9% 8 Fortis Emeklilik ve Hayat 419.1% 9 Aegon Emeklilik ve Hayat 18.8% 1 Finans Emeklilik ve Hayat 81.6% 11 Ergo Emeklilik ve Hayat 77.6% 12 Deniz Emeklilik ve Hayat 64.% 1 Total 1,78 1% The market share and ranks are as at June 211 based on AUM and compared with the previous quarter. Source: EGM, The Pensions Monitoring Centre. towerswatson.com

4 Insights January 212 Market news International credit rating agency Standard & Poor s raised Turkey s local-currency sovereign credit rating by two notches to BBB- in September, meaning that the country s credit rating rose to investment-grade for the first time in its history. US-based Standard & Poor s released a statement saying: The local-currency upgrade reflects our view of continuing improvements in Turkey s financial sector and the deepening of local markets. The agency also confirmed Turkey s foreign-currency sovereign rating at BB with a positive outlook for the future. Regulations The Supervisory Audit Board has been conducting risk-based audits since 28. The scope of the audits has now been reviewed with the aim of bringing the audit standards in line with the international standards and ensuring consistency with the Treasury s recently issued regulation regarding the supervisory monitoring and audit of the insurance industry. According to the new regulation, the Treasury will prepare auditing guidelines for various audit areas within the next year. A new circular has been published regarding the application of the detection, notification and reduction of insurance-related malpractice. The circular covers fraudulent activities by company personnel, non-disclosure and fraud by policyholders, and mis-selling. The Treasury requires that all employees of insurance companies, including the board members, attend training on the subject. The content of the training will be determined by the Treasury and the training will be delivered by Segem, the training and development department of the Association of the Insurance and Reinsurance Companies in Turkey. Company news Driven by significant market support, a large Lloyd s delegation travelled to Istanbul for a market development visit in July to explore the market s potential from a direct insurance perspective. The delegation was attended by 4 representatives including brokers and managing agents from the Lloyd s Market, and it was the largest visit of its kind to date. The programme for the July visit included presentations from local economists and opinion leaders as well as representatives from the insurance industry. Following the successful visit, Lloyd s is consulting with the attendees to determine what the most important next steps are, and what Lloyd s can and should be doing in the near future to help support market development activities further. A press conference was held on 18 July 211 to advertise the rebranding of Fortis Emeklilik Hayat, which will continue its operations under the brand BNP Paribas Cardif Emeklilik. The insurer, writing private pensions and life insurance, has been operating in Turkey since 1997 and was acquired by BNP Paribas Cardif in October 21. Garanti Bankası has disclosed to the Istanbul Stock Exchange that it completed the sale of its remaining 2% stake in its non-life insurance subsidiary Eureko Sigorta to Dutch insurer Eureko BV for 7 million following the approval from the relevant authorities. The Competition Board has approved the sale of Denizbank s share in Deniz Emeklilik to Metlife for million. Denizbank had previously announced the sale in June. DenizBank will continue to distribute life insurance and pension products to customers via its branch network through an exclusive agency agreement. The agreement has a term of 1 years and includes a profit-sharing mechanism, which passes a proportion of profit from business written back to Denizbank. Denizbank has also signed a 1-year exclusive agreement with Axa Sigorta to distribute the insurer s non-life insurance products in Turkey for a consideration of approximately 24 million. The agency agreement also entails a profit-sharing mechanism. The transaction close is expected to take place before the end of 211 and is subject to standard regulatory approvals. US insurer CIGNA has received approval to operate as a fully licensed insurer in Turkey. The new entity, CIGNA Hayat Sigorta, will initially offer personal accident and life policies through a variety of direct marketing channels such as the internet and direct response television. The Turkish Catastrophe Insurance Pool (DASK) has appointed US RE Corporation along with its Turkish partner, Türker Insurance and Reinsurance Brokers, as one of the Consortium Brokers to place reinsurance for the Pool s earthquake risk. DASK, a quasi-governmental entity, was created by the Turkish government to provide basic insurance protection against household s property losses caused by earthquakes. The Pool purchases protection for itself up to a limit of 1.8 billion. The general manager of Demir Hayat Sigorta, Ali Ersoy, has announced that they may consider a strategic partnership if there is any willing party to co-operate. 4 towerswatson.com

5 Insights January 212 Appointments Korhan Gürakan has been appointed as the general manager of Dubai Sigorta after the retirement of Çetin Alanya. Gürakan joined Dubai Sigorta in 27 during its establishment and had been working as the assistant general manager responsible for marketing since the company began writing business in 28. Enis Talaşman has been appointed as the vice chairman of the board of HDI Sigorta. Talaşman had been working as the general manager of HDI Sigorta since 29. Orhan Arıkçı has been appointed as the new general manager of the company. Arıkçı was previously working as the Turkey representative of Talanx International, the owner of HDI Sigorta. Uğur Tozşekerli has been appointed as the new chairman of the board of the Pension Monitoring Center (EGM). Tozşekerli is currently the CEO of Aegon Life and Pensions and he will hold his position in EGM for one year. Cemal Kişmir has been appointed as the general manager of BNP Paribas Cardif. Kişmir had been working as the assistant general manager responsible for the retail banking group in TEB since 2. BNP Paribas Cardif signed an exclusive distribution agreement with TEB in April 211. Highlights from the Supervisory Board Report Every year, the Supervisory Audit Board publishes an annual report including the detailed statistics for all insurance and reinsurance companies in Turkey. In this section of our bulletin, we share some highlights from the 21 report. Life Term assurance and yearly renewable term assurance products were the major product types in 21. These were followed by endowment products and annuities. Ziraat Emeklilik, Halk Emeklilik and Yapı Kredi Emeklilik are the major players in the term assurance market and write above 67% of the total term assurance business in the market. Anadolu is the major player in the annuities market with over 98% of share in premium production. The endowment policies lost their popularity after the introduction of the private pensions system in 2 and premiums from in-force policies form the majority of the production from endowments products. Anadolu Hayat Emeklilik, Allianz Emeklilik and MetLife Alico were the major players in the endowments market and write over 8% of the market. Figure 11. GWPs for life branch in 21 9% Term assurance % ly renewable term assurance 22% Endowments 6% Annuities Figure 12. GWPs in 21 according to product types and year written The new business annual premium equivalent (APE) is not disclosed in the Supervisory Board Report, neither a split of regular and single premiums written. However, a split of premium production by new business and existing business is available. According to Figure 12, the premium production is mainly flowing from the new policies written for term assurance, yearly renewable term assurance and annuity products. Ziraat Emeklilik, Garanti Emeklilik and Vakıf Emeklilik are the major players in the yearly renewable term assurance market and write nearly 6% of the total yearly renewable term assurance business in the market. 2 ly renewable term assurance Term assurance Endowments 8 99 Annuities GWP from policies written in 21 GWP from policies written before towerswatson.com

6 Insights January 212 Figure 1 shows the main distribution channels of life insurance companies. Banks sell the majority of life insurance products issued by life insurers in the form of credit-linked products attached to mortgages and other loans. According to Turkish regulations, rider benefits attached to life insurance policies are also considered within the life branch. Rider benefits are becoming more popular in the life insurance market. During 21 the number of policies with death benefits increased by 27% whereas the number of rider benefits increased by %. At the end of 21, 6% of life policies have disability cover, 9% have unemployment cover and 1% have critical illness cover. Figure 14 shows the number of rider benefits provided as riders to the death benefits. The market leader for writing rider benefits in the life branch is Garanti Emeklilik, writing 62% of all rider benefits provided. Garanti Emeklilik is followed by Yapı Kredi and Finans Emeklilik, both companies having around a 1% share in the rider benefits market. Figure 1 shows a split of rider types and the market share of the leading five insurers, according to the total number of rider benefits provided. The life insurance companies paid reinsurers 7% of their GWPs in 21 and they also recovered 7% of the claim amount from reinsurers. Figure 16 shows the percentage of loss paid by reinsurer over the sum assured according to the benefit types. The companies tend to reinsure a greater proportion of the rider benefits, particularly unemployment and critical illness. Figure 1. Life GWPs in 21 according to distribution channel Figure 14. Number of rider benefits attached to life products Disability % 8% 6% 4% 2% % 4 Disability Critical illness 12 Critical illness 9 Figure 1. Market share for rider benefits Unemployment Unemployment Anadolu Hayat Emeklilik Deniz Emeklilik Finans Emeklilik Garanti Emeklilik Yapı Kredi Emeklilik Others Other Other % Bank 18% Agency 12% Direct 1% Broker Figure 16. Use of reinsurance 6% % 4% % 9 2% 1% 14 % Death Disability Critical illness Unemployment Loss paid by reinsurer over sum assured 6 towerswatson.com

7 Insights January 212 Pensions There were more than 2. million pension contracts written as at the end of 21. Ignoring the participants who own more than one contract: 7% of the participants were aged between 2 and 44. 9% of the contracts paid premiums on a monthly basis. 4% of the participants were females. The main distribution channel for the pension contracts by volume is the direct sales force channel. The direct sales forces include sales people and corporate account managers employed by the pension provider. Some of these sellers operate within bank branches, getting leads from bank employees, while others create their own leads. Private pension assets under management were above 12 billion TL as at the end of 21. The majority of pension assets are invested in Turkish government bonds, reflecting the relatively high returns provided and the risk-averse nature of the participants. It is well known that the major issue of the pension providers is the persistency of pension contracts. It is not possible to perform a policy year-based lapse analysis from the available data. However, we can calculate indicative annual lapse rates based on the portfolio movements published in the Supervisory Board Report. Figure 19 displays the indicative lapse rates for the total industry and also the leading five providers according to the assets under management. It appears that there was a significant improvement in the indicative lapse rates during 21. The other source of poor persistency is the contracts on premium holiday or paid-up contracts. The Supervisory Board Report does not include any information regarding the proportion of contracts on premium holiday. However, according to the Individual Pensions Progress Report issued by the Pensions Monitoring Center, over % of contracts in force as at the end of 21 skipped at least three monthly premium payments. Figure 17. Number of pensions contracts according to distribution channel Figure 18. Asset types 74% Direct 16% Bank 9% Agency 1% Other 6% Government bonds 1% Deposits 1% Repo 12% Equities 2% Other Figure 19. Indicative annual lapse rates 2% 2% 1% 1% % % Although the number of pension contracts sold by bank branches is only 16%, this is misleading since the leads by bank branches given to the direct sales agents of the pension providers are not represented within bank sales but direct sales. Anadolu h/e AvivaSa e/h Garanti e/h Vakıf Emeklilik Yapı Kredi Emeklilik Total towerswatson.com 7

8 Insights January 212 Non-life Figure 2 shows the operating ratios for the non-life insurance market between 26 and 21. Figure 2. Non-life market gross operating ratios by reporting year 12% The reporting year loss ratio is based on the paid claims and the change of the outstanding claims reserves during the year. The outstanding claims reserves have each increased between 27 and 21. Total outstanding claims reserves carried forward from the 26 accounting year were TL 2.1 million, which was 48% of the claims paid in that year, of these approximately one quarter each was for motor TPL and casco. The motor TPL reserves have increased significantly and, in 21, they were above TL 1.7 million, over three times their 26 value. In total the reserves carried forward from the 21 accounting year were TL million, which was 68% of the claims paid in that year. 1% 8% 6% 4% 2% % Loss ratio Expense ratio (excluding commission) Commission ratio The allocation of these outstanding reserves to underwriting or accident year is not available and therefore it is difficult to assess the profitability of individual years. For example, if the ultimate claim amounts for accidents that happened in 29 were reassessed in 21 resulting in an increase in expected claim amounts, the profit in 21 would be reduced instead of 29. Increases in reserve amounts might indicate that claim amounts for prior accident years are being increased. The expense ratio excluding the commission payments has been increasing slightly steadily since 26 from 1% up to 1% in 21. The commission ratio has averaged 1% in four of the five years; 28 reported a lower commission ratio of 9% due to an accounting change from a written commission basis to an earned commission basis. Figure 21 shows the reporting year gross loss ratios for the main four lines of business. The pattern of loss ratios is relatively stable for casco and health, whereas TPL and fire show more volatility between 26 and 21. The fire branch has historically seen a significantly better loss ratio compared to the other major lines of business: its loss ratio has been approximately 4%, with a significantly higher ratio of 64% in 29. The poor 29 experience is mitigated by reinsurance recoveries. In 21, 27% of the gross non-life premiums written were ceded to reinsurers and 19% of the claims payments were recovered. As shown in Figure 22 the proportion of premium ceded to reinsurers is greatest for fire business, with over 6% of premium ceded. This proportion includes premiums ceded to DASK for compulsory earthquake insurance. Figure 21. Gross loss ratios for main lines of business 14% 12% 1% 8% 6% 4% 2% % Figure 22. Proportion of premium ceded to reinsurers 7% 6% % 4% % 2% 1% % Casco TPL Fire Health 27 Total Casco TPL Fire Health Proportion of premium ceded 8 towerswatson.com

9 Insights January 212 The agencies were the largest distribution channel for the main lines of business in 21. Figure 2 shows the premium production by each distribution channel. The business written by agencies ranges from 47% for health branch to 9% for motor TPL. Banks, which have the second highest premium production for fire and natural disaster line, raised 27% of the premium income for this line. This is mainly because the banks require mortgage customers to have household insurance, and it is often easier for a customer to purchase insurance from the bank providing the mortgage. Figure 2. Premium production by distribution channel 1% 8% 6% 4% 2% As discussed in the quarterly figures above, premiums for all classes of non-life business have been increasing. For the motor branches we have analysed these increases in terms of vehicle numbers, insurance penetration and average premiums, all three of these measures increase between 29 and 21, with increases in average casco premiums being particularly significant. % Casco TPL Agencies Banks Brokers Direct sales Fire Health Figure 24. Number of vehicles and number of motor policies Number of vehicles 16, 14, 12, 1, 8,.7% % % 4.% 9 4.4% 8% 6, 4, 7.1%.8% 1.% 2, Casco TPL Number of vehicles Figure 2. Average premiums Average premium (TL) % % -8.7% 7.7% 4 9.% 6.% CPI index 2.6%.6% 9.6% Casco TPL CPI towerswatson.com 9

10 Insights January 212 TPL is compulsory, and the majority of vehicles are covered. The penetration rate for TPL has been slowly improving year on year: for 21 it is 77%, which is still well below 1%. The penetration rate for TPL is more consistent regionally, with three-quarters of cities between 66% and 8% penetration. There are significant differences between regional casco penetration rates. İstanbul has the highest penetration rate for casco at 46%, compared to the national average of 2% and a minimum of %. In 21 İstanbul alone wrote over one-third of the casco policies; however, the penetration rate for the rest of Turkey is increasing more rapidly. Figures 26 and 27 show bridges of GWPs for motor casco and TPL from year to year. In 21, GWP has increased by 18% for TPL and 19% for casco branches when compared to 29 s figures. As Figures 26 and 27 show, although both the increase in the number of vehicles and increase in the penetration rate have significant effects, the main driver is the increase in the average premium for both lines of business. However, these premium increases are not significantly above the 9% inflation shown in the Turkish consumer price index and it is therefore questionable whether the 21 price increases will significantly reduce the losses currently reported in motor insurance lines of business in Turkey. Figure 2. GWP movements for motor TPL GWP,,.4% 2, 2, 1, GWP in 29 Number of vehicles 2.% Penetration rate Figure 24. GWP movements for motor casco 9.6% Average premium GWP in 21 It is questionable whether the 21 price increases will significantly reduce the motor casco and TPL loss ratios currently reported in motor insurance. GWP 2, 2,1.4% 1,9 4.6% 7.7% 1,7 1, GWP in 29 Number of vehicles Penetration rate Average premium GWP in 21 Further information For further information, please contact your Towers Watson consultant, or Süha Alıcı suha.alici@towerswatson.com Evrim Köksal Arkut evrim.koksal.arkut@towerswatson.com Chris Halliday chris.halliday@towerswatson.com Özlen Kurt ozlen.kurt@towerswatson.com 1 towerswatson.com

11 Insights January 212 About Towers Watson Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With 14, associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson is represented in Turkey by Towers Watson Danışmanlık Limited Şirketi. The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, eu.unsubscribe@towerswatson.com with the publication name as the subject and include your name, title and company address. Copyright 212 Towers Watson. All rights reserved. TW-EU January 212. towerswatson.com