INSURANCE SUPERVISION DEPARTMENT INSURANCE SECTOR IN SERBIA Third Quarter Report 2012 November, 2012
National Bank of Serbia Contents: 1. Insurance market...3 1.1 Market participants...3 Insurance companies...3 Other market participants...4 1.2 Insurance portfolio structure...4 1.3 Balance sheet total and balance sheet structure...6 Balance sheet total...6 Structure of assets...6 Structure of liabilities...7 2. Performance indicators...8 2.1. Solvency...8 2.2. Quality of assets...8 2.3. Coverage of technical reserves...8 2.4. Liquidity...9 3. Motor third party liability...9 4. Conclusion...10 2
Insurance Sector in Serbia Third Quarter Report 2012 1. Insurance market 1.1 Market participants Insurance companies In the third quarter of 2012, the insurance market comprised 28 insurance companies, one more than in the same period a year earlier, dealing with non-life insurance. Twenty-four companies engaged in insurance activities only and four in reinsurance activities only. Of the insurance companies, seven are exclusive lifeinsurers, eleven exclusive non-life insurers, while six provide both life and non-life insurance. Breakdown by ownership shows that of 28 insurance companies, 21 were in majority foreign and seven in majority domestic ownership. Non- life insurance premium, in RSD bln Life insurance premium, in RSD bln 3Q 2012 30 3Q 2012 8 3Q 2011 20 10 0 3Q 2007 3Q 2011 6 4 2 0 3Q 2007 3Q 2010 3Q 2008 3Q 2010 3Q 2008 3Q 2009 3Q 2009 Majority state and public ownership Majority f oreign ownership Majority domestic priv ate ownership Since foreign-owned insurance companies arrived in the market (13 since 2005) and obtained greenfield licences, they continue to record a dominant share of 90.7% in life insurance premium in the third quarter of 2010. They accounted for 57.1% of nonlife insurance premium, 68.5% of total assets and 64.7 of total employment. 3
National Bank of Serbia Other market participants In addition to insurance companies, the sales network also comprised 19 banks, 82 legal entities, 107 entrepreneurs, as well as 13,851 natural persons licensed to engage in insurance agency/brokerage. 1 1.2 Insurance portfolio structure In the period from 1 January to 30 September 2012, total premium came at RSD 47.5 bln (EUR 413 mln or USD 534 mln), 2 up by 6.7% from the same period a year earlier. The share of non-life insurance in total premium was 82.4%, while the share of life insurance rose from 15.8% in Q3 2011 to 17.6% in Q3 2012 as life insurance premium increased by 18.9% in this period. Total premium according to the types of insurance in Q3 2011 and Q3 2012 15.7% 15.8% 16.2% 17.6% 12.4% 11.3% Q3 2011 Q3 2012 24.3% 24.5% 31.8% 30.5% Property insurance Full cov erage motor v ehicle insurance Lif e insurance Motor v ehicle liability Other non lif e insurance The insurance premium structure in the period 1 January 30 September 2012 resembled that from the same period last year, with motor third party liability (MTPL) insurance accounting for the largest share of total premium (30.5%), followed by property insurance against fire and other hazards and other property insurance (24.5%) and full coverage motor vehicle insurance (11.3%). Non-life insurance premium rose by 4.4% in the abovementioned period relative to the same period 2011. Property insurance premium and mandatory MTPL insurance premium increased by 7.5% and 2.5% respectively, while full coverage motor vehicle insurance premium fell further by 3.3%. 1 As at 20 November 2012 2 At the NBS middle exchange rate as at 30.09.2012 4
Insurance Sector in Serbia Third Quarter Report 2012 Insurance companies are classified into three groups according to their respective share in total premium. The first group comprises two companies accounting for over 15% of total premium, the second 60.0% 40.0% 20.0% 0.0% Share in total premium by peer group, Q3 2012 50.3% 35.0% 14.7% f irst group - 2 companies second group - 5 companies third group - 17 companies includes five companies accounting for under 15% and the third comprises 17 companies accounting for under 3% of total premium. This points to a decline in portfolio concentration from the same period a year earlier, when the first group of three companies covered 64.8% of the market, the second, comprising five companies 24.1% and the third, comprising 15 companies 11.0%. The Herfindahl Hirschman index, calculated by summing up the squares of the respective market shares or, in this case, balance sheet totals of all insurance companies, points to moderate market concentration which is likely to decrease further. The HHI declined from 1144 in Q3 2011 to 1138 in Q3 2012. 5
National Bank of Serbia 1.3 Balance sheet total and balance sheet structure Balance sheet total Balance sheet total of insurance companies increased in Q3 2012 to RSD 140.7 bln, up by 13.4% on Q2 2011. Balance sheet total of insurance companies in million RSD as at 30/09/2012 AS, 1120 Axa lif e, 579 Аxa non-lif e, 775 DDOR, 16405 DDOR Re, 1316 Merkur, 1189 Energoprojekt, 969 Grawe, 11838 Societe Gen, 412 Takov o, 4171 Triglav, 3867 MetLif e, 411 Globos, 1015 Dunav, 30220 Sogaz, 750 Wiener, 15014 AMS, 2582 Basler non-lif e, 986 Basler life, 460 Delta, 24056 Dunav Re, 2845 Delta Re, 2449 Milenijum, 1978 Sav a, 2721 Sava life, 349 Uniqa lif e, 4063 Wiener Re, 3289 Uniqa non-lif e, 4841 Structure of assets As at 30 September 2012, fixed assets accounted for 50.8% of total assets of insurance companies (of which 35.3% referred to short-term financial investments and 14.2% to property). Current assets made up 49.2% of total assets (of which 21% referred to short-term financial investments and 12.6% to receivables). Comparison with Q3 2011, when current assets accounted for 52.2% (of which 23.8% were short-term financial investments and 12.1% were receivables), and fixed assets for 47.8% of total assets (of which 30.4% were long-term financial investments and 16% was property), indicates that the trends first observed in Q1 2011 are still in place. In Q3 2012, long-term financial investments recorded significant growth relative to Q3 2011 (31.5%) and accounted for a dominant share of assets. In the same period, receivables slightly increased their share in current assets, while the share of property in fixed assets decreased. 6
Insurance Sector in Serbia Third Quarter Report 2012 Structure of assets as at 30/09/2011 Structure of assets as at 30/09/2012 Real estates 16.0% Remaining 10.2% Cash 7.4% Short term fin. invest. 23.8% Receivables 12.1% Long term fin. invest. 30.4% Real estates 14.2% Remaining 10.4% Cash 6.5% Short term fin. invest. 21.0% Receivables 12.6% Long term fin. invest. 35.3% Structure of liabilities As at 30 September 2012, technical reserves accounted for 64.4% and capital and reserves for 23.5% of total liabilities. In Q3 2012 allocations to technical reserves continued to be dominant. Capital increased by 1.9% and came at RSD 32.6 bln. Technical reserves gained 18.8% to reach RSD 89.6 bln. Mathematical reserves increased at a rate of 34.1% and accounted for the largest share of technical reserves. Structure of liabilities as at 30/09/2011 Structure of liabilities as at 30/09/2012 Remaining 12.3% Capital and 26.1% Technical 61.5% Mathematical reserve 22.8% Unearned premiums 18.5% Outstanding claims 18.5% Other technical 1.8% Remaining 12.1% Capital and 23.5% Technical 64,4% Mathematical reserv e 27.0% Unearned premiums 17.1% Outstanding claims 18.2% Other technical 2.1% 7
National Bank of Serbia 2. Performance indicators 2.1. Solvency The solvency of an insurance company depends on the size and composition of its liquidity, ratio of its technical reserves to the volume of undertaken liabilities and sufficiency of its guarantee reserve to protect policyholders in the event of unforeseen losses, i.e. to act as a buffer for losses not covered by technical reserves. On 30 September 2012, the solvency margin came at RSD 16.5 bln and guarantee reserve at RSD 28.8 bln. The ratio of guarantee reserve to solvency margin stood at 181.29% for non-life insurance companies and at 178.39% for life insurance companies. 2.2. Quality of assets The share of intangible investments, property, investment in non-tradable securities and receivables (as types of assets difficult to collect) in total assets of companies engaged primarily in non-life insurance stood at 38.09% in 2011 and 35.03% in Q3 2012, which indicates that the companies ability to settle obligations did not change to any great degree. The share of the above types of assets for companies engaged primarily in life insurance remained at a satisfactory level, declining from 8.01% in 2011 to 4.81% in Q3 2012. The change in the value of this indicator was prompted by a nominal decline in the above types of assets. 2.3. Coverage of technical reserves In order to protect the interests of the insured and third damaged parties and ensure the timely payment of damage claims, insurance companies need not only allocate adequate technical reserves but also invest their assets, depending on the type of insurance they provide, taking due account of the maturity of obligations and investment profitability and dispersion. Technical reserves of companies engaged primarily in non-life insurance were adequately covered in 2011, but Q1 2012 witnessed incomplete coverage of technical reserves. As shown by data submitted by insurance companies, this is a continuation of the trend already in place the coverage of technical reserves by prescribed types of assets in Q3 2012 stood at 95.31%, while in 2011 it was 99.35%. 8
Insurance Sector in Serbia Third Quarter Report 2012 In companies engaged primarily in life insurance, coverage of technical reserves by prescribed types of assets stood at 100.65% in Q3 2012 compared to 101.51% in 2011. Overall, in Q3 2012 technical reserves of non-life insurance companies were for the most part covered by government securities (32%), deposits with banks (23%), cash holdings (12%), investment real estate (10%) and insurance premium receivables (8%). Technical reserves of life insurance companies were covered primarily by investment in securities (85%), followed by deposits with banks (8%). 2.4. Liquidity To be able to settle its obligations, an insurance company must ensure an assetliability maturity match and make sure its assets are marketable and of adequate quality. As the size and timing of individual damage claims cannot be predicted, an insurance company must carefully plan the composition of its assets so as to be able to meet, first, its obligations under damage claims, and then, all other obligations. The ratio of short-term assets (current assets less inventories) to short-term liabilities for companies engaged primarily in non-life insurance was 100.64% in Q3 2012 and 105.17% in 2011. The ratio of short-term assets (current assets less inventories) to short-term liabilities for companies engaged primarily in life insurance was 304.6% in Q3 2012 and 179.77% in 2011. As movements in this indicator reveal, companies have sufficient liquidity for settling short-term obligations. 3. Motor third party liability In Q3 2012, twelve insurance companies engaged in mandatory motor third party liability (MTPL) insurance. After declining in late 2011, MTPL premium picked up in Q1 2012. The upward trend continued in Q3 2012, with a rise of 2.5% relative to the same period in 2011. The portfolio concentration increased in this segment as in Q3 2012 three insurance companies with the largest share in MTPL premium accounted for 62% of the market, as opposed to 53% in the same period last year. 9
National Bank of Serbia 4. Conclusion The positive trend in the insurance market was kept in Q3 2012 relative to Q2 2011, with following changes in place: - Insurance sector balance sheet total rose by 13.4% to RSD 140.7 bln; - Capital increased by 1.9% to RSD 32.6 bln; - Technical reserves gained 18.8% and were fully covered in life insurance and incompletely covered in non-life insurance; - The share of investment in government securities and money market instruments increased; - Total premium gained 6.7% and came at RSD 47.5 bln; - Non-life insurance continued to account for the largest share of total premium (82.4%); Non-life insurance premium increased by 4.4%, with MTPL insurance and property insurance rising and full coverage motor vehicle insurance declining; - The share of life insurance in total premium increased from 15.8% to 17.6%; - Market concentration, as measured by the Herfindahl Hirschman index, was moderate and likely to fall further; - The number of insurance companies rose from 27 to 28, while total employment went up by 0.5% to 11,388. Insurance companies should focus on the following key areas: corporate governance which, among other things, implies an adequate system of internal controls, improvement of risk management and investment valuation techniques, promoting transparency, good business practices and fair client relations, and efforts to educate potential clients. All this will reinforce client confidence and help develop this segment of the financial system. It is also very important to ensure consistent compliance with the regulations on compulsory traffic insurance, particularly with regard to the timely settlement of claims, insurance administration costs and application of the bonus-malus system. Also important are education and preparations for putting in place a new methodological framework for risk management Solvency II. Adequate risk management is vital for the success of insurance business. This has been placed at the core of the Solvency II Directive which requires insurers to identify and quantify all types of risks they are exposed to in their operations and to manage them more effectively. It introduces more sophisticated solvency requirements in order to ensure that insurance companies have sufficient capital to offset the risks they are exposed to. According to the draft Serbian Insurance Law, the requirements from the Directive will be applied after Serbia joins the EU. 10