DIFFERENTIATION OF THE EUROPEAN INSURANCE MARKET (Polish example)

Aniela Mikulska Department of Management and Economics Technical University of Gdańsk DIFFERENTIATION OF THE EUROPEAN INSURANCE MARKET (Polish example) 1. Introduction The 2004 enlargement of the European Union by another 10 member countries introduced a change in the quality of Europe s economic relations. The integration of social, political and economic spheres of life entailed a number of consequences, such as the possibility of direct comparisons of living standards across member countries or effectiveness of legal regulations. It also helped to devise and implement programmes aimed at narrowing the civilization gap between the old 15 EU countries and the new members 1. As part of any economy s financial system, the insurance market plays a significant part in stimulating economic growth. Its effective functioning within the EU will facilitate introducing the idea of Uniform Insurance Market. The present state of affairs, however, shows a substantial diversity in the development of the insurance market among the EU member countries. 2. Insurance market s influence on economic growth On the initiative of the CEA 2, the federation of insurers and reassurers, a report was issued in 2006 concerning the active role of the insurance sector in stimulating economy and employment 3. The report presents, in a multifaceted way, the possibilities of applying the insurance system s functions in compliance with the principles of the strategy. The focus is both on engaging the financial markets of the countries involved, together with their legal systems, and also in the microeconomic dimension on ways of effective use of the financial surplus owned by households and enterprises. The extensive cooperation between the private insurance sector and public institutions, stipulated in the report, may contribute to curbing the negative effects of the current social and economic trends. One of such trends is, for example, the ageing societies of highly developed countries, which, combined with the growing inefficiency of the existing pension schemes, results in decreasing economic growth. Economic growth is stimulated by the insurance sector by 4 : improving the financial standing of enterprises under insurance protection; influencing entrepreneurs attitudes by encouraging innovative solutions and competitiveness-oriented investment; creating offers of life, old age or health insurances to significantly relieve the public sector; accumulation of capital; efficiently and without endangering the liquidity of the entrusted assets, an institutional investor is there to mobilize the financial potential necessary for functioning and development of economy (access to credit); 1 1st January 2007 the EU was also joined by Bulgaria and Romania 2 European Insurance and Reinsurance Federation 3 CEA, Insurance sector s contribution to economic growth and employment in EU (2006); original report on: www.cea.assur.org, Polish version on: www.piu.org.pl 4 CEA, op. cit., s. 8

promoting the idea of risk management, educational activities aimed at raising people s insurance awareness; encouraging stable, long-term consumption (developing trust in the future by safeguarding against possible effects of unfortunate events). In its final part, the report enumerates macro and microeconomic objectives to be met in order to make the EU economy competitive to the USA. This list is preceded by suggestions to politicians responsible, among other issues, for the scope of legal regulations imposed in particular member states that often tend to hamper the development of the insurance sector. Furthermore, the reports mentions research results showing a clear relation between the level of the insurance market and the developing potential of economy 5. 3. Poland as an example of a poorly developed insurance market within the Union The situation of insurance markets varies largely across the member states. It is the Union s policy to give a lot of attention to regional politics, and in the future the question of the insurance sector influencing the country s potential must be addressed. Poland was chosen as an example of an economy showing a low level of the insurance sector development. It is visibly outdistanced by the average index noted in the highly developed economies, often referred to as the old fifteen. Poland s accession partners of 2004 are in a similar situation. The insignificance of the new members contribution to the European insurance market is presented in graph 1. period from June 04 399 514 547 995 insurances section II insurances section I May 04 389 077 541 935 0 200 000 400 000 600 000 mln USD Graph 1. Gross premium of EU member states by sections (w USD m). Source: Szewieczek D., Wieczorek M.: Sektor ubezpieczeń gospodarczych jako ogniwo systemu finansowego w wybranych krajach Unii Europejskiej. [in:] Ubezpieczenia. Red. T. Szumlicz, SGH, Warszawa 2005, s. 25 The situation depicted in the graph (i.e. only minor changes in the collected premium value despite the substantial increase in the European insurance market following the ten new accessions) provokes comparing the results achieved by the 15 directly to the data of particular developing markets, as the average results of the 25 member states are considerably lowered by the scores of the new members. 5 CEA, op. cit., s. 7

An attempt at unifying the 2005 data for the EU and other OECD countries with the data acquired in previous years failed due to the fact that many published materials contain information expressed in different currencies (USD or Euro). Apart from that, there is the problem with identifying the real indices for 2004, as the integration took place in the middle of the accounting (calendar) year, and even earlier the accession perspective had undoubtedly a meaningful impact on the markets of the EU candidates. Regrettably, the data published in the PIU 6 report referred to a large extent to the 1995-2003 period, which made no supplementing possible. These arguments suggest the need for using, for the purposes of this study, the 2003 data of the old EU countries to provide a background for presenting the current state of affairs in the new members insurance markets, with Poland as an example. Poland, The Czech Republic and Hungary are similar member states in terms of insurance market parameters. In comparative analyses, one of the most commonly used indices is the penetration index that specifies relations between the gross imputed premium and the GNP of the countries in question. This index for EU countries before its enlargement, in 2003, was around 9 per cent, while only 3 per cent in Poland. Poland s situation was not much different from that of the other EU candidates a similar penetration index was noted in Hungary and Slovakia, and in The Czech Republic it was higher 7. According to OECD, in 2004 the penetration index in the UE-15 countries equalled 8,8 per cent, and on average 3.5 per cent for the UE-10 group 8. Poland s results are close to this average both in 2004 and 2005: 3 and 3,25 per cent respectively 9. The average share of property (non-life) insurance premium in the GNP of the richest EU states was in 2004 3.4 per cent, while for the ten new accessions it was on the level of 2.1 per cent 10. The data collected by KNUiFE for Poland indicate its share at 1.62 per cent in 2004 and 1.69 in 2005. The penetration index for sector I (life) insurances is 5.4 per cent for the EU-15, and 1.4 per cent for the EU-10. Its Polish equivalent was 1.38 per cent in 2004 and 1.55 per cent in 2005. 2005 2004 1,55 1,38 1,69 1,62 premium share in GNP - section I premium share in GNP - section II 2003 1,33 1,61 0 0,5 1 1,5 2 2,5 3 3,5 Graph 2. Premium s share in Poland s GNP in 2003-2005 (in per cent) Source: KNUiFE 6 Polish Insurance Chamber: www.piu.gov.pl ; 7 Szewieczek D., Wieczorek M.: Sektor ubezpieczeń gospodarczych jako ogniwo systemu finansowego w wybranych krajach Unii Europejskiej. [in:] Ubezpieczenia. Red. T. Szumlicz, SGH, Warszawa 2005, s. 26. 8 USA 10.6 per cent; CEA, Wkład sektora ubezpieczeń we wzrost gospodarczy i zatrudnienie w UE (2006); original report on: www.cea.assur.org, Polish translation on: www.piu.org.pl, s. 5. 9 Insurance Market 2005, Financial Supervision Committee, www.knf.gov.pl ; 10 USA 6.2 per cent; CEA, op. cit.

In addition to the obvious observation that the insurance penetration of the Polish market is on a very low level, the difference should be stressed between the structure of the collected premium when compared to that of the fifteen EU states. Namely, Section II premiums dominate in Poland, although the fast development of life insurances might foreshadow a close change so that, as is the case in highly developed countries, life insurances will generate a larger part of the total premium. Table 1. Gross imputed premium Poland in 2004-2005 (in PLN thousands) 2004 2005 dynamics 2005/2004 Section I 12.768.972 15.336.161 120,1% Section II 14.888.771 15.689.442 105,4% Total 27.657.743 31.025.603 112,2% Source: PIU: www.piu.org.pl The 2004 gap between the Union s developed states and the new accessions could also be illustrated by the gross value of the imputed premium per capita (density index). In 2003, the premium was, for the EU-15, 1,410.3 USD in section I and 974.8 USD in section II. In comparison, the Polish average premium paid by a citizen was 59.9 USD in section I and 102.2 USD in section II. Just like in the case of economic growth, also in analyzing the per capita insurance premium of the new member countries, a visible rising trend can be noticed, fuelled by the development potential of their economies 11. The possibilities of boosting the highly developed economies are, however, clearly limited. Table 2. Per capita imputed premium in Poland in 2003-2005 (previous year=100) 2003 2004 2005 dynamics 03/02 dynamics 04/03 dynamics 05/04 Section I 280,29 330,98 398,34 112,73 118,08 120,35 Section II 343,10 387,30 407,52 103,16 112,88 105,22 Total 623,39 718,29 805,86 107,25 115,22 112,19 *) values in PLZ calculated Into the real values of 2005 using the inflation index published by GUS Source: own study based on PIU data; http://www.piu.org.pl 11 See Appendix- data for 1996-2005

125 120 115 110 section I section II Total 105 100 2003 2004 2005 Graph 3. Dynamics of the per capita imputed premium in Poland (previous year=100) Source: own study based on PIU data; http://www.piu.org.pl Another area for comparison to provide arguments for the necessity of a long-term strategy to stimulate economic growth and support both the economies and insurance markets of the new Union members is the range of the insurance sector s investment into economy. The value of assets invested in the EU by insurers in 2003 exceeded 5 billion EUR. Insurers are one of the largest institutional investors. The value of their assets in relation to the GNP varies in particular member states in the UK it exceeds 100 per cent of the GNP, in Holland 50 per cent, in Portugal 20 per cent (the EU average it is over 50 per cent). In the new member states this share is below 10 per cent of the GNP, which is a direct consequence of the insurance market s low level of development 12. In addition to controlling the scale of invested assets, insurers make strategic allocation decisions. In highly developed Union countries, stocks hold an essential share of insurers investments. In contrast, in the new countries capital surplus is usually invested in debt securities 13. Table 3. Structure of main deposits made by insurers in Poland (valid for end of 2005, in per cent) Specification Section I Section II Total Debt securities and other fixed income securities 50,51 61,37 54,55 12 Czekaj K., Szkarłat A.: Portfele inwestycyjne sektora ubezpieczeń w Polsce i wybranych krajach Unii Europejskiej [in]:ubezpieczenia.. Red. T. Szumlicz, SGH, Warszawa 2005, s. 33-42. 13 see: Czekaj K., Szkarłat A.: Portfele inwestycyjne sektora ubezpieczeń w Polsce i wybranych krajach unii Europejskiej [in]:ubezpieczenia. red. T. Szumlicz, SGH, Warszawa 2005, s. 36-39. Similar trends concerning the structure of assets are observed in the USA, Canada and Japan; see: Jończyk B., Ogrodnik H.: Podstawowe trendy występujące w działalności lokacyjnej zakładów ubezpieczeń w wybranych krajach Unii Europejskiej i OECD [in]:ubezpieczenia. red. T. Szumlicz, SGH, Warszawa 2005, s. 51-60.

Time deposits 4,10 3,90 4,03 Participation units and investment certificates of trust funds 0,90 4,21 2,13 Stocks and shares in combined units 2,29 16,27 7,49 Other stocks and shares 3,89 5,85 4,62 Loans 1,47 5,90 3,12 Real estate 0,28 1,85 0,86 Other deposits 0,20 0,65 0,37 Life insurance net assets with the insurer s deposit (investment) risk 36,34 0,00 22,83 Total 100,00 100,00 100,00 Source: own study based on KNF data; www.knf.gov.pl The structure of deposits undergoes changes in line with the binding legal regulations and attractiveness of particular instruments of the money and capital market. The differences in the choices made by investors in various countries may also result from their differently structured insurance portfolios. Summarizing the comparisons made, what appears to be worth noticing is the big differentiation among EU members, and not just in the perspective of the EU-25 or EU-10 (or the present EU -12), but within the EU-15 itself with its welldeveloped financial and insurance markets. 4. Perspectives of using the insurance market potential of the new member countries for raising the competitiveness of European economy Attitude to risk is basically formed by macroeconomic circumstances and possibilities of predicting their changes: - business outlook and pace of economic growth; - incomes level of market subjects; - macroeconomic policy (its social and fiscal aspects); as well as microeconomic ones: - level of satisfying the need for security (subjective and individualized assessment); - level of insurance awareness; - habits of risk limiting actions (insurance, prevention); - undervalued assets of companies, no real possibilities of providing common and complete insurances. The actions of market subjects and their attitudes to risk handling are strictly determined by the society s level of insurance awareness. This awareness is reflected in the financial balance of insurance companies measured in the gross imputed premium.

Awareness is an acquired quality, an intellectual category related to the resources and efficiency of the mind, a reflection of social and economic consciousness. As such, it is of primary importance in constructing a society of knowledge. It may only be raised by using a number of persuasion strategies, such as: high general level of education; high level of economic education; widespread and common insurance education; wide range of insurance advising; professionalism of insurance intermediaries; high quality of insurance services on offer; intensive economic publicity from insurance companies; relatively high attractiveness of insurances against other security guarantees 14. In the scope of 2003-2005 (statistical data are only available for his period) it is yet too early to estimate the influence of the EU enlargement on the European insurance market. The accelerated economic growth of the new accessions and the development of the insurance market cannot be sustained for long without raising the insurance awareness of citizens. Long-term trends are difficult to predict, although the forecasts for the EU and its every single member are promising taking into account their economic, political and social situations. The forecasts for Poland 15 indicate a growing inclination of the society for insuring, which is an effect of: growing affluence of society, higher individual consumption and value added in services, rising attractiveness of saving (perspectives of securing the future through insurance investment products), development of financial markets improved banking and insuring products on offer, developing capital markets At the same time, the forecasts stress the low level of insurance awareness of the Poles, which can seriously undermine spreading the effects of the economic growth onto the insurance system. The guidelines arising from these forecasts concern possible ways of taking advantage of the positive economic transformations. For the insurance sector it means current analysis of the situation on financial markets to the effect of restructuring insurance companies portfolio of financial investment in order to maintain the present risk level and high return rate 16. The changes also apply to the savings structure of the Poles, who gradually renounce keeping their financial surplus on bank deposits and choose diversification of risk using available financial instruments. 14 Szromnik A.: Negatywne procesy zmian rynku ubezpieczeniowego w świetle koncepcji błędnych kół. Wiadomości ubezpieczeniowe Nr 7-8/2000, s. 3-15; compare: Bariery rozwoju polskiego rynku ubezpieczeń. Red. Sułkowska W., Zakamycze 2000, s. 72-102; 15 Forecast for the insurance market for 2005-2007, PIU; www.piu.gov.pl 16 Forecast, op. cit., s. 93.

Graph 4. Savings structure of Poles forecast Source: study by Union Investment TFI S.A.[in]: Prognoza rynku ubezpieczeniowego na lata 2005-2007, PIU; www.piu.gov.pl, s. 93. Analyses of changes in the dynamics of gross imputed premium show that in insurance sector I an effective annual premium growth of 13 and 14 per cent is to be expected in years 2006-2007 respectively. In sector II the effective growth for these years is to be 4 and 5 per cent 17. Summary The growth of European economic competitiveness is possible through implementing effective use of production resources, raised productivity, transfer of technologies, building a society of knowledge-based development. New accessions increase the development potential of the EU as a whole, but the use of his potential depends largely on stimulating the entrepreneurial spirit in developing countries. The insurance sector has a lot to offer in this respect. The basic manifestation of efficient performance of insuring is, after all, takeover of risks characteristic of a given economic activity and feeding the financial system with insurance funds. Bibliography: 1. Wkład sektora ubezpieczeń we wzrost gospodarczy i zatrudnienie w UE, CEA; original report: http://www.cea.assur.org/, Polish translation on: http://www.piu.org.pl/ 2. Szewieczek D., Wieczorek M.: Sektor ubezpieczeń gospodarczych jako ogniwo systemu finansowego w wybranych krajach Unii Europejskiej, [in:] Ubezpieczenia, red. T. Szumlicz, SGH, Warszawa 2005 3. Rynek Ubezpieczeń 2005, Komisja Nadzoru Finansowego, http://www.knf.gov.pl/ 4. Czekaj K., Szkarłat A.: Portfele inwestycyjne sektora ubezpieczeń w Polsce i wybranych krajach unii Europejskiej, [in]:ubezpieczenia, red. T. Szumlicz, SGH, Warszawa 2005 17 Forecast, op. cit., s. 95.

5. Jończyk B., Ogrodnik H.: Podstawowe trendy występujące w działalności lokacyjnej zakładów ubezpieczeń w wybranych krajach Unii Europejskiej i OECD [in]:ubezpieczenia, red. T. Szumlicz, SGH, Warszawa 2005 6. Szromnik A.: Negatywne procesy zmian rynku ubezpieczeniowego w świetle koncepcji błędnych kół, Wiadomości Ubezpieczeniowe Nr 7-8/2000 7. Bariery rozwoju polskiego rynku ubezpieczeń, red. Sułkowska W., Zakamycze 2000 8. Forecast for the insurance market for 2005-2007, PIU; http://www.piu.gov.pl/ Appendix: BASIC INDICES DESCRIBING THE DEVELOPMENT OF THE POLISH INSURANCE MARKET IN 1996-2005 Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Number of insurance companies Section I 15 21 24 31 35 36 37 36 33 32 Section II 31 32 31 36 33 35 36 41 38 37 Total 46 53 55 67 68 71 73 77 71 69 Section I Section II Total 369 865 539 384 909 249 Basic capital (in PLN thousands) 469 789 1 244 1 603 1 884 307 136 855 095 461 854 1 073 1 461 1 638 1 846 199 829 570 180 322 1 862 2 706 3 241 3 730 965 425 275 783 1 323 506 2 042 456 1 938 539 3 980 995 2 118 029 2 086 699 4 204 727 2 116 466 2 088 409 4 204 875 2 211 740 2 518 650 4 730 390 Total foreign capital share in basic capital (in per cent) 18,2% 25,3% 32,7% 50,1% 59,1% 67,8% 71,9% 71,9% 72,1% 72,7% Section I 4 057 996 Gross imputed premium (in PLN thousands*) 5 142 6 095 7 747 8 595 9 051 9 505 828 137 383 173 482 807 10 704 393 12 640 452 15 336 161

Section II Total 7 889 968 11 947 964 10 453 637 15 596 464 11 571 219 17 666 356 12 909 584 20 656 968 12 893 628 21 488 801 12 827 672 21 879 153 12 715 213 22 221 020 13 103 293 23 807 686 14 791 358 27 431 811 15 689 442 31 025 603 Section I Section II Total Gross damages and benefits paid (in PLN thousands*) 1 776 1 910 2 076 2 344 2 664 3 304 4 131 4 938 826 832 704 321 085 884 424 078 4 386 6 241 6 485 7 868 7 847 7 647 7 478 7 341 239 224 221 652 803 565 543 289 6 163 8 152 8 561 10 212 10 511 10 952 11 609 12 279 064 055 925 973 888 449 968 367 6 100 207 8 114 671 14 214 878 7 548 939 8 324 152 15 873 091 Gross imputed premium per capita (in PLN*) Section I 105,02 133,03 157,63 200,43 222,42 234,30 248,63 280,29 330,98 398,34 Section II 204,20 270,40 299,25 333,98 333,65 332,05 332,58 343,10 387,30 407,52 Total 309,22 403,43 456,88 534,41 556,07 566,35 581,22 623,39 718,29 805,86 *) values in PLN calculated into real 2005 values using the inflation index published by GUS Source: http://www.piu.org.pl