XPRIMM: How do you comment the results achieved by your market in 2014 in terms of development and profitability?
Bozana SLJIVAR: It is too early to talk about the financial results of operations in 2014, since, under the Law, insurance companies have a deadline of 4 months after the year's end to submit audited financial statements together with the auditor's report. At the moment, an insight into business results may be acquired only from the perspective of the written premium in the Republic of Srpska insurance market. Preliminary data on the non-life premium indicate that, compared to previous year, the growth of 11% was achieved, and the growth rate of life insurance premium amounted to 17%. However, even such a high rate of growth in life insurance premium has not resulted in a significant change in the structure of the premium, i.e. the share of life insurance premium in the total premium increased from 13.6% in 2013 to just 14.3% in 2014. MTPL premium was increased by 8%, and the share of MTPL insurance premium risen from 62% in 2013 to 67% in 2014.

Data listed above indicate that the growth in the share of life insurance premium and in the share of MPTL insurance premium was achieved at the expense of a decline in the share of voluntary non-life insurance premium.

Low share of voluntary insurance premium in the total premium points out to to significant potentials for growth in the Republic of Srpska insurance market. In addition to improvement in general economic circumstances, any further development in the voluntary insurance market requires more incentive-based laws and regulations, as well as introduction of various forms of mandatory insurance based on the model of well developed European countries and, of course, increase of public awareness regarding insurance products.

On the other hand, the amount of paid claims increased by more than 50%, due to severe flooding in May and August 2014.

From the profitability point of view, it should be mentioned that the negative effect on the profitability caused by the damages from natural disaster in May 2014 is minimized since adequate foreign reinsurance coverage had been provided. Preliminary data show that combined ratio with reinsurance effects is significantly below 100.

XPRIMM: Which are the most challenging aspects of the insurers' activity, possibly in need of further improvement? What are the expected measures in this regard?
B.S.: Raising awareness about the importance of insurance, with an emphasis on non-mandatory and life insurance is a necessity. Efforts should be invested in attempts to reduce the share of MTPL in non-life business.

As already underlined, the reasons for lagging behind should be sought both in the general economic circumstances, such as economic stability, the achieved level of the standard of living and in specific circumstances such as those related to tax exemptions and other incentives, the insurance culture and the low level of financial literacy in the population. One should emphasize that the low levels of development indicators, such as premium per capita etc. show that there is room for growth and development in the insurance market, certainly.

On the other hand, market development depends on more than just the economic conditions and regulatory action - it also depends on factors that are under control of insurance companies and in that regard more proactive involvement of insurance companies is to be expected.

One should point out that, with the objective of market development, financial education and development of insurance culture are increasingly in the focus of the Agency.

For that purpose, the Agency initiated activities of publishing an informational bulletin, with the objective of informing the broader public about the significance of insurance, types of insurance, and ways of contracting and claiming one's rights from insurance. That bulletin is distributed through daily newspapers, consumer associations, etc. Cooperation with universities has also been established in order to raise financial literacy among the youth / students and a team for public education on property insurance has been formed together with the Association of Insurance Companies.

XPRIMM: The motor insurance segment was affected, in the entire CEE region, by a highly competitive environment leading to an aggressive price war and a scarce profitability of the segment. Which is the current situation in your market in this respect?
B.S.: Unfair competition is present here as well but we are still operating under a tariff based system so that the effect on the MTPL profit is not that significant.

Problems relating to the implementation of a tariff based system are complex and had been generated during a long period of time. Expenses and risks management is a weak point for domestic insurance companies. Although the MTPL premium is prescribed by the Law and insurance companies are not supposed to charge less than that, insurance companies still find various methods and channels to spend significant amounts of that premium on discounts provided in the course of insurance acquisition. This indicates that the insurance premium had not been adequately set, based on market principles (it is higher than optimal - balanced), or that insurance companies are not conducting business in a rational manner, as is to be expected from profit oriented economic operators, or it might be both.

All the market participants and institutions are well aware that the current situation in the domestic MTPL market is not sustainable in the long run, but any return to the level of premiums that would be adequate to underwritten risks and necessary for maintaining market stability would represent a long term process, especially having in mind that the public has got used to discounts and low premium. It is in the joint interest of all market participants, the Regulator and the RS government to maintain the stability of the domestic insurance market and at the same time not to prevent fair competition, which is to enable efficient coverage and allocation of risks and resources.

In the domain of MTPL insurance there is the harshest competition, and it often appears in unfair forms. At the beginning of 2014 a draft of the new Law on Mandatory Insurance in Transport was prepared and submitted into the parliamentary procedure in the form of a draft, and after the public debate in which the Agency is to take part, it is expected that the Law will be adopted by the end of 2015.

The purpose of adoption of the Law is to harmonize the legal framework of the Republic of Srpska with the EC Directive 2009/103, and to create regulatory preconditions for initiating the process of liberalization and deregulation of the MTPL market, in accordance with demands of the third directive on non-life insurance 92/49/EEC, which stipulates that no regulations may be adopted that place insurance companies under obligation to obtain prior approval of an external supervisory body for their insurance conditions and tariffs. The draft Law envisages a period of five years for gradual transition to free MTPL premium determination. This way the preconditions will be ensured for facilitating the design of insurance products in the MTPL market in the Republic of Srpska that are tailored to market demands and with a premium that is reflecting the actual risks.

XPRIMM: The ever decreasing new car sales in the crisis and post-crisis years negatively impacted on the motor hull class evolution. How do you comment on this aspect? Are there specific solutions to adopt in order to better deal with car fleets' ageing?
B.S.: Our vehicle fleets are significantly older than those in other European countries. This has a lot to do with low income levels. Our tariff does not include a "age of the car" diversification, which means that the insurance premium is the same for newer and older cars. Even if such diversification were to be introduced into the tariff we do not belive it would have any effect on the age of the vehicle fleet.

XPRIMM: Property insurance - especially in what the dwelling insurance and agricultural insurance are concerned - has still a low penetration across the CEE region, although the frequency and intensity of the weather related events are significantly increasing. Please comment on the current situation in your market.
B.S.: As already mentioned, the Agency has formed a team, including representatives from insurance companies, tasked with educating the general public about the importance and benefits of property insurance.

After the catastrophic floods in May of last year, an ongoing debate has started on whether Government should introduce additional forms of mandatory insurance, on whether there is a need for regional collaboration in that sense, or whether to create insurance pools instead, modeled on the pools introduced by some other countries. Various propositions emerged, starting from conditioning agricultural subsidies with insurance policy acquisitions, to the idea of introducing mandatory catastrophic risk insurance for everyone, through obligatory insurance only for agronomists who received state subventions and even statements that no obligations should be imposed on anyone.

The Agency, within its scope of authority, keeps insurance statistics by types of insurance based on insurance classification harmonized with EU directives. In the context of interpretation of our statistical data, on should clarify that property insurance includes the following (individual) types of insurance: property insurance from fire and natural forces, insurance from other damages to property and collision damage waiver insurance (the so-called kasko insurance), and that within the framework of those types of insurance various natural disaster risks are covered, including the risk of flooding. Furthermore, the risk of flooding is most often covered as additional risk, which means that the mere existence of a property insurance contract for one of the aforementioned types of insurance, does not necessarily mean that the coverage is also contracted for the risk of flooding. Therefore, one cannot directly derive data on the number of contracts on insurance that cover the risk of flooding, i.e. the number of inhabitants with contracted coverage for natural disasters, from the number of concluded contracts on property insurance. The situation is the same in regards to data available on agricultural insurance, as crop and yield insurance represents only one sub-type within a type of insurance called insurance from other damages to property.

However, regardless of the fact that it is not necessary for the purposes of supervision, the Agency has, after those floods, stipulated new reporting forms for analytical monitoring of insurance premium and claims by individual forms of insurance under the type of insurance called insurance from other damages to property.

The data showing that the share of the premium from the type of insurance relating to property insurance from fire and natural forces and insurance of other damages to property in 2014 amounted to just 10% of total premium also speaks volumes on the level of penetration of insurance from natural disasters. If one takes into consideration the fact that the coverage of the risk of flooding is most often contracted as additional risk for which an increase to basic premium is paid, it is certain that the share of insurance premium and the number of contracts on property insurance that cover risk of flooding is significantly lower compared to the piece of data presented above.

XPRIMM: How do you assess the 2015 perspectives? Do you expect some significant changes in the market / legislation etc.?
B.S.: The premium for January 2015 is 7.7% higher than the premium for the same period of last year. The amount of claims paid is significantly lower, but it is still too soon to say how situation will develop. At the moment we are in the process of adopting a new MTPL Law, and preparatory activities are under way for the new Law on Insurance Companies. Based on initial information available to us in 2015, continued growth of the premium is to be expected, together with a continued trend of growth in life insurance sector.

In parallel with the changes in the legal framework, the Agency will direct its regulatory efforts towards raising the level of risk management for the risks to which insurance companies are exposed in their business, as well as towards increasing the demands that are set for the actuarial profession.