Johannes HARTMANN: Overall, 2014 was a strong year for VIG Re. While, compared to previous years, we have been moderate by growing our premium income by 4.7% only, we succeeded to grow our profit by 21.3%. The main success factor for this is that we only underwrite business which we understand and that we focus on clients which are best in class and value our partnership approach.
XPRIMM: Is your company's area of interest exceeding the CEE region? If so, how much is the CEE area contributing to your business volume?
J.H.: VIG Re is the specialist for reinsurance in CEE. Apart from Austria, this is our home market and our clients benefit from our in depth market insights and understanding of local needs. Today we serve 158 clients in CEE, they make up for 54.7% of our premium income accounted in 2014. Besides CEE, we also do business in Austria, Germany and Turkey.
XPRIMM: How do you comment the results achieved across the CEE region in 2014 from a reinsurer's point of view?
J.H.: CEE reinsurance faced a couple of challenges in 2014. Albeit from a global perspective the year was quite benign, Western Balkans suffered in May the most severe floods ever reported. Later in July the Sofia region was hit by a severe hailstorm to a magnitude nobody had been accounting for.
We are all aware of the extremely difficult political and economic situation in Ukraine. Beyond the human tragedy, just from an economic perspective, especially the massive depreciation of Grivna meant distress to many insurance companies.
Besides these extreme events, CEE markets show signs of economic recovery, while growth in insurance still remains subdued in most countries.
XPRIMM: Which are the most challenging aspects of a reinsurer activity in the CEE, possibly in need of further improvement? What are the expected measures in this regard?
J.H.: Although CEE is often perceived as a high growth market, this is not necessarily true for reinsurance. Reasons for this are the ongoing market consolidation in combination with centralization of reinsurance and higher retention levels. In combination with the inflow of additional capital driven by subdued investment yields, these are the main reasons why reinsurance supply is currently outnumbering demand, resulting in a distinct buyer's market.
While this is obviously good news for insurance companies - and there are good reasons to believe that these favorable terms may continue for the next years - it is a challenge for reinsurers. In order to outperform in reinsurance, three elements are key: superior market intelligence, underwriting discipline and cost leadership. We are very confident that VIG Re is well positioned in this regard. Furthermore we believe focusing on long term partnerships pays off better than short term opportunistic decision making and is appreciated by our clients.
The second specific element is that "CEE" is often misperceived as a homogenous market. The differences are often not only in economic terms but also in soft facts such as language, history and business culture that are often underestimated. Being local with our headquarters in Prague and most of our staff recruited in the region is definitively an advantage.
There are of course other issues which should be mentioned, such as the unhealthy level of competition, over-regulation of the industry or the challenge of low interest yields. But these are rather global challenges and I know no market where companies would not complain about ruinous competition.
XPRIMM: Which are in your view the most "promising" business lines in the CEE market and how is your company intending to take advantage of the opportunities offered by these lines?
J.H.: The risk landscape of our society is changing fundamentally and fast. Cyber crime, intellectual property, reputational risk are already today for many companies and even individuals a bigger threat than a mere fire loss, water leakage or small car collision. The insurance industry will have to find solutions in order to stay relevant as an industry. This being said, CEE will probably not be the market were demand will hike and solutions be tested first.
The CEE markets are still lacking substantially behind in insurance penetration for most of the classical insurance products, where demand will grow with a growing middle class. There is still a lot of growth potential even in lines such as motor, property or life insurance.
Probably the biggest untapped growth potential is the private health insurance, but this would be call for a strong political support which is unlikely to happen in the near future. Despite this, health insurance is an area, which we identified as a strategic focus, and support our clients in product development and underwriting.
The biggest opportunity of growth for VIG Re however, is that reinsurance buying is undergoing nowadays a fundamental change. Insurance companies are becoming more sophisticated as they understand their needs in risks and capital management much better. They make their decisions how to optimize their reinsurance in a much better informed way. Reinsurance is not anymore a foreign word to the chief financial officer or the risk manager but they do not know how to utilize reinsurance as a strategic tool to optimize their business. And as a provider you have to understand the impact of a specific solution on the relevant specific accounting standards and capital model.
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. In your opinion which are the most important challenges in this business area? Have you seen good examples in this respect across the region?
J.H.: As in all CEE markets motor insurance is the largest line and a commodity, it has been always targeted to achieve growth targets but was very rarely the main driver of profits. Insurance companies who want to succeed in this segment have to outperform in respect of claims management, superior client segmentation empowered by intelligent underwriting system and sales excellence. And at the best to have the stamina to downsize the business if it is obvious that even when you are the best in class you will not make a profit. That might be currently the case in some CEE countries.
XPRIMM: Property insurance 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 from the reinsurance perspective.
J.H.: Similar to health insurance, natural catastrophes is another area where politics is pivotal. There is little incentive to buy insurance or even to care for risk prevention as long as politicians publicly promise to compensate for losses as this buys them credit for the next elections. Mandatory systems like in Romania are appealing, but penetration will remain low as long as no sanctions are applied in case of non-compliance. There is no simple answer to the best approach of country risk management, and probably there is not "one fits all" solution.
From a reinsures' perspective we know that there are more natural catastrophes to come, also in our region. Frequency will increase as well as severity of the events. Probably we will also see more unprecedented events, like the example of the hailstorm in Sofia. The good news for reinsurers is that there will be more business. The good news for insurers is that reinsurance will be available at very attractive terms.