XPRIMM: How strong was the impact of the financial crisis on the Macedonian economy and the social conditions? As far as the insurance industry is concerned, which were the most affected business lines?
Klime POPOSKI: I would say that the insurance sector in the country is in a dynamic phase of development whose consequences are felt despite the financial crisis. Recent statistics show that over the last two years and in the first half of 2013 the most dynamic development in the insurance sector was perhaps recorded by the countries of Central and Southeastern Europe. This is due to the stable macroeconomic situation in the country, as well as to the foreign direct investment, or the entry on the market of several insurance companies based in the EU during the financial crisis, which contributed to increasing the supply of the insurance market.

In terms of the insurance business, all lines of business have increased except for the motor Casco insurance as a direct consequence of the fall in sales of new cars and reduced intensity offer car loans and leasing arrangements. On the other hand, the biggest factor in the development of the insurance market in terms of the impact of the financial crisis was life insurance, property insurance, accident insurance and travel insurance.

XPRIMM: Macedonia is currently going through the various stages of its EU accession process. Is the Macedonian financial market prepared for this process? In what way do you think will the future EU accession of the country influence the insurance market development?
K.P.: A strategic priority of all citizens in Macedonia is joining the EU family. For this purpose, in the overall financial system reform adjustments are also made to the overall regulation of the requirements of EU directives and the best international standards in the area of financial supervision are applied.

The main insurance law in Macedonia (Law on Insurance Supervision) incorporates the insurance principles and standards of the International Association of Insurance Supervisors (IAIS), as well as the EU Insurance Directives. The Law regulates the establishment and operation of insurance undertakings, risk management, the role of authorized actuaries, financial reporting, internal and external auditing, activities of insurance brokerage and insurance agency, the supervision over insurance undertakings, the procedure for decision-making by ISA, the operations of insurance and reinsurance pools, cooperation with supervisory agencies and EU authorities, as well as the penalty provisions.

The main challenges in the EU accession, which will have an impact on the insurance market, are related to the implementation of the Solvency 2 directive, the issue of freedom of services and freedom of establishment, and above all, the MTPL liberalization. Regarding the last one, ISA has organized a project with the World Bank for MTPL liberalization, which will help setting the path to better meeting this goal.

Also, in terms of accessing to the EU, we must bear in mind that 11 out of the 15 companies on the Macedonian market are daughter companies of insurance companies based in the EU. That's why we believe that the insurance market is ready to join the EU. In addition, I believe that joining the EU single market will bring additional competition because other insurance companies from the EU may find their interest in the market.

XPRIMM: How important is the role played by the foreign financial groups in your market? Is Macedonia a market easy to access by foreign investors? Is there still room for newcomers?
K.P.: Foreign investors recognize that the Republic of Macedonia has great potential. The market is easy to access taking into consideration that attracting FDI is a major commitment of the Government. Macedonia is high on the list of 'Doing business' and the procedure for licensing in ISA is transparent, and deadlines are always respected.

This is obvious from the fact that insurance companies in the Republic of Macedonia are owned by foreign entities from the financial sector (87.6% in 2012), which are partially or fully present in 14 of the 15 insurance companies on the market.

To summarize, the legislation establishes no entry barriers and restrictions for the entry of new investors. In circumstances where we have positive growth rates in the market, especially in the area of life insurance, we expect interest in new players, for which we already have announcements.

XPRIMM: Looking back to 2012 and the first half of 2013, what do you think are the most important events on the Macedonian insurance market?
K.P.: There are a growing number of newly formed insurance brokerage companies and licensed agents and brokers who have an increasingly important role as intermediaries in the distribution of insurance. The development of the distribution channels impacted on the increase in premiums for life insurance. In this regard, one of the new insurance agencies in 2012 is a commercial bank, which is promoting the bancassurance as a new distribution channel in the country.

Also of particular importance in this period was the development of the project to establish a market for insurance against catastrophic risks and natural disasters, briefly known as EUROPA Re. The project is in its final stage, and some insurance companies have expressed interest in contracting with EUROPA Re.

XPRIMM: Life insurance recorded significant growth rates both in 2012 and the first half of 2013. Which are the reasons for the growth? Considering this dynamic, but also the still low share that life insurance is holding in the market portfolio, what chances are there for this market segment to gain a significant position of the market?
K.P.: In 2012 the share of life insurance achieved gross written premiums in the amount of 598.1 million (2011: 496.9 million), representing an increase of 20.35%. However, in the first half of 2013, the same class of insurance gross written premiums grew by 25.88% or a total of 321.2 million (1H2012: 253.1 million).

This result is primarily due to the emergence of two new companies on the life insurance market (the business was started in 2011) and the growing business of the existing companies for life insurance.

The major impact of the positive results for life insurance has increased the awareness in general insurance, particularly life insurance. In this field, ISA is consistently taking action for growing the public's financial literacy by issuing leaflets and brochures for certain classes of insurance in order to develop public awareness of insurance. In 2012, the ISA issued a leaflet for life insurance which contains information about basic terms used in insurance and more detailed explanations of this kind of insurance.

Despite all these factors, the increase in the portfolio will primarily depend on the business strategies of companies on life insurance.

Our expectation is that by the end of 2013 life insurance will exceed the 10% market share in the overall market and will see continuous growth in order to reach the European average.

XPRIMM: A good dynamic was also recorded for the "damages to property" class, especially in the beginning of 2013. At the same time, the "fire" insurance class recorded in 1H2013 a significant drawback after the positive evolution in 2012. How do you comment?
K.P.: The property insurance is organized in two lines of business, namely "Property insurance against fire and other hazards" and "Other property insurance classes". ISA recently adopted a bylaw that defines how the division of premiums should be made by lines of business. Previously, the companies made the division differently, while some made a complete separation of risks, and some grouped the GWP using the first risk as a reference. Given the relationship of the risks of these two lines of business, we consider that the critical time hasn't passed yet for full implementation in the practice of insurance companies. Because of that, I do not want to comment distinctly on the dynamics in these two lines of business. The best indicator of the movement of the property line is if observing the dynamics of the total property insurance.

In fact, if we look at GWP collectively for property insurance, we notice an increase of around 12 % in 2012. According to the latest data, after the second quarter of 2013, this trend continues to increase by about 8 % compared with 2Q, 2012.

What we especially appreciate is the increase of 30 % noted in 2013 for individual property insurance, which we think is largely due to the activities undertaken by the ISA in order to promote financial literacy by issuing brochures, holding direct meetings with potential consumers of insurance project for catastrophic risks, etc.

XPRIMM: How much is Macedonia exposed to Nat Cat risks, especially to earthquake and floods risks? What can you tell us in respect of the insurance coverage for these risks?
K.P.: According to statistical data about Macedonia's exposure to catastrophic risk due to earthquake and floods, it is clear that the country is exposed to these risks.

Unfortunately, the development of insurance against these risks is very low. To put it in numbers, only about 5 % of the total premiums for property insurance is covering the insurance of these risks. On the hand, we see a products insufficient offer by the insurance industry. These products are currently offered on our market only as a supplement to the basic property products, i.e. there are no stand-alone products. On the other hand, there is certainly a weak demand. As a result, these products are expensive and therefore uninteresting for both claimants and bidders.

Therefore, we are having high expectations from the Europa RE project and we think that penetration will increase when that products that are in the final stages of preparation are available on the market. The project requires great preparation in order for Europe Re's team to learn the specifics of the Macedonian market, then to develop a precise risk mapping of the country, and most importantly, to offer the public a quality product for the required premiums.

In line with the perspectives of the catastrophic risk insurance, I would like to add that in Macedonia's overall economy agriculture has a very important place. In order to stimulate the purchase of agricultural insurance, the Government awarded the highest subsidies of premiums compared with most European countries. This policy will continue in the future, which means there is a stimulus to the side of the purchase demand for agricultural insurance, which should be used by insurance companies.

XPRIMM: What are, in your opinion, the expectations for the end-of-year figures? Will the Macedonian market close the current year with a positive trend in underwriting?
K.P.: In the second quarter of 2013 there has been an increase of 6.32% in GWP compared with the GWP achieved in 2Q 2012. Regarding life insurance, an increase of 25.88% can be noted in comparison with the same period of last year, which is just an extension of the existing trend. Moreover, I am glad that the increase of 4.73% in the non-life insurance is due to the increase in voluntary insurance, especially property insurance. From here, I think that 2013 will end with a positive trend in both segments of the insurance.

Also, we expect the insurance companies to improve profitability during 2013, given that in the previous 3 years, most of the companies showed losses in their operations due to undertaking major reforms in order to comply with legal requirements imposed by ISA.

XPRIMM: What changes are still needed on the Macedonian insurance market?
K.P.: In life insurance there is an initiative for tax incentives that should have a positive impact on the further development of this segment, for which there are ongoing discussions with the Ministry of Finance.

In this regard, I think the growth in life insurance can be increased through a change in the banking regulation that would allow the release of provisions on loans that are collateralized by life insurance policies.

Closer cooperation between the insurance companies and the commercial banks should recognize an interest on both sides and contribute to the development of bancassurance as an alternative sales channel.

In terms of investment opportunities, we believe that for the insurance companies the further development of the government securities is very important in order to enable a better quality investment policy, and therefore better risk management. It primarily involves a wider range of securities with longer or different maturities, issued both in dinars or a foreign currency clause. In terms of diversification and a lower-yield environment, I think the emergence of municipal bonds can have a very important role.

In the area of non-life insurance expectations are aimed at creating and offering innovative and complex products that cover more risks, designed for the needs of small- and medium-sized enterprises. In Macedonia, there are over 90,000 registered legal entities and more than 90 % are small- and medium-sized. Also, the use of alternative distribution channels (ex. Internet, mobile phones), will be more efficient, faster and informative in offering products to the household sector.

Finally, in order to improve financial education in the country provisions for signing a memorandum of cooperation among all financial regulators are under way. They are aimed at shaping a strategy for financial literacy on the benefits and purposes of insurance, information that is bound to systematically reach the general public.