Market for motor third party liability insurance in selected countries of South East Europe

23 April 2015 —
The motor third-part liability insurance represents the most important insurance line of business, both in the developed and the developing countries. The legal framework, premium and reserving based on actuarial projections, guarantee funds, information systems, and reinsurance techniques all are crucial for the development of a healthy MTPL insurance system. In countries in transition, the normal practice is to employ prescribed premiums, with policy conditions being set by the government. As markets mature, countries should move toward greater freedom in setting premiums, thus leading to a more efficient allocation of risk and resources.

The significance of the MTPL insurance may be perceived based on the market share of this line of business in the overall insurance market. For the selected SEE countries, one may ascertain that still the most important part of the insurance market belongs to the motor third-party liability premiums, and there have been no important changes in the past in the overall market share of this line of business. Only in the case of Croatia, there is a decreasing trend, from 32.26% to 27.53%, as a direct effect of the reduction of motor third-party liability tariffs, due to the introduced liberalization. After Croatia, the situation is as follows: Serbia with 33%, Albania with 40%, Montenegro with 45%, Macedonia with 46%, Bosnia and Herzegovina with 48%, and the highest share is found in Kosovo with 71%. (Table 1)


Taking into account the sensitivity of the market liberalization issue, the experiences of countries in the region vary. Currently, of the countries in the region, only Albania and Croatia have a liberalized market for motor third party liability insurance. In Albania, the market liberalization of MTPL insurance was introduced in August 2011, whereas Croatia, after becoming an EU member state in 2013, introduced a liberalized regime and market-based premium for motor third party liability insurance.

The MTPL insurance markets in Serbia, Bosnia, Montenegro, Kosovo and Macedonia does not have market-based pricing for this class of insurance, and have regulated prices. The rationale for the state-defined tariffs is mainly a combination of various arguments:
  • The insurance price, especially in case of mandatory insurance, is considered by the population as the other basic commodities and services (e.g. food, electricity, utilities, etc.); in other words it is part of the household expenses and the Government insists to control it.
  • The insufficiently developed competitive market may create a large gap between the commercial premium and the "pure" premium (loss cost). The state-defined pricing is seen as an opportunity to control the possible monopolistic position.
  • In case of large claims or general worsening of the results from the operations of the insurers, their solvency must be guaranteed by the state, meaning that the state strives and has the right to determine the pricing at an implicit threshold level.
Taking into account the common strategic goal of these countries - EU membership, they are implementing in their national legislation the European insurance directives, including the Motor Insurance Directives. The need to liberalise the MTPL market is imposed with the EU directives concerning the "free movement of insurance services and the right to set tariffs" (Second Directive no. 88/357/EEC from 1980, supplemented by 90/618/EEC, and the Third Directive no. 92/49/EEC from 1992), that affirm the principle of freely setting the MTPL tariffs in all EU Member States. The basis for the previous directives is the First Directive no. 73/239/EEC from 1973. Due to the complexity of this change, the insurance industry was compelled to apply certain necessary steps when transitioning to a liberalised MTPL market, and the examples of some states lead to a conclusion that it is a complex process.

In the last three years in the SEE countries, the motor third-party liability premiums has decreased on average by 1.24%, that is to say in 2014 the total gross written premium was 829,148,416 EUR, 3.51% less than the generated premium in 2013. The largest contribution to this reduction is that of Croatia, having the largest market share of 37% in the SEE region, due to the liberalization process. All other countries have increased their MTPL premiums, with the highest growth in Albania with 81% in 2014 compared to 2013. This large increase in Albania is the result of an increased MTPL tariff, after the huge price decline since August 2011, when the liberalization was introduced.


Measured by the number of MTPL insurance policies sold, there is a growth in all countries on average by 2,10%, with the exception of Serbia. This indicates that the global economic and financial crisis has not affected the use of motor vehicles. An additional factor for the increased number of sold policies is the successful Government actions undertaken for the purpose of reducing uninsured vehicles, such is the case of Macedonia.


In most SEE countries (except Serbia and Albania), there is a declining trend in the average price of motor third party liability insurance due to the following two reasons:
  1. The effect of liberalization of the MTPL insurance market, which in the case of Croatia led to a drastic reduction in the average premium, and if in 2012 the average premium was 200 EUR, in 2014 it was 156 EUR;
  2. The existence of the bonus-malus system (however, not all countries in the region have implemented a bonus-malus system, which is the case of Montenegro and the Federation of Bosnia and Herzegovina. Montenegro started with bonus - malus system since February this year).
On the other hand, there is an increasing trend of the average motor third-party liability premium in Albania and Serbia. In Serbia, the price of motor third party liability insurance is regulated, but in July 2014, pursuant to a request received from the Association of Insurers, the National Bank of Serbia increased the price of motor third party liability insurance by 40%, on average. In Albania, following the liberalization of market for motor third-party liability insurance, in the period between 2011 and 2013 there was a sharp drop in the price of this type of insurance, deterioration the financial health of insurance companies. Therefore, in 2014 there was a major correction upwards in the pricing of motor third-party liability insurance, so if in 2013 the average premium was 55 EUR, in 2014 it was 94 EUR.


Commensurate to the average premium decline, in almost all of the analysed countries, there is a decreasing trend in the average paid claims. Reduced average paid claims are observed in Bosnia and Herzegovina, Serbia, Macedonia, Croatia and Montenegro, while increased average paid claims are observed in Albania and Kosovo.

The lowest average paid claims was in the amount of 969 EUR in 2014 in Kosovo, and the highest average paid claim of 2 2.370 EUR was in Albania. Montenegro has the largest decrease in the average paid claims from 1.978 euros in 2012 to 1.170 euros in 2014.


Very important aspect in the MTPL market analysis of the SEE countries is the profitability, expressed through the combined ratio. It should be noted that there is no data on the combined ratio for Serbia, due to lack of data on the expense ratio, and on the combined ratio for the territory of BiH. Data is available for the Republic of Srpska, being only part of the total market of BiH. According to Table 6, it may be ascertained that the technical results for this insurance line of business show good performance and are a powerful generator for the overall profitability of the insurance industry. With the exception of Macedonia, all other countries in the region have a combined ratio below 100%.

Second important finding is the high level of the expense ratio, which in most countries is greater than the claims ratio, with the exception of Kosovo and Montenegro. However, the difference between the expense and claims ratios in these two countries is very small. This indicates that the insurance companies have high operating costs and high underwriting costs. Considerable portion of expenses relates to direct underwriting costs, which in turn are mainly driven by intermediary commissions. The intermediators has very powerful role as a sales channel. Almost in all countries half of the premiums is driven by the intermediators.

The lower level of the claims ratio can be explained by: inadequate claims payment and reserving practices among a sizeable part of insurance companies, which in turn undermine these companies' claims paying capacity and solvency; the lack of proper regulatory requirements to reinsurance of unlimited green card liabilities which may inflict large financial losses on the insurance market and can adversely affect the standing of the local Nib's as a members of the Council of Bureaux; other main market issues comprise a high and/or unknown the level of uninsured vehicles which impose additional costs on policyholders; furthermore, the lack of standardized approach by courts to bodily injury claims awards is additional burden of the financial health of the companies.


Conclusion: The MTPL insurance in the total structure of the insurance markets in SEE countries is the most important line of business. It should be noted that there is growth in MTPL policies sold, where most of the countries have also growth in their GWPs and positive combined ratios. The biggest challenge for the future development of the MTPL is the current liberalization of MTPL in the case of Croatia and Albania, as well as the preparation of the other countries for the liberalization process. In order to provide quality actuarial-statistical analyses of the MTPL market, which may be internationally comparable, the reporting system should be strengthened. Also, the regulatory bodies play the key role in ensuring the level of allocated technical provisions, adequately forming the MTPL tariffs in terms of regulated prices, as well as providing quality reinsurance and effective supervision.

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