xprimm.com: How would you characterize the insurance market evolution in Baltic States (Estonia, Latvia, and Lithuania) in the recent years? Which were the main challenges and what relevant changes were registered as a result of the crisis?
Mindaugas JUSIUS: Until the end of 2008, we saw a gradual growth of premiums written both in life and non-life insurance markets in the Baltic States. The growth has been mainly driven by developing local economies. The crisis had a different impact on further development of life and non-life insurance markets. Therefore I will give an overview of life and non-life insurance markets separately.

With regards to the life insurance market, the uncertainty in the financial markets must be highlighted as one of the most important factors. Unit-linked insurance is clearly dominating in the Baltic countries. In the end of 2008 a significant drop of the value of equities frightened investors who had unit-linked contracts. That was the reason of significant drop in life premiums written (10-15%). Negative investment returns repeated in 2011. The level of contract terminations also increased. Later on decreased purchase power and uncertainty in global financial market were the greatest challenges for life insurance companies. Nevertheless, people rather turned towards pure protection services and sales of term life products have increased.

As regards non-life insurance, the market decreased significantly during the crisis (25-50%). The previous growth was very much driven by the high real estate and car sales figures supported by the banks, which also required insurance cover. During the crisis the sales of the new cars almost stopped. Due to the lack of the new business price competition increased significantly. This was supported by the improved motor claim results (lower claim frequency and decreased repair costs). However, by now most of the companies have difficulties to show any profits. But there have been no signs of any market consolidation but contrary, most of the companies have tried to benefit from the expansion to the other Baltic counties, which have led to higher competition. Most of the companies struggle with their costs, which have not been sufficiently adjusted (in Latvia and Lithuania the expense ratios of P&C insurance are usually between 35-40%).

On the other hand, it is worth to mention that companies are reorganising internally by changing legal set-up. To simplify the governance and increase operational efficiency MANDATUM, SWEDBANK and ERGO companies have merged their Baltic units establishing one legal entity with branches in operating countries.

xprimm.com: Which are the main differences between these three insurance markets?
M.J.: We consider Baltic insurance markets as very similar. All countries gained independence in early 90s and are in the same stages of development. Furthermore, our research shows that customers have very similar needs in Lithuania, Latvia and Estonia. Nevertheless there are some specifics country by country.

One important difference to be mentioned is the structure of distribution channels. Banks as sales channels are clearly dominating in Estonia, while in Lithuania and Latvia broker and tied-agent channels contribute quite a lot to insurance sales. Internet sales are available for the most popular products, but the share of products sold through the Internet is still below 5%.

The life insurance business in many European countries is supported by tax benefits. There is a very strong tax benefit for life insurance saving contracts in Latvia (a customer can get up to 25% of premiums paid back if the contract is longer than 5 years). In Estonia "investment account" has been introduced in 2011 and the conditions for all savings and investments products became similar, so insurance has no additional tax benefits. In Lithuania tax benefit remains for pension saving. Naturally the product portfolio structure is not the same mainly due to differences in taxation but not customer needs.

Customer needs could be considered as similar in all three Baltic countries. Countries have passed similar economic lifecycles and the maturity of insurance market is in early development phase. So, the offering is very similar, although there is no health insurance (medical insurance) in Estonia, while in Latvia it is a popular service. Lithuanian private non-life market is very much MTPL (motor third party liability) centric and other lines are not so well developed.

xprimm.com: In the crisis periods, Baltic insurance market reacted differently?
M.J.: The main trends have been similar, but the reaction has been steeper in Latvia. The impact of the crisis was biggest there but this has been a characteristic of this market.

xprimm.com: Is there something specific for the Baltic insurance markets, compared to the rest of the insurance markets of Central and Eastern Europe?
M.J.: Insurance market is a bit less developed in the Baltic countries compared with other CEE countries. But it is not a significant difference. We have analyzed the reasons, but there is probably a complex of reasons.

First of all, perception - People do not perceive insurance as the only opportunity to assure protection. They still rather prefer savings as a primary tool for protection. The recent research shows that people expect their relatives to provide financial support in case something unexpected happens.

Than, the lack of trust in insurance providers - There was a range of bankruptcies of small insurance companies in 1991-1998 and it stays in the memory.

Finally, lower purchasing power - There is a correlation between the level of activity of usage of insurance services and GDP per capita. Till GDP per capita is lower than 10.000EUR, the demand for insurance services remains very limited. So we expect the demand to grow together with the economic development in the Baltic countries.

xprimm.com: Which are, in your opinion, the most important challenges to overcome in the future years for these markets? What about opportunities?
M.J.: Although currently market players face a lot of challenges, we consider great growth opportunities in the Baltic insurance markets in the long run.

First of all, I would highlight the need for financial education. It is an important factor limiting market development. Service providers together with supervisory authorities should consolidate efforts in customer education area. The benefits and the need for insurance services have to be presented to the potential customers in a simple manner.

Secondly, all insurance companies need to cope with operational efficiency in the nearest future as there is little room for price increase.

As regards unit-linked insurance, regulation is becoming tougher. We can expect tax benefits to be reduced as governments face budget challenges and the overall trends are not supportive. So life insurance companies must develop unique value for the customer that would difference insurance offering from other long term saving solutions.

xprimm.com: How is your company organized in the Baltic States?
M.J.: Life insurance services are provided by SWEDBANK Life Insurance SE and SWEDBANK P&C Insurance AS is the provider of non-life products in the Baltic countries. Both companies are registered in Estonia and have established branches in Latvia and Lithuania. Insurance activities are well integrated with the local Swedbank infrastructure and the business management is centralized.

xprimm.com: Describe in a few paragraphs which are the main distribution channels of insurance products, why customers buy insurance products from you, and not from competing companies, and what type of clients are in your target?
M.J.: SWEDBANK has implemented bancassurance model in the Baltic countries. It means that bank branches and Internet bank are the only sales channels for insurance services. Furthermore, insurance services are provided only for our bank customers. Compared with other rivals, SWEDBANK products are simple, so it is easy for customers to find a solution which meets the need.

SWEDBANK's mission is to promote a sound and sustainable financial situation for many households and enterprises. Therefore, the majority of protection products come as supplementary services for customers who have credits. But there are also stand alone insurance offerings. As regards saving or investment insurance the bank employees provide an offer from wide spectrum of financial services. Customer needs are the most important when choosing a right product.

Our competitive advantages are based on simple and efficient sales processes, and qualitative advice. By selling products through bank branches, Swedbank has far away lower sales costs compared with traditional insurance companies. It enables us to provide insurance services at an affordable price and with convenient process for many customers. Customers appreciate getting the full scope of financial services from one place.

xprimm.com: SWEDBANK Insurance is one of the most important insurance company in this Region, on life insurance segment. How would you comment the company's achievements in the current year?
M.J.: SWEDBANK Life Insurance SE is a leading life insurance provider in the region. It holds close to 1/3 of the market (in terms of premiums written and the number of customers). It is a great honour, but at the same time a huge responsibility. We appreciate our customers for expressed trust and it motivates us to improve our services.

2011 for us was a challenging time, but to summarize we should be proud of achieved results. Several innovative products have been developed for the Baltic markets. The main focus in development of new solutions has been on protection of customers assets. We have introduced special guarantees for long term savers. In addition, we had widened our term life and non-life insurance product ranges. Great investments were done in terms of preparation for new Solvency II requirements. Financial results are positive despite challenges in delivering expected investment returns.

It is needed also to mention that SWEDBANK P&C insurance AS role is growing quickly and more customers express trust with the company. Our aim is to bring for customers all needed banking and insurance services at SWEDBANK branches in the future.

xprimm.com: Which are the main future plans of the SWEDBANK Insurance in 2012?
M.J.: The uncertainty in economic environment will probably remain also in 2012. During such times, the need for protection services increases so we plan to further develop our insurance protection services (both in the life and non-life areas). We strive to satisfy customer needs and maintain a high customer satisfaction level (customer focus).

Another priority for 2012 is to improve operational efficiency by enhancing the internal processes.

Non-life insurance business development in Lithuania. SWEDBANK P&C Insurance AS opened a branch in Lithuania in 2011. There are plans to increase the number of services available for SWEDBANK customers in Lithuania.