NBS: Unfavorable trends in the euro area have spread over to the CEE countries, weighing down on export opportunities and slowing down economic growth, and also impacting on Serbia, taking into consideration its key trade partners. After a rebound of GDP in 2010 and 2011, economic activity dropped again in 2012, with a decline of 1.7% in GDP. The economic recovery in Q1 2013 appears sustainable, as y-o-y GDP growth amounted to 2.1% in Q1 and to 0.7% in Q2 of this year. It is expected that GDP will grow by around 2.0% in 2013 and by approximately 2.5% in 2014. Despite deteriorated prospects for the recovery of Serbia's main trade partners, it is expected that net exports will make key contribution to economic growth this year, while headwinds will be coming from private and government consumption due to low real income and fiscal consolidation.
The real growth of non-life premiums in CEE countries of 4.8% in 2012 was driven by the strong expansion in the largest market, but the economic outlook remains the main concern for non-life insurers, as it is expected that consumption and investment activities will likely recover very slowly and markets will remain highly competitive, which undermines underwriting profitability. The real growth of life premiums of 5.1% in 2012 in the region was also driven by the largest market, while on other life markets (especially among the EU countries) premiums continued to decline sharply, due to the recessionary climate on many markets, and it is expected that weak economies, which are recovering from recession, will prevent a quick return to strong growth .
Long term positive trends on the Serbian insurance market continued in 2012 and in 1H 2013, but with slowing-down signs, in line with general trends in the CEE countries, and under an influence of economic conditions in Serbia. Both non-life and life premiums recorded nominal growth throughout the period. However, in real terms non-life premiums shrank, showing a particular decline in full coverage motor vehicle insurance, which experienced the strongest share increase until the end of 2008, but which has melted away since, following the trends in this class in the entire region. The situation in life insurance is somewhat better since life premiums recorded a real growth in 2012, but in 1H 2013 it is showing signs of stagnation in real terms.
XPRIMM: The Serbian currency depreciated substantially in 2012 compared with EUR. To what extend has this trend affected the insurance business?
NBS: It is important to point out that Serbia is implementing a managed float exchange rate regime. Depreciation pressures, in place since late 2011, persisted through the greater part of 1H 2012, but movements on the foreign exchange market stabilized in late August and the appreciation trend continued in the remainder of 2012. The strengthening of the dinar was also supported by the foreign investors' interest in dinar government securities which increased as the country risk premiums declined. At the end of 2012 the dinar depreciated against the euro by a nominal 8.0% relative to the end of 2011.
The insurance sector is influenced twofold by movements in foreign exchange markets, i.e. by shifts in the foreign exchange-sensitive revenues, mainly stemming from premiums, and expenses, particularly for claims.
The premium income segment that has the greatest sensitivity to foreign exchange movements is the one represented by life premiums. This is a consequence of the provisions of the Law on Foreign Exchange Operations, which allows premium payments for life insurance contracts to be carried out in foreign exchange. However, the effects of foreign exchange movements on life premiums are also influenced by payment patterns (premiums paid annually, quarterly or monthly) as well as specific dates that these payments are carried out, so, even if the exchange rate has influenced a more pronounced increase of life premiums, the total effect is difficult to quantify.
Expenses with claims, especially for non-life insurance companies, are influenced by changes in import prices (i.e., the price of replacement of imported automobile parts). According to data for the last year, import prices are estimated to have shrunk by 3.8% in Q4 2012, which is why y-o-y import inflation decelerated to 11.9%. Having in mind lower import inflation than the general rate of the inflation in 2012, the effects of movements on foreign exchange markets for non-life claims weren't pronounced, using import inflation as a proxy of these effects.
XPRIMM: Serbia received the EU candidate status in 2012 and we assume that the preliminary preparations are already well under way. Does the insurance legal framework need any adjustment for the full compliance with the EU directives?
NBS: Earlier in 2007 the Serbian Government adopted the Information necessary to establish new coordination bodies for the EU accession process, taking into consideration other EU negotiation experiences, best practices of the new EU member states, size and capacity of the Serbian administration. In 2012 the Government established a Coordination body for the EU accession process, headed by the Prime Minister, who will consider all issues relating to the European integration and coordinate activities of the public administration. Expert groups and subgroups were also established. The expert group of the Coordination body, headed by the Director of the European Integration Office and comprising the heads of the working groups for negotiations, will be the main body for horizontal coordination of the accession process. The Expert Subgroups, 35 in total, will act as working groups for negotiations as a key mechanism for coordinating various areas of the EU acquis, whose division, competence and composition substantially match the negotiation chapters. The National Bank of Serbia is a member of a Subgroup for Financial services, which is headed by the Ministry of finance.
Following the decision of the European Council in June 2013 on opening accession negotiations with Serbia, there was a new Decision on establishing a Coordination body in September 2013, by way of which the current coordination structure was amended and modified, in line with the negotiation process.
Serbia will be obliged to transpose the acquis regarding insurance services in full by its accession to the EU and to demonstrate its ability to apply it consistently, with possible transitional periods if agreed between Serbia and EU. Negotiations on the terms, conditions and dynamics of transposition of the acquis from chapter 9 'Financial services' are upfront.
XPRIMM: In what way do you think will Serbia's future EU accession influence the insurance market development?
NBS: Accession will give a strong impetus to insurance companies to further strengthen their corporate governance, particularly focusing on internal controls and risk management. Implementation of Solvency II, which requires insurers to identify and quantify all types of risks they are exposed to and to manage them more effectively, will introduce more sophisticated solvency requirements, thus ensuring that insurance companies have sufficient capital to offset all the risks they are exposed to.
Another incentive for insurance companies to further improve their business models, and also promote transparency, good business practices and fair client relations is future liberalization of the market. Liberalization will also open markets of other EU countries to Serbian insurers, and give them a chance to expand their business if they are able to withstand stiff competition and offer high quality of insurance services to other EU markets.
The latest experiences of neighbors that joined EU indicate possible insurance liberalization dynamics, with a significant number of insurance companies and intermediaries entering the market soon after joining the community.
Keeping in mind the increased competition and the more sophisticated risk-sensitive capital requirements, it is expected that Serbia's accession to the EU will bring greater protection of policyholders and increased availability of insurance products.
XPRIMM: Looking back to 2012 and the first half of 2013, what do you think are the most important events on the Serbian insurance market?
NBS: When analyzing the situation on the Serbian insurance market, once can notice that long term positive trends have persisted, but with evidence of a slowdown in 1H 2013. In total, 28 insurance companies are present on the market, so the number of participants remained unchanged and the concentration, measured by the Herfindahl Hirschman index, remained moderate. At the end of 1H 2013 insurance companies in Serbia had 11,604 employees.
Total assets of the insurance sector reached 150.9 bln dinars (1,3 bln euros ) at the end of 1H 2013, with a y-o-y increase in 1H 2013 and 2012 of 7.1% and 11.8% respectively. The capital was 35.3 bln dinars (309 mln euros) at the end of 1H 2013, a y-o-y increase in 1H 2013 and 2012 of 7.2% and 7.3% respectively. Technical reserves reached 98.1 bln dinars (859 mln euros) at the end of 1H 2013, with a robust growth rate in 1H 2013 and 2012 of 11.3% and 14.6% respectively.
Total premiums reached 61.5 bln dinars (540 mln euros ) in 2012, with a y-o-y growth rate of 7.2%. Non-life classes remained dominant, with MTPL and property insurance premiums going up, while full coverage motor vehicle insurance premiums decreased. The share of life insurance in total premiums reached 19.3% in 2012, on the back of a robust growth during the year. In 1H 2013 total premiums value reached 34.1 bln dinars (298 mln euros), with a y-o-y increase of 4.9%. Trends observed in the previous year continued during 1H 2013, with both non-life and life premium increasing, but at a slower pace than in 2012.
XPRIMM: Life insurance recorded significant growth rates lately. Which are the reasons for the growth?
NBS: Life premium in Serbia recorded a strong growth of 18.6% in 2012, and even after slowing down in 1H 2013, the growth rate of 9.7% remained substantial. Analyzing the trends in the life segment of the market, it is obvious that the spread of life insurance, measured by the number of life insurance contracts, that exceeded 400,000 in 2012, had a significant y-o-y growth. The most dynamic segment was represented by new contracts, as around 137,000 new life contracts were concluded in 2012, a y-o-y growth of 31.0%, increasing the share of new contracts to one third.
The increase in the life portfolio was paralleled by positive trends for lapse and surrender ratios in 2012. For the whole market, lapse ratio improved to 9.3% in 2012 from 9.9% a year earlier. An improvement in this indicator was recorded for a majority of life companies, and lapse ratio is lower than before the crisis. Surrendered ratio dropped significantly to 2.9% in 2012, from 4.1% a year earlier. This trend was obvious for most companies, especially larger ones which are present on the market for a longer period of time.
XPRIMM: A good dynamic was also recorded for the "damage to property" class, especially in the beginning of 2013. How do you comment on that?
NBS: Non-life premium increase in 2012 and 1H 2013 of 4.8% and 3.9% respectively was outpaced by positive trends in property insurance types . On the back of growth rates in 2012 and 1H 2013 of 8.0% and 13.1% respectively, property insurance types in 1H 2013 became the most important segment of the total premium volume with a share of 28.2%.
In 1H 2013, out of 17 insurance companies that offer non-life insurance products, 16 recorded property premiums. The property insurance segment is highly concentrated, with the largest insurance company having a share of almost half of the premiums in 1H 2013, and the 3 largest companies, more than 80%. In the observed period, 11 companies in this segment of the market recorded an increase in property insurance premiums, but the biggest impact was due to a premium increase recorded by one company.
XPRIMM: Serbia has a significant exposure to Nat Cat risks, especially to earthquake and floods risks. What can you tell us in respect of the insurance coverage for these risks?
NBS: As natural catastrophes refer to events caused by natural forces, which generally result in a large number of individual losses involving many insurance policies, where the scale of the losses depends not only on the severity of the natural forces concerned, but also on man-made factors, such as building design or the efficiency of disaster control in the afflicted region, natural catastrophes include a large number of risks, such as floods, storms, earthquakes, droughts, wild fires, heat waves, cold waves, frost, hail, tsunamis, etc.
Analyzing a 10-year record of Serbia's exposure to natural catastrophes, based on Swiss Re publicly-available data, four major natural catastrophic events were observed in the region that also affected Serbia, including 2 floods, an earthquake and a cold wave.
In 2005 floods caused by heavy rains caused Begej and Tamis river banks to burst, flooding 80,000 hectares of land in Romania, Serbia and Hungary, leaving 4 dead, 3,700 homeless, and total damages of 591 mln US dollars . In 2006 floods caused by heavy rain and melting snow caused Danube and Elbe river banks to burst, flooding houses, roads and agricultural land in Germany, Austria, the Czech Republic, Poland, Romania, Bulgaria, Hungary, Slovakia, Serbia and Croatia, leaving 12 dead and total damages of 1 bln US dollars . In 2010 an earthquake hit Kragujevac in Central Serbia, leaving 2 dead and 50 injured, with 6,000 buildings damaged and total damages of 143 mln US dollars . In 2012 a cold wave hit Russia, Ukraine, Poland, Serbia and the Czech Republic leaving 317 dead .
Insurance companies in Serbia offer coverage for CAT risks, such as earthquakes, floods and droughts as basic and auxiliary coverage according to general and specific policy conditions. In 2012 earthquake coverage was offered by 14 companies, while 17 insurers offered flood and drought risk coverage.
Based on additional insurance company data for the 2012 calendar year, submitted to the National Bank of Serbia outside the standard reporting requirements, there were 30,821 insurance contracts that covered earthquake risks, as well as 131,102 insurance contracts covering flood and drought risks. Total premiums for earthquake coverage were 134 million dinars, while flood and drought risk premiums totaled 292 million dinars.
Analysis of the concentration in the CAT risk segment of the market reveals that the 3 biggest companies had a market share of 70.3% of the total CAT premium. The composition of the CAT risks segment of the market shows that flood and drought risk had the majority in both number of contracts and insurance premiums, with a share of 81.0% and 68.5% respectively. Earthquake coverage was offered in 19.0% of contracts including CAT risks, with a premium share of 31.5%.
The share of the CAT risk in the total non-life market is small, with 4.3% of all non-life contracts that include CAT risk coverage (3.5% for flood and drought and 0.8% for the earthquake risk) and a share of non-life premiums of 0.9% (0.6% for flood and drought and 0.3% for the earthquake risk).