National Bank of Serbia, Insurance Supervision Department

27 September 2012 — Vlad BOLDIJAR
NBSXPRIMM: Please introduce us in a few words the insurance market of Serbia. There is a local specific?
N.B.S. / I.S.D.:
In the light of the economic slowdown in 2011 as a result of the economic problems in the euro zone and downward revised economic growth forecasts for many countries (including Serbia), only subdued positive trends in the domestic insurance market can be expected to continue.

Non-life premium is dominant, and represented 83% of the total premium in 1H 2012, with the premium structure dominated by MTPL insurance with 29.1% of the total premium, followed by property insurances (26.1%) and full coverage motor vehicle insurance (11.3%).

XPRIMM: Exchange rate affects most prices. How much affect the RSD/EUR rate, the insurance industry/prices?
N.B.S. / I.S.D.:
As a general rule insurance premium in Serbia is paid in local currency, with an exception for life insurance premium which could be paid in foreign currency. Having in mind mentioned, the foreign exchange rates could have an effect on life premium, but the effect on the total premium is subdued, since non-life is dominant in the Serbian insurance market.

XPRIMM: How exposed is Serbia to natural disasters? Can you exemplify several CAT in recent years?
N.B.S. / I.S.D.:
In recent period Serbia was exposed to serious natural disasters. For example, in 2010 there was an earthquake in Kraljevo, with total damage estimated at USD 143 million. Also, this year, a serious drought hit the agricultural sector, with possible damages still being assessed. On the other hand, according to latest available data, the share of premium covering the risks of flood, drought and earthquake was less than 1% of the total non-life premium, so it could be concluded that there is significant space for improving insurance covering those risks.

Having in mind exposure of South East Europe region to CAT risks, World Bank has started the CRIF project, based on a public-private partnership to facilitate enhanced capacity in this region (including Serbia) in order to allow such risks to be insured to a greater extent, and on more favorable terms.

XPRIMM: Are there significant differences between the Serbian and other Balkan insurance markets?
N.B.S. / I.S.D.:
Compared to other markets in the region, such as Slovenia, Croatia, Romania, Bulgaria and Turkey, structure of insurance market in Serbia is mostly in line with its neighbors. The share of non-life insurance in total premium is more significant than the share of life. With the share of 17.4% life insurance, Serbia is in between the smallest share recorded in Turkey (14.4%) and largest share in Slovenia (31.3%). But, according to indicators of development of the insurance market, such as premium per capita of 97 USD and premium as 1.8% of GDP, Serbia slightly legs behind countries in the region of CEE.

Presence of international insurance groups is also evident across the region. Out of 15 foreign insurance groups present on the Serbian insurance market 13 are also present in other countries of the region.

XPRIMM: How strong has influenced the foreign capital the development of insurance market in Serbia? But for the future?
N.B.S. / I.S.D.:
According to the ownership structure in the second quarter of the 2012, 21 of 28 insurance companies are foreign-owned, while 7 companies are majority domestic-owned.

In the second quarter of the 2012, insurance companies with foreign ownership (13 green field licenses from 2005) are gaining prevailing share in the life insurance premium of 90.7%, non-life insurance premiums of 57.7%, total assets of 67.7% and the number of employees of 65.2%. Such prevailing participation of those insurance companies in premium, total assets and number of employees is dating from 2007.

The arrival of foreign owners significantly upgraded business processes, corporate governance and risk management, and we expect that the transfer of know-how from the parent companies will continue in the future.

XPRIMM: How would you characterize the local insurance market evolution this half year?
N.B.S. / I.S.D.:
Positive trends in 1H 2012 relative to the same period of 2011 were evident, showing a slight increase in trends compared to the situation at the end of 2011. Premium recorded a nominal rise of 6.2% y-o-y, with an increased share of life premium in the total premium. Market structure remained largely unchanged, with MTPL insurance retaining its dominant position.

Balance sheet total and capital also increased, and technical reserves had a robust rate of increase of 16.2% y-o-y. During 2011 two new insurance companies entered the non-life insurance segment of the market, and the concentration of the market further decreased in 1H 2012, with a rise in the number of employees. Insurance market as a whole remained solvent and liquid in both life and non- life segments in 1H 2012.

XPRIMM: Despite crisis, how do you explain the insurance market increasing (in RSD), especially in life insurance segment?
N.B.S. / I.S.D.:
As mentioned earlier, slightly positive nominal trends were recorded in the Serbian market in 1H 2012. With non-life premium increasing by 4.2%, thanks to a rise of mandatory MTPL premium by 5.7% and to a lesser extent an increase of property insurance premium by 2%. On the other hand, full coverage motor vehicle premium fell again, this time by 3.7%.

Despite a mixed picture in non-life, life premium recorded a strong growth, with a rate of 17.4%. This movement was to some extent influenced by foreign exchange movement, but also by positive trends regarding increase in number of new contracts and lapse and surrender ratios decreasing.

XPRIMM: There were significant changes in 1H2012? (decisions/ legislation)
N.B.S. / I.S.D.:
Amendments to the Insurance Law and the Law on Compulsory Traffic Insurance have been adopted in 2011.

a. Amendment to the Insurance Law has been adopted on the 26th December 2011 and is in force from the 4th January 2012. The separation of composite insurance companies has been postponed until 31st December 2012.

b. Amendment to the Law on Compulsory Traffic Insurance has been adopted on the 18th October 2011 and is in force from the 20th October 2011. The operation of the new Guarantee fund was envisaged by 30th June 2012.

Further amendments to this Law have been adopted on the 29th December 2011 and are in force from the 7th January 2012. These amendments cover approximately 10% of the basic text of the Law and they relate to the refining and legal and technical amendments to the Law. However, there are few important novelties:
  • The most important novelty relates to the right of recourse of The Republic Fund for Health Insurance towards insurance companies that provide compulsory traffic insurance services. A new obligation of insurance companies towards The Republic Fund for Health Insurance has been introduced. Namely, insurance companies are obliged to pay per month to the account of the Fund 5% of gross premium of the motor third party liability insurance, until the twentieth of the month, according to the calculation of the premium for the previous month. A legal assumption has been introduced that this payment settles all actual damages, meaning that all demands, from The Fund to the insurance companies, based on motor third party liability insurance recourse have been settled,
  • The list of risks covered by insurance of aircraft owners against liability for damages caused to third parties and passengers is expanded and now includes the risk of aircraft hijacking, sabotage, unlawful seizure of aircraft, as well as the risk of civil commotion. Also, foreign registered aircrafts with flights in the air space of the Republic of Serbia (only over flying) do not need to compulsory insure against damage caused to passengers, cargo and baggage. These amendments enable further harmonization with relevant acquis (Regulation (EC) No 785/2004 of the European Parliament and of the Council of 21 April 2004 on insurance requirements for air carriers and aircraft operators). In addition, the so called "small aviation" is excluded from the obligation of insurance against the risk of war and terrorism (for aircraft with a MTOM of less than 500kg), but only for aircrafts that are used for non-commercial purposes or that are used for local flight instruction or local amateur and sport
  • The list of persons who are not entitled to make demands for compensation for damages arising from motor third party liability insurance has been stated more precisely and the list now includes persons who have suffered damage due to the effects of hazardous cargo during its transportation,
  • The Ministry of Finance gives its consent to the decisions of the Association of Insurers of Serbia, relating to the amount of contributions paid by the insurance company for providing funds necessary to carry out tasks that are assigned by the Law.
c. A new Company Law has also been adopted last year. The Insurance Law refers to the application of this Law in the operations of insurance companies, as a general regime for matters that are not specifically regulated by the Insurance Law. The new Company Law has been further aligned with acquis. For insurance companies, an important novelty is the introduction of a one-tier or a two-tier management system.

Legal measures that will allow faster development and harmonization with acquis communautaire will be provided by the new Draft Insurance Law, which is in the process of finalization. The provisions of the Draft Law are harmonized with acquis regulating insurance services in the following areas: freedom to provide services and right of establishment, insurance group supervision, information for policy holders, professional secrecy and exchange of information, qualifying holdings and close links, insurance intermediation and risk management and internal control system. The Draft law also envisages basis for regulation and implementation of the Solvency II Directive.

XPRIMM: Which are the most important challenges and opportunities for the insurers/consumers in 2012?
N.B.S. / I.S.D.:
Insurance companies should focus on the following key areas: corporate governance (implying, inter alia, a well-developed system of internal controls), improvement of risk management and investment valuation techniques, promoting transparency, good business practices and fair dealing with clients, as well as education of prospective clients. This will contribute to the strengthening of client confidence and the creation of conditions conducive to further development of this segment of the financial system.

It is important to ensure consistent compliance with compulsory traffic insurance regulations, particularly with regard to timely payment of claims, underwriting expense and application of the bonus-malus system.

Also important are education and preparations for putting in place a new methodological framework for risk management, Solvency II. Namely, adequate risk management is of key importance for successful insurance business. That is precisely the essence of the Solvency II directive, which requires insurers to identify and quantify all types of risks they are exposed to in their operations and to manage them more effectively. The directive has introduced more sophisticated solvency requirements in order to secure sufficient capital for the risks the insurers are exposed to. According to the new draft Insurance Law, the directive shall apply from the date of Serbia's entry in the EU.

XPRIMM: What are your expectations for the end of 2012?
N.B.S. / I.S.D.:
In light of the economic slowdown in 2011 as a result of, among other things, the economic problems in the euro zone, and downward revised economic growth forecasts for many countries (including Serbia), only subdued positive trends in the domestic insurance market can be expected to continue. These trends are also affected by reduced household spending and private sector investments, and therefore the decline in the demand for insurance products.

Having in mind the level of solvency of the insurance sector in Serbia, coverage of technical reserves and the entry of two new foreign insurance companies in our market in 2011, in case of the projected GDP growth of 2.5% in 2013, as well as in case of an increase in final consumption, conditions for the increased development of the domestic insurance market can be expected next year.

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