National Bank of Serbia - Insurance Supervision Department

15 September 2011 — Vlad BOLDIJAR
NBSXPRIMM: How have the trends of economy reflected in the insurance market activity (1H/2011)?
National Bank of Serbia / Insurance Supervision Department: In Q2 2011 the Serbian insurance sector recorded positive results relative to the same period a year earlier despite low wage growth (2.9% relative to Q1 2011) and a slowdown in y-o-y GDP growth.
The number of insurance companies rose from 26 a year earlier to 27, employment in the insurance sector increased to 11,289 (up by 3.3% y-o-y), while market concentration measured by the Herfindahl Hirschman Index declined. At end-Q2, balance sheet total of the insurance sector amounted to RSD 125.1 bln, up by 8.7% from the same period last year. Capital increased by 11.1% relative to Q2 2010, reaching RSD 32.6 bln at the end of the period under review. Technical reserves also continued up, at the rate of 6.7% relative to the same period a year earlier, reaching RSD 75.8 bln at end-Q2. Technical reserves are fully covered by adequate types of assets in both life and non-life insurance business.
On the other hand, total premium came at RSD 30.6 bln in Q2 (EUR 298 mln), marking a modest increase of 2.1% y-o-y. Such movements are due to dented household demand, and consequently dampened demand for insurance products, notably non-compulsory non-life insurance and the drop in premium for some types of insurance within this group, such as property insurance (2.9%) and full coverage motor vehicle insurance (2.8%).

XPRIMM: What classes of insurance were the most profitable and dynamic in 1H/2011?
N.B.S. / I.S.D.: Premium composition continues to be dominated by non-life insurance. Its share in total premium measured 84.6% at end-Q2, while the share of life insurance equalled 15.4%. The share of life insurance increased from 14.2% at end-Q2 2010 as its growth outpaced that in non-life insurance.
Life insurance recorded a strong y-o-y growth in Q2 2011 (11%), continuing the previously evidenced trend of the most dynamic growth in this segment of the market. In line with this, within the composition of technical reserves, it was mathematical reserves of life insurance that grew at the fastest pace of 20.4% relative to Q2 2010.
Bulk of life insurance premium is accounted for by mixed endowment insurance. Increasingly popular is supplemental critical illness cover. In terms of life insurance payable in the event of death (residual debt insurance), which ranked second by the number of concluded policies in 2010, insurance companies are paying more and more attention to decreasing term products, taken out when entering into a credit agreement with a bank, which means that banks are increasingly used as the channel for distribution of life insurance products.
The composition of non-life insurance premium in 2010 and 2011 shows prevalence of compulsory motor third party liability insurance (29.2% share in total premium, 1.6% premium growth rate in Q2 2011), property insurance and full coverage motor vehicle insurance. The earned net loss ratio for non-life insurance, i.e. the ratio of earned claims retained to earned net pure premium, equalled 73.55% in 2010, so it can be said that the indicator of price and premium adequacy was satisfactory.

XPRIMM: In times of crisis, which were the most important changes in marketing strategies of insurance companies?
N.B.S. / I.S.D.: The level of market development determines the marketing mix. Developing markets, such as the Serbian market, are usually characterised by a large share of traditional channels of sale - employees of insurance companies. As the market develops, the number of independent agents and brokers increases, and in case of life insurance, so does the number of banks providing insurance services. The 2006 amendments to the Insurance Law gave banks the possibility to engage in insurance sales, opening up a legal possibility to establish bank insurance as a special marketing strategy, especially for life insurance products.
From 2004 until the start of the crisis (2008), the significance of employees of insurance companies as the dominant channel of distribution declined from 94% to 87% of total premium. At the same time, insurance brokers and agents gained in significance, and their share in total premium rose from 6% to 12% of total premium during the same period. Given its nascent stage of development at end-2008, bank insurance accounted for mere 0.5% of total premium.
In 2009 and 2010, the above trend not only continued, but further intensified. Thus, in 2010 the share of individual channels of distribution was as follows: 73% - employees of insurance companies, 26% - insurance agents and brokers, and more than 1% - bank insurance. Only few insurance companies changed their marketing strategy by developing a channel of distribution that was not dominant in their marketing mix pre-crisis.
If marketing strategies are observed in light of market features, the dominance of non-life insurance in the Serbian market may be attributed to the greatest significance of employees of insurance companies in terms of insurance sales. However, as the market develops, it can be reasonably expected that the significance of insurance brokers and agents will increase, as well as that of bank insurance which should go hand in hand with the development of life insurance.

XPRIMM: There were significant changes (decisions / legislation) in the first half of 2011?
N.B.S. / I.S.D.: In the first half of 2011, in the field of insurance supervision, Decision Amending the Decision on Restrictions on Specific Forms of Depositing and Investing Technical Reserve Assets and on Maximum Levels of Specific Deposits and Investments of Guarantee Reserves of Insurance Companies (Official Gazette of the Republic of Serbia, No. 3/2011) was adopted, specifying relaxed requirements that shares traded in an organized market of securities but not included in the A Listing of the Belgrade Stock Exchange must meet, as well as extending the deadline for use of claims in respect of undue premiums from unexpired non-life insurance, coinsurance and reinsurance for coverage of technical reserves by 31 December 2012. Also, Decision Amending the Decision on the Conditions for Acquiring the Title of Certified Actuary (Official Gazette of the Republic of Serbia, No. 3/2011) was adopted in order to harmonise conditions for acquiring this title with the law governing higher education in Serbia.

XPRIMM: What are your expectations for the end of 2011?
N.B.S. / I.S.D.: After stagnating last year, household spending is expected to recover and grow modestly in 2011, led chiefly by the real growth in public sector wages. As Q2 saw an increase in investment loan approvals, investment activity of the private sector is expected to step up in the coming period, providing the greatest boost to economic growth in 2011 which is projected at 3%.
According to preliminary estimates, global growth slowed down in Q2 and is expected to reaccelerate in the second half of the year. The deepening of economic crisis in some EU countries and the debt crisis of eurozone periphery intensifies the risks to global economy and makes the forecasting of economic activity, even in the near term, rather difficult.
Given that the movements in other segments of the economy largely determine the performance of the insurance market, and in view of the expected recovery in household spending, earlier tendencies are likely to continue by end-2011, i.e. further, albeit slow, growth and positive developments in the insurance market. Long-term trends of premium growth rise in the share of life insurance in total premium, and the growth in balance sheet assets and technical reserves will probably continue.
The problem of a lack of quality assets for investment, notably for companies engaged in life insurance business, was significantly alleviated by the auctions of 15-year government bonds in Q1 and Q2 2011. More auctions of these securities are announced for the coming period.
In addition to the above, a World Bank project envisages the creation of possibilities, based on the principle of public-private partnership, for the development of insurance against natural disasters in South East Europe. If the project is implemented, the Serbian corporate and the household sectors could access insurance against the ever more present risk of natural disasters (earthquakes, droughts and floods) under favourable terms, which could be very important, especially for some segments of the society, primarily agriculture which has suffered major damage due to drought and floods in recent years.

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