David ONOPRISHVILI, Chairman, Insurance State Supervision Service of Georgia

3 May 2023 — Daniela GHETU
David ONOPRISHVILI, Chairman, Insurance State Supervision Service of Georgia
XPRIMM: How would you describe in general the insurance market's development in 2022? How strong was the impact of the volatile economic conditions in the wake of the pandemic crisis and as an effect of the ongoing war in Ukraine? Did inflation have a significant impact on the market profitability?

David ONOPRISHVILI: It is important that the insurance sector continues to grow steadily. In 2022, the premium collected from insurance activities amounted to GEL 910 million, which is 18% more than the data of the same period of the previous year. The increase in the written premium is noticeable in all major lines of business. According to the results of 2022, the total amount of claims paid by insurers from direct insurance activities amounted to GEL 495.1 million, which is 14% higher than the similar data of the previous year. The insurance profit (technical result) of the companies in 2022 amounted to GEL 210.3 million, which is 22% higher than the data of the previous year, and the net profit amounted to GEL 39.2 million showing decrease by only 2% compared to the year 2021. The decrease in net profit, despite the increase in technical result, is mainly due to the loss from foreign currency exchange rates deviations and the increase in administrative expenses that in turn was caused by inflation.

So, we can conclude that despite impact of the volatile economic conditions in the wake of the pandemic crisis and as an effect of the ongoing war in Ukraine the insurance market in Georgia managed to avoid significant losses and maintained stabile development path mainly due to high economic growth in the country - over 10% both in 2021 and 2022 years.

XPRIMM: Did the sanctions imposed upon the Russian and Belarusian re/insurers have any impact of the Georgian insurance market?

D.O.: In general, Georgian insurance market was not significantly impacted by the sanctions imposed upon the Russian reinsurers, as Russian reinsurance companies were not largely involved in the reinsurance arrangement in Georgia. However, in order to ensure financial stability and unobstructed settlement of expected insurance claims, Georgian insurers adapted to the existing reality and found new reinsurers for the contracts which were reinsured by Russian companies, however it was related with certain extra expenses.

XPRIMM: Compared with the previous year it seems that Georgian insurers recorded a significant growth in the number of policies issued, as well as in GWP. The trend was visible especially for the motor insurance lines. How do you comment on this evolution?

D.O.: A significant increase in the number of policies issued and in gross written premium (18%) is due to increased GWP in Medical insurance (23% increase), Motor Casco (16% increase), MTPL (46% increase) and Life insurance (25% increase). Among the types of motor insurance, the increase of Border MTPL is clearly noticeable, as the tourism sector is actively recovering in the post-pandemic period and the number of incoming foreign vehicles, as well as the number of transit trucks has also increased.

XPRIMM: In the context of the imminent implementation of the law on mandatory MTPL insurance, how do you asses the market potential of this line of business? Also, what are the main concerns with regard to the debut of this new market segment?

D.O.: We are in a very active phase for finalizing the draft law on mandatory MTPL with all stakeholders and the government is going to initiate the process of its introduction during this Spring. It is planned to bring into force the law on mandatory MTPL from the beginning of 2024. Considering the number of existing motor vehicles in the country and the mandatory nature of insurance we assume that substantial market potential exists for this line of business that will boost the market significantly in general. Despite good growth potential there are still concerns regarding the debut of this new market segment. We would emphasize mainly penetration rate and frequency rate as a main concern since there is no reliable historical data available and many assumptions were applied.

We deem that Georgian insurance market must ensure market penetration with the involvement of all stakeholders and relevant protection of consumer rights in terms of law enforcement.

XPRIMM: The motor insurance segment's success is largely linked, in all markets, to the opportunities brought by digitalization in terms of improving underwriting, streamlining back-office operations etc. How do you asses the Georgian market's progress in technology terms? Is the market prepared to offer modern value-added services to its customers by using telematics, IoT etc.?

D.O.: I absolutely agree that in the most cases application of modern technologies and digitalization plays a vital role in development of insurance market, and it is especially true regarding motor insurance segment. Most insurance companies represented on Georgian market have already developed and are actively using more convenient and efficient digital technologies to interact with customers and streamline back-office processes. Significant progress in technology terms is already evident but we expect the competition in the market will further stimulate the introduction of modern value-added services.

The system of offering/selling of various insurance products through digital channels is more and more developing and growing. Herewith, it should be outlined that in order to avoid unhealthy competition in the market, it was considered also to sell the compulsory MTPL policies through online channels.

These issues are also related to the amendments of the Law "on Insurance" submitted to the Parliament of Georgia, that considers some new powers of the ISSSG to establish additional rules, concerning information security systems and relevant recommendations for online sales of insurance products, full and partial outsourcing of information technology function, real-time monitoring system (mystery shopper) of the performance of insurance activity.

XPRIMM: An important regulatory change going on in the Georgian market is the transition to the Solvency II regime. Please comment on the progress made and the planned timeline for the introduction of the new supervisory regime. In your opinion, is the market prepared for this change?

D.O.: Indeed, moving to Solvency II regime is really an important regulatory change, which is really challenging for Georgian insurance industry.

In 2022, after almost 3 years EU-funded Twinning project "Capacity Building of Insurance State Supervision Service of Georgia" was finished considering assistance in harmonization of Georgian legislation with the Directive of the European Parliament and the Council of Europe 25/2009/138 / EC of November 25, 2009 (SOLVENCY II). The project was carried out in partnership with the EU Member State, Kingdom of Spain - The Directorate-General for Insurance and Pension Funds (DGSFP) under the Ministry of Economic Affairs and Digital Transformation. Within the framework of the project Spanish experts drafted the initial legislative framework and relevant law and by-laws, though in order to adapt them correctly in the Georgian legal system, a special working group was created in ISSSG, which is working in accordance with the action plan and schedule approved by the Chairman. In the working group, together with the ISSSG employees invited experts are engaged.

During the project, together with the Spanish experts, several market awareness raising campaign and workshops were held, in order to make the new system familiar for everyone.

Transposition of Solvency II, regulatory changes, principles of proportionality and exceptions mainly include the exceptions provided in the Solvency II Directive for the companies with certain characteristics and imposition of proportional requirements on them, sequence of implementation stages and the content of the regulatory framework. As you are aware, the system consists of three components (so called pillars):

The "first pillar" includes financial requirements to insurance undertakings, such as minimum capital, solvency, assessment of assets and liabilities, technical provisions, own funds, as well as approaches, standard formulas, specific parameters and internal models used in calculations. Implementation of these components are quite a considerable challenge for the insurance sector (as it used to be in EU countries), therefore, in future, the stages of implementation, possibilities and existing (local) environment shall be analyzed in detail.

The "second pillar" is based on the governance system and supervising and includes quality requirements, such as the internal governance system of companies and its main functions - actuarial, internal audit, internal control and compliance, and risk management, which in turn includes implementation of Own Risk and Solvency Assessment (ORSA) process. This is also a challenge both for the industry and supervision, as companies will have to implement an entirely new governance system, and on the other hand the new system requires new supervising approaches.

The "third pillar" includes the accountability of insurance undertakings in the above-mentioned 2 components, including various reporting forms, disclosure, enforcement of market discipline, transparency and openness.

Implementation of Solvency II is a very complex task both for us as supervisors and for the market as well. There are many important details to consider, such as the existing legal environment, constantly and rapidly changing regulations and standards and of course available resources and capacity. Therefore, even though we are still in the process of working on the draft law, we have decided to start the implementation from the second pillar, with main accents on qualitative part, especially on governance. Only after the implementation of the second pillar it will be more realistic to implement the first and then the third pillar. Moreover, we expect some significant changes to take place in the quantitative part of Solvency II in the next few years to come. Therefore, proper implementation of a good governance system will help the market to cope with significant upcoming challenges.

All the above requires accurate approaches (step-by-step, unified), maximum mobilization of resources, proper planning and the relevant legislative process, with proper analysis of its implementation timeline, which both European and Georgian sides are fully aware of.

XPRIMM: What are your expectations for the Georgian insurance market's evolution in 2023? What would be, in your opinion, the main challenges and the main opportunities?

D.O.: Georgian insurance market is an integral part of the global environment, therefore existing geopolitical risks, related to war in Ukraine, regional pressure etc are impossible to ignore. We expect those effects to be no less tangible in 2023.

It is also worth mentioning certain temporary regulatory concerns related to the implementation of IFRS 17 and 9. There are several important components to consider while making appropriate adaptations to the new standards, including misconceptions in revenue, expense, asset and liability recognition and reporting based on IFRS vs supervisory requirements (including but not limited to the calculation of capital requirements).

Also, I would like to outline the EU-Georgia Association Agreement, according to which Georgia shall carry out number of challenging reforms. As it is known, the European Union expressed readiness to grant Georgia the status of a candidate for accession to the European Union after a set of recommended reforms. In this regard, ISSSG has number of obligations to be fulfilled.

The draft law on introduction of compulsory Motor Third Party Liability Insurance (MTPL) is ready to be submitted to Parliament. Insurance should become compulsory for all the owners of the motor vehicles driven in Georgia, as it is prescribed in the EU Directive. Considering that insurance market in Georgia is relatively small and small part of car owners have liability insurance on voluntarily basis, the "obligation" of having insurance shall make the insurance market more attractive for investors and on the other hand, the citizens of Georgia will be more protected from financial loses. Market penetration is low, and interest will increase in the field and the market shall grow.

Within the framework of Solvency II system, it is planned to introduce the actuarial function in insurance companies on a mandatory manner. Meanwhile, draft amendments to the Law of Georgia "On Insurance" saying that all insurers operating in Georgia shall have actuary, is submitted to the parliament and are under parliamentary discussions. This project shall prepare the basis for the implementation of the actuarial function. Herewith, together with the interested institutions and donor organizations, we are working on the issues to implement actuarial education in Georgia.

At the same time, legislative framework regulating private pension provision (pillar III) according to Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 "On the activities and supervision of institutions for occupational retirement provision" has been drafted which means that it shall bring us even closer to EU standards. The law will be supplemented with several other noticeable changes in other laws. This in turn will give more incentives to the potential beneficiaries for not only private pension schemes, but also to those who are potential long term life insurance policyholders. These include tax incentives and some support for the increase in liquidity and attractiveness of local capital markets.

It is important to outline, that in terms of consumer rights protection issues of mistery shopping system shall be implemented which shall ensure even more effective levers for monitoring.

Interview conducted by Daniela GHETU