It is a known fact that Türkiye faces a serious earthquake risk due to its location in a geography with fault lines. However, the earthquake that occurred on February 6th 2023, centered in Kahramanmaraş and with a vast effect in 11 provinces, is different from the disasters experienced before. The area affected by the earthquake is larger than many European countries in terms of both surface area and population. Following the earthquakes in the region, 38,000 aftershocks took place. These characteristics all prove that this disaster was not just a big earthquake but rather a mega catastrophe.
XPRIMM: 2022 was a difficult year globally: high socio-political volatility, the supply chains crises, high inflation etc. All the factors impacted on insurers’ business everywhere. How did Turkish insurers cope with the difficult macroeconomic environment? How do you comment on the 2022 results of the insurance market?
Özgür OBALI: 2022 was a year of many challenges due to natural disasters such as floods and forest fires, fluctuations in exchange rates, and rising global and local inflation.
Looking at the results of our sector by the end of 2022, premium production increased by 123% compared to the previous year, reaching TRY 278 billion.
Despite the unfavorable macroeconomic conditions, the Turkish insurance sector continued to serve for the sustainable growth of the country's economy by providing coverage/assurance for both individuals and businesses, with the total amount of claims incurred reaching TRY 120 billion.
Another important factor contributing to the successful performance of the companies despite the unfavorable developments is the investment income they generated thanks to their successful investment policies.
On the other hand, according to the 2022 year-end data received from Pension Monitoring Center the total number of Private Pension System (BES) and Automatic Enrollment System (OKS) participants exceeded 14.5 million with an increase of 9.3% compared to the previous year. The total fund size of BES and OKS, including state contribution, reached TRY 433.4 billion with an increase of 77.3% in this period.
XPRIMM: While 2023 brough signs of economic recovery, it also brough from its very beginning, a natural catastrophe of particularly large dimensions in Türkiye, the Kahramanmaraş earthquakes. How do you comment on insurers’ activity and results in the first half of 2023?
Ö.O.: Despite the February 2023 earthquake, the sector displayed a successful financial performance in the first half of the year. Premium production grew by 131% compared to the same period of the previous year, reaching TRY 210 billion. All branches, except Traffic, recorded technical profits. As to Traffic branch, structural solutions are being developed to improve its profitability. By the end of 2023, premium production is expected to reach TRY 500 billion.
In the case of the Kahramanmaraş earthquake, the insurance sector achieved a very successful performance, and the amount of the claims incurred exceeded TRY 100 billion, including Turkish Catastrophe Insurance Pool (TCIP). In the light of this information, it is estimated that the economic loss related to the Marmara Earthquake will be around USD 90-120 Billion. This situation reveals how important it is for the insurance sector to strengthen its capital structures in order to be prepared for a possible Marmara earthquake.
XPRIMM:The Kahramanmaraş earthquakes were particularly challenging for Türkiye, as a country, but also for the Turkish insurance industry. Besides the humanitarian tragedy, the earthquakes had a huge economic impact and required also unprecedented efforts of the insurance industry. Please share the main information on the earthquakes’ impact on the insurance industry, as well as the main lessons you have learned from these events of unprecedented severity.
Ö.O.: It is a known fact that our country faces a serious earthquake risk due to its location in a geography with fault lines. However, the earthquake that occurred on February 6th 2023, centered in Kahramanmaraş and with a vast effect in 11 provinces, is different from the disasters experienced before. On Feb 6th, two earthquakes of magnitude 7.7 and 7.6 occurred 9 hours apart, and another earthquake of magnitude 6.4 occurred 2 weeks later. The area affected by the earthquake is larger than many European countries in terms of both surface area and population. Following the earthquakes in the region, 38,000 aftershocks took place. These characteristics all prove that this disaster was not just a big earthquake but rather a mega catastrophe.
However, the Kahramanmaraş-centered earthquakes dated February 6th,2023 were very instructive in terms of seeing the areas that need improvement in the insurance system; a lot of data about the insurance industry emerged.
After the Kahramanmaraş earthquakes on February 6th, one of the main problems that caused friction for the insured and problems in the claims process was the issue of underinsurance. There was a lack of insurance coverage caused by inaccurate declaration of residents’ square meter information along with coverage limits that fell short of reconstruction costs which have increased significantly with inflation. For this purpose, efforts are continuing to integrate insurance companies with the public database to systematically obtain residents’ square meter information. In addition, a minimum unit sq m price was defined for civil risks and an obligation to protect against inflation in the Producer Price Index (PPI) amount was introduced.
Earthquake insurance provided as additional coverage to fire and engineering branches in Türkiye is subject to the tariff approved by the Insurance Regulation and Supervision Agency. It is also known that the price sensitivity of international reinsurers increased after the Kahramanmaraş earthquake and further increases are expected. In this context, the non-tariff insurance amount for fire insurance was increased from TRY 400 million to TRY 2 billion to cover the costs and to ensure fund accumulation for future disasters. The industry demand about increasing tariff prices on a risk group basis by 25% was shared with the Insurance Regulation and Supervision Agency.
One of the major issues that has been faced is that the earthquake modelling results varied extremely from the actual outcomes. In order to reach more accurate results in possible future disasters, use of alternative scenario analysis in earthquake modeling is important for the risk predictability.
XPRIMM: How do you comment on the Turkish homes’ insurance coverage for natural catastrophes, especially in the context of the increased incidence and severity of the extreme weather events?
Ö.O.: Unfortunately, the frequency and severity of extreme weather events seem to have increased following climate change that has affected the whole world.
However, during interviews with disaster victims in the wake of recent catastrophes in our country, it has become evident that a significant portion of our citizens lack sufficient information regarding insurance coverage for damages resulting from natural disasters.
On the other hand, after the Kahramanmaraş earthquake, the importance of facultative earthquake insurance has become evident once again. As known, the Turkish Catastrophe Insurance Pool (TCIP) pays up to the coverage limit in the policy. For this reason, facultative earthquake insurance can be obtained for residences and earthquake coverage can be obtained above the coverage limit provided by TCIP and up to the development value of the building, as well as earthquake coverage can be provided for the contents inside the house.
On the other hand, considering the diversity of disasters experienced, the necessity of developing an insurance product that covers not only earthquakes, but also different natural disasters have emerged. In this context, the work on transforming compulsory earthquake insurance into compulsory disaster insurance covering other disasters, which is included in the Med-Term Plan by the Government, is planned to be completed in the 3rd term of 2024.
XPRIMM: Motor insurance – especially the MTPL line, is a challenging business line for the Turkish market since many years. Moreover, in all markets, the motor insurance business was mostly impacted by inflation and currency devaluation. How did Turkish insurers cope with these trends? Also, what measures were taken to preserve the market’s stability?
Ö.O.: Inflation and increases in exchange rates, which affect spare parts and vehicle prices in Motor Third Party Liability Insurance (MTPL) and motor own damage insurance, have led to a significant increase in costs. In addition, the increases in the minimum wage in the last year have unfortunately significantly raised the costs of death and bodily injuries compensation as well as vehicle repair labor.
Considering the costs in question as well as the losses from previous years, it has become impossible to ensure sustainability with current premiums. While our insurance companies were able to issue policies 14.8% below the ceiling premiums in MTPL within the scope of the ceiling premium tariff applied in September last year, this year they can only issue policies below 3.5% due to increasing costs. However, in any case, it is not possible to exceed the ceiling premiums determined by the public authority. Considering the cost increases, it appears that the increase in the ceiling premium is not sufficient.
In addition, the increases in vehicle prices in motor insurance have led to an increase in the compensation paid. In parallel with the increase in exchange rates, vehicle prices have also increased, and the problem of new vehicles’ availability in the market still exists. This situation also causes prices to increase in the second-hand vehicle market. Manufacturers in the automotive industry are experiencing difficulties caused by disruptions in the global international supply chain due to the impact of the pandemic. Failure to solve the current problems will have a negative impact on the insurance industry as well as the automotive industry in the coming period.
On the other hand, although Motor Vehicle Insurance is a voluntary insurance product and is not required to be provided by companies, the issue of covering vehicle damage with comprehensive insurance varies according to the risk acceptance policy of the insurance company. The premium of the insurance product in question is freely determined by the insurance companies within the framework of the relevant legislation, considering multiple criteria such as the insured's past damage data, the insured's age, vehicle brand model and year.
The sector, especially MTPL, seems to believe that it is necessary to focus on different medium and long-term solution proposals. These solutions range from pricing to other factors affecting the cost, in order to place the cost within a predictable and sustainable framework in the long term.
To make cost management effective, the sector optimizes cost management, tries to control costs and discipline loss of value by increasing the use of equivalent parts.
Legal regulation risks are very high, so pricing and risk selections are made by taking these risks into consideration in technical calculations, and future risks are calculated and added in a much better way in premium adjustments,
Simultaneously, the insurance sector must focus on achieving a well-balanced portfolio distribution in pricing and risk selection, use financial income instruments to compensate for technical losses and striving to enhance portfolio equilibrium by maximizing the efficiency and profitability of profitable branches,
Furthermore, concerted efforts are being undertaken to ensure that the following projects, aimed at enhancing the sector's overall infrastructure, remain a focal point within the industry and are effectively implemented:
- Switching to a free tariff in MTPL and narrowing the pool of risky insured drivers
- Increasing price differentiation and customer satisfaction by distinguishing between good and bad drivers with the Person-Based Policy Issuance System, which is based on the driver list and evaluates the person's driving behavior
- Implementing the practice of rehabilitating extremely high-risk drivers and operators by segregating them into a separate pool.
- Revising of the regulations and practices regarding the issues of Attorney fees, Loss of Value, Health Practice Communiqué (where doctor examination fees are determined) and Equivalent Part applications, which are very large cost elements.
XPRIMM: What are your associations’ priorities for the next period? Are there any eventual regulatory changes that would be needed so that insurers’ activity may improve? What are the most challengins aspects of the insurance business in your market?
Ö.O.: The Earthquake-Focused Insurance Reform Agenda Project was launched by our Association. The Project aims to identify the main problems experienced and the industry’s needs in terms of both civil and commercial/industrial risks and to formulate the corresponding strategies for the upcoming short-term and long-term periods. The strategic initiatives aim to address the unmet customer needs with new offerings, enhance existing products to increase earthquake insurance penetration, identify new ways of communication to increase awareness, increase the effectiveness of the channels, explore new means of financing and define improvement areas for better and more efficient claims management. In this way, it is aimed to determine the roadmap including the priorities by creating reform items for the sector’s needs.
Work continues within our Association for the creation of the Supplementary Pension System (TES), which is included in the Medium-Term Program (OVP) announced in September 2023.
Creation of the Supplementary Pension System
For the establishment of second-pillar vocational plans, which are missing in our social security system; the need to restructure the automatic enrollment system (OKS) has been seen, and our work has begun to implement the Supplementary Pension System in the last quarter of 2024. The next 20 years offer a demographic window of opportunity for Türkiye in terms of savings accumulation due to the increase in the productive population of working age. Creating a sustainable retirement system and contribute to the financial sustainability of the public pension system is our first priority, and it is evaluated that it will have a very positive impact on increasing savings. It is thought that in order for TES to be applicable to all employees, incentives and state contributions should be provided, and employers should benefit from an appropriate set of policies to support their employees' entry into the system. On the other hand, when we look at world practices, we see that in countries where automatic enrollment is successful, the implementation of the system with compulsory stay, conditional exit and employer contribution takes place and transition is spread over time and also the system and its benefits are well explained to the employees who will join the system.
XPRIMM: Speaking about the future – are there any business lines that Turkish insurers are considering growth opportunities for the near future?
Ö.O.: After the Covid-19 pandemic the way of doing business changed. The "hybrid" model has started to be adopted in parallel with digitalization.
In this process, companies have started to demand cyber risk insurance against the risks of business interruption caused by cyber attacks. Individual policyholders have also started to demand cyber risk insurance to protect their intangible assets and personal data. In this context, the demand for cyber risk insurance has increased both individually and corporately, and although it is higher for corporates, it has not yet been reflected in policy production. The new risk perception brought about by developing technology is increasing day by day and this is expected to be reflected in both product diversity and the number of insurance companies offering coverage.
In this period of rapidly increasing digitalization, healthcare providers are expected to give more weight to telehealth services, which have come to the fore more with the Covid-19 pandemic within the scope of health insurance, thus it is known that demand will increase, so insurance companies continue their initiatives and studies in this field.
On the other hand, after Kahramanmaraş earthquake, the importance of urban transformation was once again recognized. In this framework, urban transformation has been included in the Med-Term Plan and we expect both Building Inspection Insurance and Construction Bonds to be among the important agenda items in the upcoming period. In addition, as mentioned above, it is aimed to develop and expand a "Catastrophe Insurance" to cover all catastrophic hazards and it is possible to say that we anticipate growth in these areas as well.
Also, green transformation is one of the issues we are working on diligently. We are working intensively in this direction. As the insurance industry, we consider this within the framework of sustainability, and in line with the concept of insurance=sustainability, almost all of our companies undertake important social responsibility projects to leave a livable world for future generations. We don't view this as just a responsibility; we also promote sustainability by providing insurance solutions for investments in this direction. Accordingly, we continue to support renewable energy projects that we believe are important for our country's fight against climate change and energy security. In this way, we provide coverage for 745 megawatts of installed capacity in wind energy and 1400 megawatts in solar energy.
Therefore, green insurance products sensitive to environmental factors, green energy projects and insurances for sustainable businesses are among the products with growth potential in the future.
XPRIMM: The Turkish markets also includes a segment of Participation Insurance – TAKAFUL. Please provide more details.
Ö.O.: Türkiye is the closest candidate to become the regional leader in participation insurance, with its advantages both geographically and demographically.
In addition to being the 8th most populous country among the Islamic countries, our country is ready to take on this role with the advantage of having an open economy model with its geopolitical, strategic and demographic elements.
Towards this goal, a conference on TAKAFUL has been planned to be held for the first time in Istanbul in December 2023, together with AAOIFI, an organization that determines international standards in this field, and an important step has been taken to ensure awareness and cooperation both in our country and on international platforms.
TÜRK KATILIM REASÜRANS AŞ, a state subsidiary, started operations in 2021 in order to support the development of participation insurance in the coming years and increase reinsurance capacity. Türk Katılım Re is expected to provide significant support to participation insurers operating both in our country and in the international market.
It is planned to increase the market share of participation insurance to 10-15% levels in the first stage (currently 5%) due to factors such as the constantly developing and growing economy of our country, developing participation insurance models, and the inclusion of segments of people who cannot benefit from the insurance system for faith-based reasons.
In this direction, increasing awareness and competition with new products that can be developed specifically for this field with new companies to be established with domestic/foreign capital in this field in our country, and enlightening the public through various communication channels and advertisements will make it easier to achieve these goals.
Participation insurance in our country is expected to show significant development in the coming years with the support of Insurance and Private Pension Regulation and Supervision Authority (IPRSA), which is the regulatory and supervisory authority in the field of participation insurance.
Interview conducted by Daniela Ghetu
