The collapse of the stock exchange indexes and the liquidity crisis significantly “cut down” life underwriting in Central and Eastern European countries, a segment covered mainly by unit-linked products. Although traditional life insurance has the highest share (67% in 2008) in Romania, the current economic context caused a slower growth rate for life insurance in 2008 and an unavoidable decline in 1Q 2009. These facts were the starting point for the debates taking place on the Life and Health Insurance Day at FIAR 2009.
Big expectations – limited results
If the 2008 edition of FIAR focused on the spectacular growth of the life insurance market, the debates this year covered the measures that local company leaders are about to implement in order to guarantee a growth that is at least identical to the previous year’s growth rate. Although life insurance share is still low, with a maximum 23%, as recorded in 2005, it experienced a two-digit growth over the past several years, the expectations being more than optimistic. But the financial crunch shattered the hopes of insurance companies, leading to a slower growth in 2008, namely 17.1% in euros, compared to 36% in 2007. Its share represented 20.5%, meaning an EUR 502 million total underwritings volume.
The preliminary results for the first three months of 2009 also show the first decline on this market, over the past years. Unfortunately, the downward trend on the life insurance market is steeper than the overall market trend. Thus, the decline in euros experienced by this segment (-16%) was almost 4 points higher than the market’s decline, which caused a decrease of the life insurance share in the overall insurance industry to 16.2%, from 18.35% - as reported in the same period of 2008.
An explanation thereof was given by Angela TONCESCU, President of the Insurance Supervisory Commission, at FIAR 2009, who stated that one of the reasons for the decline is the cancellation of life insurance policies by certain companies, such as ARDAF and BT Asigurări. However, after assessing the companies’ results for 1Q, we notice that only 12 out of 39 insurance companies experienced positive trends, while the rest of them witnessed a decrease in underwriting. Also, looking at the TOP 5 life insurance companies that concentrate 69% of the total underwriting, we see that only the third ranking company - BCR Asigurări de ViaÈ›ă– recorded a significant increase of 44.6% in lei. The market leaders- ING and AIG Life – reported a decline of 11.2% and 16.1%, respectively, having a 47% market share. ASIROM, ranking fourth, has seen a significant decline of life business, by 25.1%, followed by ALLIANZ-ŢIRIAC, with a more than modest evolution, namely 0.64% in national currency.
The magic is gone...
Some of the main factors leading to a considerable decline in life insurance, over the first quarter of this year, are as follows: the mortgage loan squeeze, the decrease in the number of insurance policies sold through financial institutions, as well as unemployment and the high number of cancellations. The representatives of the supervisory authority and the industry leaders present at the events organized under the umbrella of FIAR backed the previous forecast, pointing out to a nominal increase around 10%.
The decline in life underwriting was already predictable at the end of last year. The credit squeeze affected it, as well as the increase in unemployment and a low renewal rate from individuals, Dan CONSTANTINESCU, Member of the ISC Council, stated. He added that the biggest problem in the reference period was the increase of outstanding payments for contracted policies, due to a decline in the population’s income.
Meanwhile, many policies were sold through banks, together with mortgage loans. The 20% decrease in their number was immediately reflected on the sales of insurance, Cornelia COMAN, General Manager, ING Asigurări de ViaÈ›ă, thinks. At the same time, we also notice a contraction of the corporate market, as more companies decide to no longer offer their employees life insurance contracts to motivate and retain them, COMAN added.
On the other hand, given that only a small part of life insurance sold this year was linked to loans, the credit squeeze will not bring the market down, but it will impact on the market’s growth, according to Theodor ALEXANDRESCU, General Manager, AIG Life Romania. Thus, the share of loan related life insurance was like a bonus for insurers, but now the population must be educated to accumulate and save instead of consuming, Romeo JANTEA, CEO, GUILD Broker, added.
Last but not least, the psychological factors also added to the life underwriting decline. Another reason for the decline is that people lost their confidence, the confidence in their financial future, to which we add the uncertainty of the income they might allocate for a life insurance plan. Thus, we have less new business in 2009 and more outstanding payments, as well as surrenders, Cornelia COMAN states.
In a crisis, life is not a priority…
At least, these are the conclusions of a Panel Survey conducted by MEDNET Marketing Research Center in collaboration with Media XPRIMM, which indicates that from the 36.5% Romanians who planned to buy insurance last year, only 22% actually bought it in 2009, most of them choosing life insurance (37.3%). But this year, Romanians’ preferences changed, thus 35.3% of those who planned to buy insurance in the near future prefer to buy household insurance (53.9%) and only one third of them are interested in life insurance. As for the need of life insurance, it ranks third among the Romanians’ choices, after household insurance and Motor Hull insurance. The security it provides, to which we add the mandatory component, as well as the advantageous offer, represent the main reasons for respondents to buy insurance. On the other hand, the scarcity of money and the limited offer are the main reasons why more than one third of the respondents gave up the idea of buying more insurance.
Captives of the stock exchange
In the past years before the crisis, the unit-linked (UL) products represented one of the growth engines in Central and Eastern Europe, especially on the emerging markets. Thus, 32% of the European countries have a 50% UL share in the overall premium volume, which rendered the European insurance market vulnerable,as a result of the financial crunch and the collapse of investment funds.
For instance, in Hungary, the unit-linked products experienced only a 0.4% increase in 2008, although one year earlier they were the industry’s main growth source with a 66.3% share. The same applies to the Baltic States, as the income for the reference period in Lithuania dropped by 25% compared to the previous year, while Latvia and Estonia experienced a 5.5%, respectively 13.2% decline over the first half of the year, despite the over 50% share they had in the previous year. Poland is not in a better position either, the share of unit-linked policies going down steeply, from 50.7% to 17.1%. A similar situation is present in the Czech Republic and in Slovenia, with modest increases compared to last year.
By comparison, traditional insurance in Romania underwent a faster growth compared to the unit-linked products. In 2008, they reached a 67% share, and in 1Q 2009 they represented 71% of the total life underwriting.
However, we notice that the decline in the sales of such policies (-3%) caused a negative trend on the life market in 1Q. Thus, ING Life Insurance reported a 7% decrease in the sales of unit-linked products with a single premium, followed by ALLIANZ-ŢIRIAC, with a 14.8% decrease, and by AVIVA, reporting a modest 3.42% increase; we realize that the listed entities cover a share in excess of 90% on the unit-linked market. At the same time, according to ISC data, the total number of cancellations in the first quarter, about 60%, was recorded on this segment, and the value of paid compensations increased by 91%.
For this year, we estimate a lower unit-linked share in the overall market, to reach 20%, Cornelia COMAN considers. Also, in the current context, the decrease down to 20% in the share of investment products, by the end of the year is obvious, Frans van der ENT, CEO, EUREKO, stated. Thus, the future trends for the unit-linked market in Romania require, among other things, a higher prudence in risk distribution, an enhanced transparency for products, a wider product flexibility, as well as more efficient promoting.
We rely on retail and on bancassurance
According to General Manager of AIG Life, Theodor ALEXANDRESCU, the stagnation of the life insurance market is visible in 2009, therefore the stakes must be placed on traditional products and on retail.
In this respect, the President of BCR Asigurări de ViaÈ›ă, Florina VIZINTEANU, thinks that a contraction of the economy over the next period and the increase of unemployment represent the main risks that will impact the existing contracts, therefore the most important focus should be placed on retail. Actually, BCR Asigurări de ViaÈ›ă is one of the few companies on the market to experience a positive trend in the first quarter, due to placing the stakes on retail and on bancassurance, namely selling unit-linked products through banks, reaching a 28.5% share in the portfolio, Florina VIZINTEANU pointed out.
On the other hand, Silvia SÎRB, General Manager, AEGON Asigurări de ViaÈ›ă, estimates that time has come for a “boom” in the distribution through banks, justified by shifting the bank business on income from taxes and commissions.
At the same time, a relaxed taxation in life insurance might have a positive impact on the interest for insurance, both of the employers and of the individual customers, Dan CONSTANTINESCU added.
Is there room for optimism?
Undoubtedly, 2009 means re-orientation of strategies, adapting the products and maintaining the existing portfolios. But do we still have hopes for growth?
According to our estimation for this year end, we shall experience the same rate as last year, without any decline. The life insurance market growth, overall, shall range between 8% and 10%. I am sure we will start to recover in the following 9 months, Cornelia COMAN restates her confidence.
Also, it is early to make forecasts on growth or stagnation, we will be able to talk in more concrete terms after the first quarter. For now, the main objectives are attracting new customers and keeping and retaining the existing ones, Florina VIZINTEANU thinks.
In other words, I still think we can reach a two-digit growth this year as well, provided the company leaders make tremendous efforts in this respect. We need to focus on niche products, original ideas and we have to adapt to changes, Silvia SÎRB says.
Last but not least, the word of the year is prudence. I think that, up to now, the forecasts were too optimistic, compared to the reality. We must get ready for a stagnation period, meaning challenges for the companies to introduce new strategies, because in a crisis one can grow only if others collapse. Certain companies will withdraw, making enough room for growth for the remaining ones, Frans van der ENT adds.
What about health?
Private health insurance was another topic tackled during the event, and the problems specific to this segment, in stagnation for several years now, were thoroughly analyzed. Thus, the underwritings on this class amounted to EUR 9.1 million in 2008, with an extremely low share on the overall market, only 0.4%. The first quarter of this year doesn’t look optimistic at all, reporting a 14.5% decrease in euros, compared to 1Q/2008, and the share dropped at 0.3%.
The causes for this situation are not necessarily related to the financial crunch. Things will chang if the Ministry of Health establishes, this year, the basic package, followed by the introduction of co-payment for healthcare services, Sorina NICULESCU, Insurance Specialist, thinks. These measures are only the starting point, as there are other shortcomings, such as the non-harmonization of the public and private system, of the tax incentives, a poor infrastructure and, not least, the lack of financial and medical education.
At the same time, the major issue for health insurance is the unfair competition between healthcare providers offering underwritings, which only represent hidden health insurance, for which no reserves are created, Dan CONSTANTINESCU underlined. On the same line, Theodor ALEXANDRESCU states that ISC should not allow them not to underwrite the risk. The entire private healthcare market, that reached EUR 400 million, should go through private life insurance.
The need to fully reconsider this sector is obvious, as it represents the real engine for growth, given the market stagnation in 2009. In fact, this conclusion is also confirmed by the results of a recent survey conducted by MEDNET Marketing Research Center in partnership with Media XPRIMM, an assessment stating that private health insurance is the first option mentioned by employees in terms of the most important benefit they would like to have from their job.
