At the time of writing, it is clear that recovery from the recession will be slow and uneven in the CEE region. GDP growth will not reach pre-crisis levels anytime soon, and indeed will only achieve rates below those of the other emerging markets. Fixed investment and private consumption are still relatively weak, and are expected to remain so in 2010.

Surveying a battered landscape

According an International Monetary Fund report, the CEE region breaks down into three groups:

1. Poland, the region’s most robust economy;

2. Four countries projected to attain modest GDP growth in 2010 (Czech Republic, Slovenia, Slovakia and Romania); and

3. Five countries whose economies are expected to contract in 2010 (Hungary, Bulgaria, Estonia, Lithuania, and Latvia).

The coming months will show just how accurate the forecast is, but even if real life deviates somewhat from the IMF estimations, it already seems clear that the way the countries react to the crisis will lead to a further diversification of the region’s economies.

Insurance is a very particular industry in that it responds to current economic developments with a slight delay compared to other industries. Insurers’ financial results, therefore, do not immediately reflect fluctuations in the economic cycle. Consequently, it is to be expected that regional insurance industries will still face a fairly long period of volatility.

For the time being, the CEE insurance market’s results show a 7.63% fall in gross written premium (GWP) terms, exceeding the regional GDP contraction of 5% in 2009. The worst outputs were recorded by Latvia and Lithuania, with year-on-year GWP falls of 22.4% and 25.5%, respectively. Romania came third, with a drop of 13%, followed by Hungary, down 9.4%. This ”misfortune” ranking mirrors the countries’ general economic underperformance, as they are the most affected by the recession in the region. It is also worth mentioning that in some countries, including Hungary and the Baltics, a strong depreciation of the national currencies over the past year added to the negative trend when denominating financial indicators in euros.

Life insurance – the 2009 Cinderella

Life insurance lines were the most affected by the crisis. Poland and Romania registered the most impressive negative changes, of about 21% each, followed by Bulgaria, with a drop of 19%. Clearly, the Polish Life insurance downturn drove the general negative trend in the region, as Poland holds a roughly 50% a share of the CEE Life insurance market.

Starting at the end of 2008, the uncertainty that the crisis induced in the personal finances of CEE citizens, together with a growing distrust of financial investment results, led to a dramatic fall in the public appetite for life insurance products. Nevertheless, the large number of surrenders of Life policies seen mainly the first half of 2009 was not only driven by a worsened financial situation, but also by various subjective factors. People react emotionally under the impact of the wave of bad news from the financial world.

But behind the spontaneous reactions, one can detect a number of trends that are common to all countries across the region. First, single-premium products have been abandoned in favour of products with a regular payment as people try to balance their budget and spread expenses throughout the year. At the same time, the ”traditional” Life insurance products, especially those offering some kind of return guarantee, are by far more popular than the riskier Unit-Linked policies despite the fact that this is probably the best time to invest in them in order to capitalise on a recovery in capital markets. In addition, a drop in bank lending, together with a fall in the number of sponsored employee benefits schemes, resulted in an overall drop in group business.

Non-life insurance: under pressure

Motor insurance dominates the CEE insurance markets, accounting for about 60% of the region’s Non-life portfolio. It is worth mentioning that the volume of car sales is the major factor influencing the voluntary motor insurance volume, especially those sales financed by leasing or bank loans where the taking out of a Motor Hull insurance policy is a condition of the contract. This is why a massive drop in car sales throughout the CEE has had a major influence on the region’s Non-life business volume. And in addition to the drop in car sales, fleet insurance was another of the main sources of the decline in Motor business. As carriers saw a massive reduction in activity, they stopped buying cover for their entire fleet.

Altogether, corporate business made an important contribution to the fall in Non-life business during 2009. Companies hit by the economic crisis searched for ways to survive the turbulence, and insurance coverage for their business often fell victim to cost reductions. But insurance companies have tried to counter this response by stressing that insurance is, in fact, a resource that could help them to survive the current period. To assist struggling corporate clients as well as to maintain business, insurers have been more receptive to proposals to adapt insurance policies and change payment schedules.

We are feeling the influence of the crisis on the behaviour of corporate clients, Petra GREKSOVÁ, spokesperson for ALLIANZ-Slovenská poisťovňa (Allianz -SP), the biggest insurer in Slovakia, told the Slovak Spectator newspaper. Clients have a greater tendency to re-assess insurance policies; in particular, they reduce the sums insured and the scope of coverage of policies. Often such behaviour is the result of a reduction in their business activities or a real need to save money.

Payment discipline was also an issue of 2009 as difficulties in cash flow led many corporate clients to postpone or even skip premium payments. In fact, insurers had to deal with a high level of portfolio volatility in this respect, as the signing of a policy contract and receipt of the first premium instalment were no guarantee that the rest of the premium payments would follow.

The collapse of the real estate boom and the attendant halt to new construction activity meant a decline for the Property lines. However, small and medium-sized companies became more interesting as clients, both because of their number and their increased vulnerability to a wide range of risks. Insurers in some CEE countries, like Slovakia or Romania, reported an increasing interest in comprehensive insurance products as businessman realised that their company would not be able to cope with the occurrence of some unexpected risks unless they had insurance coverage.

Another characteristic of this period was an increased interest in liability, especially in products related to producer liability and management liability insurance (D&O insurance). Ironically, corporate customers were also clamouring for financial risk insurance products, but this was probably the only business line that insurers avoided.

A brief look to the future

In choosing to take an optimistic view when looking to the future, one must highlight that the crisis has forced through some necessary transformations and pushed markets to accelerate their progress along the road to maturity.

And although it is maybe too soon to talk about crisis conclusions, some facts have already emerged from the haze of confusion

• The region’s highly competitive markets had to redirect their competitive impulses away from acquiring additional market share in the Motor lines towards more innovation and better client service;
• Smaller companies behaved better during the crisis, being structurally more flexible and so better able to adapt to the new market conditions. As a result, markets have tended to become less concentrated;
• The downturn in the Motor insurance lines forced a better diversification of risks in the insurers’ portfolios;
• In trying to push ahead sales, insurers had to be more creative and to develop new products, and be more client-oriented and establish better distribution channels;
• The CEE insurance markets are increasingly profit oriented. The era of extensive growth has come to an end, leaving a new ”intensive” approach in its place.

Motor insurance in the CEE

• Czech Republaic and Slovenia are the only motor insurance markets reporting a positive result in 2009, while the Baltics are holding the weakest performance;
• Fleet insurance proved to be challenging under the weakening market of transported goods;
• Under the hard economic conditions, insurance fraud related to the motor lines seems to become a hot issue in many countries;
• With very few exceptions, motor lines have higher contribution to the total paid claims amount than to the written premium volume. Most probably, it is not by chance that the mentioned exceptions are Poland, Czech Republic and Hungary, the most developed insurance markets in the region.

Property insurance in the CEE

• Property insurance business proved to be somehow less sensitive to the volatile economic environment; except for Latvia and Lithuania, property insurance produced positive or at least modest negative results;
• Property insurance has a low contribution to the paid claims volume, being this way one of the most profitable insurance lines;
• Floods, extreme temperatures and storms are the main natural hazards in the region. In addition, Albania, Bulgaria, Croatia, Romania, Serbia and Slovenia are prone to the seismic risk. Still, no significant nat cat event occured;
• Catastrophic risks is a concern of increasing importance to countries in the region. Romania already settled a cat risks insurance pool, starting to issue the first mandatory dwelling insurance policies in July 2010. Similar intentions are under scrutiny in Bulgaria and Bosnia.