Last year Croatia experienced its biggest economic contraction since the Balkan wars in the 1990s as investments and consumption slumped. According to the local statistics office, GDP dropped almost 5.8%, after a 2.4% gain in 2008 and a record advance of 5.5% in 2007. The drop has been marked by a plunge in personal consumption and capital expenditure and economic analysts forecast that GDP would continue to shrink this year as both categories will take time to recover. Most probably, the economy will only start expanding in 2011.

Croatia holds a 4% of the CEE insurance market in terms of GWP, being one of the region’s mid-sized players. Non-Life insurance business prevails, representing almost 74% of market turnover. Although a modest share of Life insurance is usually seen as a sign of a market’s greenness, in the particular case of the 2009 crisis, it was quite a positive development to be less exposed to this very household wealth-sensitive business. Thus, the Croatian market dropped only 2.54% in 2009, compared to the more developed Hungarian or Polish markets where the Life business downturn was a major factor.

Gross premiums written by Croatian insurers totalled EUR1,288.13m, while paid claims reached EUR654.38m, some 4% higher than in 2008. The GWP volume for the Life insurance lines was EUR430.63m, 2% lower than in 2008, while paid indemnities rose 36.7% to EUR127.46m. The non-life insurance segment posted declines in both GWP and paid claims on the year, with premiums falling 2.73% to EUR947.51m and paid claims easing almost 2% to EUR974.06m.

It is worth mentioning that despite the lower turnover, the Croatian insurance market managed to stay in positive territory as far as profitability is concerned. According to the Board President of the Croatian supervising authority, HANFA, Ante SAMODOL, the insurance industry reported a consolidated profit of EUR0.86m.

Life insurance under pressure

With an overall 2% drop in turnover and an almost 37% growth in paid indemnities, the Life insurance market's situation is quite volatile. The Unit-Linked insurance line witnessed a 37% fall in volume in the first half of the year as a result of the distrust triggered by poor investment results and a fall in the population's purchasing power. By the end of 2009, the negative change was only 27%, but this was because the end-2008 results were already affected by the first signs of the crisis rather than being due to a market resurgence.

Another contributing factor to the decline in Life insurance was the breakdown of banking loans, which meant a significant drop in bancassurance activity. Still, after the initial shock, the market partly stabilised and preserved a high growth potential. But a government announcement of an intention to cut the fiscal incentives offered to the Life and Health insurance policies as part of a new economic recovery programme could pose a new threat to the Life insurance sector in 2010. No final decision has yet been announced on this matter.

In addition to the classic Life insurance offer, life insurance providers are offering new products in an attempt to respond to the new market conditions. GRAWE has introduced its 'saves 1-2-3' tariff, which targets customers interested mainly in the savings component. Some of the most important benefits of the new product are the preservation of the real value of money, affordable insurance premiums,equal access for all ages and a disregard of the health status or risk of occupations and sports. TRIGLAV, in turn, created Flex insurance - a life insurance policy with a strong investment part, which may grow up to 100% in pace with the policy's maturation.

Non-Life insurance - the price dilemma

Motor Hull insurance played the most important part in the market decline in 2009. Following a dramatic 50% year-on-year fall in the number of passenger cars sales, the number of Motor Hull insurance policies dropped almost 27,000 units. Consequently, the GWP fell 12.76% to EUR137.44m.

Similarly, the MTPL insurance line also registered a 41,000 decline in policies, while there were 140,000 more uninsured and/or unregistered cars in Croatia. Nevertheless, due to tariff increases the GWP level remained almost unchanged on the year and MTPL, with a more than 31% share of the portfolio, continued to be the market's most important business.

The only market segment to post a positive outcome was the Fire and Allied Perils insurance line, where GWP rose 3.84% to EUR80.10m. It is also true that Fire and Allied Perils claims rose about 14% to EUR30.5m.

It is also worth mentioning that most insurers reacted to the crisis by lowering prices. Thus, the average premium per policy fell to EUR1,054.6 in 2009 from EUR1,072.76 in 2008. Only four companies reported an increase in the average premium value, but this can only be considered a first step towards retreating from a dumping policy as they were the cheapest insurance providers. In fact, some of the market professionals see the crisis as providing an incentive for companies to undertake healthier underwriting. It is obvious that the majority of industry is not profitable and I think that it's not just about individual situations and one bad year, but there are many structural barriers to profitability, says Boris GALIC, CEO of ALLIANZ Zagreb, one of the few insurers that managed to increase its profitability during a crisis year. This is the result of our market fragmentation, with perhaps too many insurance companies and of certain market behaviour that is not common in other businesses, namely selling insurance at prices that surely represent at loss. In this respect, maybe it is better to have some radical situations to clear the air.

Market leader

CROATIA Osiguranje (CO) is the insurance market's clear leader with a 38.7% share of the non-life market and a 14.3% share of the Life insurance market. Still, the company lost some 2 percentage points of its market share compared with 2008, mainly in the Non- Life segment, due to a 6.6% drop in GWP volume. It is also worth mentioning that CO managed to report a 4.1% rise in pre-tax profits to EUR13.27m.

CO did not have an easy year in 2009 because in addition to the volatile economic environment it had to deal with a strongly negative campaign related to its management. As the company is still mostly state owned and its management is subject to political pressure, the position of its former CEO became tenuous and he was replaced in March 2010.

Meanwhile, despite the turmoil, CO expanded its business in Macedonia, Montenegro and Serbia, concluded some very profitable distribution arrangements with the Croatian Post and was named the best insurer in the CEE region by Euromoney.