15th Talk on Insurance and Regulation

Dr. Klime Poposki, President of the Council of Experts

Frankfurt, November 15, 2018

Goethe University FrankfurtInternational Center for Insurance Regulation (ICIR)

Structure

• Political enviorment and EU accession process

• Economic performance

• Financial system

• Insurance market trends and developments

• Regulatory and Supervisory framework

• Challenges and perspectives

Western Balkan Countries Region

1999-Euro Atlantic integration -cooperation agreement, the Stability Pact for SEE.

2003-EU summit in Greece. 2004-Stabilisation and Association

Agreements . EC in February 2018 set an indicative

deadline (2025) for admission.

EU ENLARGEMENT

Population (000) Credit RatingWorld Bank Atlas

ClassificationYear of candidate status

Year of negotiation process

Albania Candidate status 2014 2,873B+ S&P;

B1 Moody'sMiddle- income

Bosnia and Hercegovina Potential candidate in progress 3,507B S&P;

B3 Moody'sMiddle- income

Kosovo Potential candidate in progress 1,831 UnratedLower Middle-

income

Macedonia Candidate status 2004 2,083BB- S&P;BB+ Fitch

Middle- income

Montenegro Candidate status-negotiations

20102012 (open 30 chapters)

622B+ S&P;

B1 Moody'sMiddle- income

SerbiaCandidate status-negotiations

20122014 (open 12 chapters)

7,022BB S&P;

BA3 Moody'sMiddle- income

Economic performance - GDP per capita (PPP adjusted)

Source: IMF World Economic Outlook

WBC, Average annual growth

rate

2001-2017

3.2%

Pre- crisis period

(2001-2008)

Post- crisis period

(2009-2017)5.3% 1.2%

EU,Average annual

growth rate

2001-2017

1.4%Pre- crisis

period (2001-2008)

Post- crisis period

(2009-2017)2.2% 0.7%

Convergence scenarios

GDP structure and the role of SMEs

Exports, by destination as per cent of total exports

Source: UNCTAD and Central Bank of Kosovo

External economic relations and FDI

Share of EU28 in the total stock of FDI in WBC, %, 2016

Poverty Line

Gini index

Source: World Bank World Development Indicators/IndexMundi

Social Challenges

AlbaniaBosnia &

HerzegovinaKosovo Macedonia Montenegro Serbia EU

2012 2011 2013 2015 2013 2014 2013

Population below poverty line 14.3% 17.2% 30% 21.5% 8.6% 8.9% 9.8%

Unemployment rates, in %

Youth unemployment, % of labor force aged 15-24

Source: World Bank Group, WiiW

Source: World Bank World Development Indicators

Inflation, end-of-period consumer prices, Exchange currency regime

Albania Floating exchange rate

Bosnia & Herzegovina

Euro-denominated currency board

Kosovo Euro currency

Macedonia Denar pegs to Euro

Montenegro Euro currency

Serbia Floating exchange rate

Financial Sector

Stable financial sector

No significant FI

failures

On average financial

sector assets = 96%

of GDP

Bank - centric

structure

Rapid growth of

pension and insurance

in the last 10 Years

Low capital market

activity

Nonperforming loans are declining Banks are adequately capitalized

Insurance market overview

2017 ALB BIH KOS MKD MNE SRB CEE EU

Insurance penetration 1.03% 2.18% 1.36% 1.45% 1.94% 2.08% 2.60% 7.19%

Insurance density (EUR) 42.35 99.61 46.82 70.44 131.25 111.78 299.00 1,943.28

Number of insurance companies 11 27 15 16 10 17

% in financial sector's total assets 0.1% 5.6% 3.0% 3.5% 4.7% 6.3%

Insurance Penetration – comparison 1990/2017

Source: 1990: S&P Global ; 2017: Xprimm

2002 2005 20171990 20091997

Monopoly

Insurance Supervision

Agency

Liberalizationand

privatization

Insurance Supervision

Law

-Foreign Inv.-Solvency

Requirements

OligopolyNew InsuranceSupervision

Law

First Life insurance company

2007

New InsuranceSupervision

Law

(Solvency I)

- 5 Life insurance companies

- GWP = EUR 23.52 mil (2017)

- 0.23% penetration rate

Insurance milestone in Macedonia- 11 Nonlife Insurance

Companies- GWP = EUR

122.72mil (2017) - 1.22%

penetration rate

Central Planned

Economies

- 3.11% penetration

rate

- One State own Insurer

Premium structure – comparison 1990/2017

Literature review

1945-1991 CENTRALLY PLANNED INSURANCE MARKETS: ‒ Rogers, P. P., Schönfelder B. and Schütte E., 1988, Insurance in Socialist East Europe, New York: Praeger;‒ Marbacher, J. and Furrer, J., eds., 1990, “Eastern Europe: Hard Road from Insurance Monopoly to

Market”, Sigma, No 5. Zürich: Swiss Re; 1991-2004 TRANSITIONAL PROCESS:- Baur, E. and Enz, R., eds., 1994, “Eastern Europe: The Insurance Industry under the Impact of Economic

Transition”, Sigma, No 5. Zürich: Swiss Re;- Baur, E. and Hess, T., eds., 1995, “The Insurance Industry in Eastern Europe: Recovery has begun”, Sigma,

No 5. Zürich: Swiss Re;- Dorfman, M. S. and Ennsfellner, K. C., 2001, “Transition from Central Planning to Market-based Insurance

Transactions: A Case Study of Poland, the Czech Republic and Hungary”, Journal of Insurance Regulation,20 (2), 160-194;

- Robert, B.K. Pye, 2007, “The Evolution of Financial Services in Transition Economies: An Overview of the Insurance Sector”, Journal of Post-Communist Economies, Volume 17, 2005 – Issue 2.

Insurance premium trends 2008/2017

Note: Kosovo growth (2015-2017)

Note: Kosovo growth (2010-2017)

Cumulative growth

(2008-2017)

Annual average growth

(2008-2017)CEE 6.18% 0.67%

EU 4.85% 0.53%

Cumulative growth

(2008-2017)

Annual average growth

(2008-2017)CEE -9.29% -1.08%EU 1.67% 0.18%

Market concentration and Presence of foreign investors

Life Insurance Product Structure - 2017

Source: Insurance supervision authorities of selected countries

Nonlife Insurance Product Structure - 2017

Location of Supervisory

Authority

Integrated institutions

Within the Central Bank

- Serbia - Kosovo (2008)

Separate institutions

Partially integrated institutions

Within the Ministry of Finance/ Economy

Separate institutions

- Albania (2006)

Non-integrated institutions

-Macedonia (2009)-Montenegro (2007)-BIH (2004)

Mission statement and Key objectives Organizational, institutional and financial independence IAIS members, implementation of ICP FSAP Assessment Harmonization with EU insurance directives

The Governance of Regulatory and Supervisory Authority

Insurance Supervision Framework of ISA

Supervisory Review Process

Supervision Department: 12 employees (10 economists, 2 actuaries)

Licensing Department: 5 employees (2 economists, 3 lawyers)

IT Unit: 2 employees

Annual plan of on-site inspections

Permanent off-site supervision – IT supervisory system for reporting Monthly/quarterly/annually

Internal procedures On-site Off-site Consumer protection

Joint on-site inspection with foreign and local supervisors

Supervisory colleges

Regulation

Insurance Supervision Law harmonized with the EU directives within the

Solvency I regime. The Law incorporates the provisions of the First, Second and Third EU Insurance Directive, the Directive 77/92/EEC with regard to the insurance intermediaries as well as Directive 64/225/EEC with regard to reinsurance and retrocession

Insurance Supervision Law incorporates the principles and standards for conducting effective supervision of the International Association of Insurance Supervisors (IAIS)

Transitional provisions

Law on compulsory insurance in traffic Harmonized with the Fourth EU Motor

Insurance Directive.

Transitional provision: Regulation of the MTPL premium tariff

and green card

Minimum insured sums

Information Center

Claims representatives

Compensation Body.

Relationships with EIOPA

Professional secrecy equivalence assessment 2014:‒ in respect of professional secrecy, the regime of Macedonia is considered to be largely

equivalent under Principle 2 dealing with professional secrecy and exchange of information

Participation of Supervisory colleagues: ‒ FMA, Austria; ISA, Slovenia, FSC, Bulgaria

Conferences, Workshops, Trainings;

High Level meeting (October 2017, plan for 2019);

Open and permanent discussion and communication for our preparation of Solvency 2;

Challenges

Non Life business‒ Motor insurance

‒ Property insurance including the catastrophic risks insurance

‒ Health insurance

Life Insurance

Regulation

Supervision

Non life insurance market characteristics – survey

MTPL overviewMKD MNE SRB BiH ALB KOS

MTPL share 51.91% 53.01% 47.12% 58.43% 65.72% 64.50%

Vehicles per 1000 citizens 320 246 219 194 178 333

Average GWP (EUR) 118 146 110 152 136 133

Combined Ratio 94.55% 79.00% 65.10% 81.64% 91.70% 94.91%

Claim Ratio 46.25% 36.00% 38.91% 48.19% 26.84% 41.27%

MTPL liberalization? no YES no no YES noIn force: aug.2017 aug.2011Plan for MTPL liberalization?

YES YES YES YES YES

Centralized system for MTPL insurance policies and claims?

YES YES YES no YES YES

Harmonization with min Sum Insured (MID)?

no no no no no no

Green card - single premium?

YES no no no YES YES

Supervisory action

Preliminary field work points to formidable challenges faced by the market today. Inter alia, these include:

High commissions & premium discounts

Policyholder’s lost trust & reduced

sales

Undermining paying capacity

Reducing necessary financial resources

Improper technical reserves

High competition & high MTPL reliance

Lack of proper regulatory requirements to reinsurance of unlimited green card liabilities

Insufficient & inaccurate industry data

High level of uninsured vehicles

Lack of standardized approach by courts to bodily injury claims awards

On top of that:

Technical provisionsIn the period 1.1.2012 to 31.12.2017:- the total gross claims reserves for MTPL, for the total market, increased by 49% or over 15 million euros.- run off result for 31.12.2011 is -7.3 million euros or -24% in relative terms- run off result for 31.12.2011 for the 6 companies with highest MTPL share in their portfolio is -5.5 millions euros or

-53% in relative terms

Ca

Insurance against catastrophic risks-average impact of nat cat and vulnerability index to climate changes

SEE is significantly vulnerable and exposed to natural disasters. – over EUR 80 billions in last 30 years;

25% of all expected losses are likely to return every 20 years on average

38% of all expected losses are likely to return every 20 – 50 years on average

In the case of flood with a 250 years mean return period the loss of Macedonian economy is estimated EUR 930 million

In the case of major earthquake with a 250 years mean return period the loss of Macedonian economy is estimated EUR 1,6 billion

Source: Adapting to climate change in Eastern Europe and Central Asia, World bank and AIR World-wide risk model estimation

Vulnerability index

Insurance against catastrophic risks - Macedonia

Share in non-life GWP 11 non-life companies Property insurance EUR 23.35 million(19% from N/L) Only 4.84% of the nonlife premiums refers to CAT

risks (1.34% earthquake, 0.92% flood, 2.58% hail and frost)

1.62% of legal entities have earthquake insurance, 3.71% flood insurance

Only 0.92% of public and state institutions have earthquake insurance, 4.77% flood insurance

0.84% of householder residencies have earthuqake, 1,47% flood insurance

Agriculture insurance EUR 2.56 million (2.08% from N/L, or 10.95% from property insurance)

Only 3.98% of the registered farmers have agriculture insurance

Government action in promoting PPP schemes

2008 - Government subsidies for agriculture insurance premium (up to 60%)

2008 - start of the preparation World bank project - Southeastern Europe Catastrophe Risk Insurance Facility (SEECCRIF) to promote development of the catastrophe and weather risk insurance market in the region

‒ 2013 – reinsurance company Europa Reinsurance Facility Ltd. (Europa RE) formed in state ownership ofMacedonia, Serbia and Albania;

‒ 2014 – country-specific flood and earthquake models developed by AIR;

‒ 2015 – insurance products launched sold through local insurance companies (Earthquake and Flood – risk basedindemnity products);

‒ Agriculture – parametric based for AYII

‒ 2016 - website launched - CATMonitor™ as part of its commitment to provide education and raise disaster riskawareness in the SEE region

‒ Macedonia: only 4 insurance companies has entered the programme, Intermediate results – lower penetrationthan expected

Future plans:

Some form of compulsory insurance as a micro insurance for earthquake

Sovereign and sub-sovereign risk transfer products

Agro insurance pool

Life insurance challenges

• Non- graduated mortality national tables (Ex for Macedonia - last census was in 2002 -> mortality tables from other countries have been used)

• ALM duration mismatch due to non-developed financial markets;

• Absence of having appropriate risk-free market curve;

• Supervisors regulate the minimal interest rate for calculation of the mathematical provision, as a fix number being 60% of the income on the 10 years government bonds;

• Lapses and surrenders;

• Supervising intermediaries and the commission they are taking to see whether they have incentives for misleading;

• Close monitoring of banks as an intermediary;

• Product design;

• Unit-linked products;

• Policyholder financial literacy;

• Positive outlook and still the most important driving factor for insurance growth

Regulatory and supervisory challenges

Regulation Solvency II (EU Twining project: “Further harmonization with EU in the field of

insurance and increase of market operations”) IDD (Plan for applying EU Twining project) IFRS 17 Liberalization of motor TPL insurance Further harmonization with the IAIS core principles and standards

Supervision Risk based supervision Market conduct IT Dispute resolution mechanism (ombudsman, mediation, financial education)

Strengthening the political, operational and financial independence Proper staffing and funding

Literature review

• S. Kozarevic, E Kozarevic, E Siljegovic , Development of the insurance sector in the Western Balkan countries: the drive towards the European Union insurance system, International Journal of Economic Policy in Emerging Economies 4 (3), 287-302;

• S.Kozarevic, L Peressin, G Valentinuz, Efficiency of the Transition of Insurance Markets in South-Eastern European Post-Communist Countries, SEEJE – South-Eastern Europe Journal of Economics 11 (2), 139-164;

• Ćurak, M., Lončar, S., Poposki, K., Insurance Sector Development and Economic Growth in Transition Countries, International Research Journal of Finance and Economics, Vol. 34, 2009, str. 29-41., ISSN: 1450-2887;

• Kjosevski, J. (2012). The determinants of life insurance demand in central and Southeastern Europe, International Journal of Economics and Finance, 4(3), pp. 237–247.

• Pervan, M., Ćurak, M., Poposki, K., Insurance industry in Macedonia: A general overview, International Journal of Economics and Statistics, No. 2, 2014, str. 161-169, ISSN: 2309-0685;

• Ćurak, M., Podrug, D., Poposki, K., Policyholder and insurance policy features as determinants of life insurance lapse evidence from Croatia, Economics and Business Review, No. 1/15, 2015, str. 58-77, ISBN: 2392 01614;

• Poposki, Klime., Kjosevski Jordan., Stojanovski Zoran., „The determinants of non-life insurance penetration in selected countries from South Eastern Europe ,“ Economics and Business Review, Vol. 1 (15), No. 3, 2015: 20–37;

Thank you

Klime PoposkiEmail: klime.poposki@aso.mk

www.aso.mk