CEE Life Insurance Markets Jure Kimovec, FRM, CAIA, ERP Copyright © 2017 by S&P Global. All rights reserved. Ljubljana, 4.September 2017
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CEE Life Insurance Markets
Jure Kimovec, FRM, CAIA, ERP
Copyright © 2017 by S&P Global.
All rights reserved.
Ljubljana, 4.September 2017
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2
2,90%
1,75%
1,53%
1,30% 1,29% 1,20% 1,19%
0,84%
0,64% 0,55% 0,55%
0,46% 0,41% 0,39% 0,36% 0,25% 0,22% 0,21%
0,12% 0,12% 0,09% 0,06%
Source: S&P Global Ratings
Life insurance GWP vs Nominal GDP in 2016
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CEE Life Insurance Market - €12.3 bn at the end of 2016
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Poland; 44%
Czech; 17%
Hungary; 12%
Slovakia; 8%
Slovenia; 5%
Croatia; 3%
Source: S&P Global Ratings
Poland Czech Hungary SlovakiaSlovenia Croatia Romania LithuaniaBulgaria Serbia Latvia EstoniaBIH Macedonia Montenegro Albania
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Selected CEE Countries Market Structure
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Poland Czech Hungary Slovakia Slovenia
Source: S&P Global Ratings * For Hungary, data is from 2015
Traditional Unit-Linked Other
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Market Developments of CEE Life Insurance
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• Low interest rate environment is leading companies to reduce
guaranteed rate on traditional products which is hampering demand for
them.
• Consumer protection initiatives, due to upcoming IDD implementation,
are triggering changes of life insurance offerings in several CEE
countries.
• Cyclically higher amount of old contracts maturities.
• Favorable regulatory changes for additional supplementary pension
insurance or private life insurance schemes in several CEE countries.
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Poland; 1,83%
Czech; 1,30%
Slovakia; 0,70%
Slovenia; 1,75%
Croatia; 2%
Hungary; 2,30%
Austria; 0,50%
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%
3,00%
3,50%
4,00%
4,50%
5,00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: S&P Global Ratings
Maximum Technical Interest Rate
Poland Czech Slovakia Slovenia Croatia Hungary Austria
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Proportion of Traditional Guranteed Life Insurance is Declining
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24,6% 15,4%
50% 52%
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
2012 2013 2014 2015 2016
Source: S&P Global Ratings
Slovenia Czech Republic Hungary Slovakia
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Average Guranteed Rate on Back Book
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It remains relatively high in comparison to reinvestment yields achieved on
high quality fixed income securities.
Country
Average market
guaranteed rate
on back book
(%)
Maximum
guaranteed rate
on new business
(%)Germany 2.9 0.9
Austria 2.80-2.90 0.5
Italy 1.60-1.80 1.5
Denmark 2.5 0 - 1.5
Sweden* 3.3 0
Norway 3.00-3.50 0 - 2.0
Slovenia 2.70 1.75
Slovakia 3.30 - 3.50 0.7
*Contracts can offer a guarantee of between 100% and 85% of gross premium paid.
Source: S&P Global Ratings
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Average Guranteed Interest Rate on Back Book Will Only Gradually Decline
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0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
in % in %
Source: Slovakia National Bank
Traditional Guranteed Life Insurance in Slovakia
Average interest rate guaranteed in life insurance contracts (left scale)
Rate of return on asset investments (left scale)
Yield on 10-year Slovak government bonds (right scale)
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Unit-linked Past Developments Across CEE
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• Unit-linked products were introduced in the CEE late 1990s/early 2000s.
• The market developed relatively rapidly before the 2008 financial crisis.
• Due to product complexities consumers often have difficulties to
understand risks, cost/charges and other characteristics of these
products.
• In the past this led to material misselling across EU, with some of the
CEE countries being considerably affected.
• 2008 financial crisis materially reduced value of underlying invested
assets of unit-linked products, reduced demand for new unit-linked
policies and heightened lapse rates.
• Misaligned incentives for sales staff caused excessive switching of the
life insurance policies in number of CEE countries.
• Reputational and financial damage for the insurance sector.
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Unit-Liked Surrender Payments Remain High Across CEE Countries – Example of Hungary
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0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
20
05
Q1
Q3
20
06
Q1
Q3
20
07
Q1
Q3
20
08
Q1
Q3
20
09
Q1
Q3
2010 Q
1
Q3
20
11
Q1
Q3
20
12
Q1
Q3
20
13
Q1
Q3
20
14
Q1
Q3
20
15
Q1
Q3
20
16
Q1
Q3
HUF Bn
Source: MNB (Magyar Nemzeti Bank)
HUF Bn
Traditional maturity Traditional surrender Traditional other benefit
UL maturity UL surrender UL other benefit
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Low consumer confidence lead to increasing customer protection measures
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• In the past years there has been material loss of consumer confidence
due to misselling and in general low transparency and low comparability
of unit-linked insurance products.
• Stagnating / declining life insurance markets created need to restore
consumer confidence in the sector.
• Number of regulatory changes and industry self regulation was done
throughout CEE countries from 2008 onwards.
• We consider that markets which intrinsically focusing on consumer
protection are overcoming the issues faster and more efficiently.
• Rapidly implemented partial market regulation can have less favorable
impact on the life insurance market.
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Poland
• New regulation (Act on Insurance and
Reinsurance activity) entered into force
in Jan 2016.
• Reduction of liquidation fees for unit-
linked policies.
• Allows a pro rata reduction of brokers'
rights to compensation (at least 5-year
period).
• Intensive changes of product offerings.
Czech Republic
• In Dec 2016 change of distribution
regulation.
• Caps brokers' commissions and
extending the cancellation period.
• Allows a pro rata reduction of brokers'
rights to compensation (5-year period).
• Intensive change of product offerings,
some of the companies might cease to
write some life products.
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8,4% -3,5% 6,4%
-23%
0
2
4
6
8
10
12
14
16
2012 2013 2014 2015 2016
bn PLN
Source: KNF
Unit-Linked development in Poland
-8,0% 7,1%
-5,7%
-25,5%
0
5
10
15
20
25
30
35
40
2012 2013 2014 2015 2016
bn CZK
Source: CNB
Unit-Linked development in Czech Rep
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Impact of IDD Implementation
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• Upcoming EU-wide IDD implemantation in 2017/2018 is triggering changes of
life insurance offerings in several CEE countries.
• IDD transposition into national law gives freedom to countries to introduce
additional measures if they deem it necessary to ensure the protection of
consumers on their markets.
• In general we consider that new customer protection regulation is not
existential treat to majority of life insurers’ business models.
• We consider that the largest changes are likely to happen in product
distribution, since the regulation intends to ensure a level playing field between
all participants.
• This could have some negative consequences on business models, in
particular for companies that considerably rely on external distribution of their
products.
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Impact of IDD Implementation
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• In short to mid-term period we consider that IDD implementation is likely to have
material impact on further market developments in the region, in particular
growth prospects.
• Given low interest rate environment which is pressuring profitability of traditional
life insurance products, we consider that lower profitability of unit-linked
business could in some cases lead to additional pressure on life insurance
business lines.
• In longer term we consider that IDD is likely to be favorable since it leads to
improvement of product transparency and higher focus on customer centric
sales which together have the potential to reduce information asymmetry for
policyholders.
• This could gradually lead to strengthening of consumer confidence in insurance
sector in the region.
• Greater transparency and higher consumer confidence can offer potential for
future development which could lead to great sustainability and stability of
insurers business models.
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Financial Education in the Region Remains Area For Additional Improvement
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0
10
20
30
40
50
60
70
80
Source: S&P Global Ratings
Financially Literate Adults in %
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CEE Life Insurance Growth Prospects
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• We expect growth in Slovenia in 2017 and 2018 to be comparatively
better than in the Czech Republic and Poland.
• We consider that expected growth between 5% - 7% in 2017 and 3% -
5% in 2018 not to be high enough to materially increase life insurance
penetrations which could offer significant improvement of old age
savings through insurance.
• We consider Czech Republic and Poland life insurance market growth
prospect to remain relatively unfavorable in 2017-2018 on account of
regulatory changes, low interest rate environment and more attractive
offerings from competitive savings products.
• In our view, additional supplementary pension insurance or private life
insurance schemes introduced in several CEE countries, are currently
stabilizing factors for few life insurance markets in the region.
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Thank you for your attention!
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Jure Kimovec, FRM, CAIA, ERP
S&P Global Ratings - Frankfurt
Insurance Ratings
T: +49 173 659 19 14
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Competitive Position
Operating performance
Complements
other subfactors
in that a positive
assessment is a
likely
consequence of
a healthy
competitive
position
Differentiation of brand or reputation
Assesses
commercial
advantage or
disadvantage from
differentiation of
brand or
reputation relative
to competitors
Market position
Assesses an
insurer’s share
of premiums or
liabilities for the
markets where
it operates
Level of controlled
distribution
Assesses
competitive
advantage
derived from
control over
distribution
Geographic diversification
Considers
geographic
presence and
insurance
penetration to
assess diversity
Underperformance or outperformance directly influences the operating
performance assessment and limits that of three other subfactors
Appendix 1: Competitive Position
Other diversification
Considers benefits
from other sources
of diversification
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Appendix 2: The S&P Global Financial Literacy
Survey 2014
Being financially literate:
How many can answer 3 out of these 4 topics
correctly
20
The survey covers four
topics:
•Numeracy
•Interest compounding
•Inflation
•Risk diversification