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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


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


CEE Life Insurance Market - €12.3 bn at the end of 2016

3

Poland; 44%

Czech; 17%

Hungary; 12%

Slovakia; 8%

Slovenia; 5%

Croatia; 3%


Poland Czech Hungary SlovakiaSlovenia Croatia Romania LithuaniaBulgaria Serbia Latvia EstoniaBIH Macedonia Montenegro Albania


Selected CEE Countries Market Structure

4

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


Market Developments of CEE Life Insurance

5

• 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.


6

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


Maximum Technical Interest Rate

Poland Czech Slovakia Slovenia Croatia Hungary Austria


Proportion of Traditional Guranteed Life Insurance is Declining

7

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


Slovenia Czech Republic Hungary Slovakia


Average Guranteed Rate on Back Book

8

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.



Average Guranteed Interest Rate on Back Book Will Only Gradually Decline

9

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)


Unit-linked Past Developments Across CEE

10

• 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.


Unit-Liked Surrender Payments Remain High Across CEE Countries – Example of Hungary

11

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


Low consumer confidence lead to increasing customer protection measures

12

• 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.


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.

13

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


Impact of IDD Implementation

14

• 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.


Impact of IDD Implementation

15

• 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.


Financial Education in the Region Remains Area For Additional Improvement

16

0

10

20

30

40

50

60

70

80


Financially Literate Adults in %


CEE Life Insurance Growth Prospects

17

• 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.


Thank you for your attention!

18

Jure Kimovec, FRM, CAIA, ERP

S&P Global Ratings - Frankfurt

Insurance Ratings

T: +49 173 659 19 14

[email protected]


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

19


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

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