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Development of the insurance market after the EU accession
submited on 22.06.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 22.06.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
European insurance companies continue to express considerable interest towards Bulgarian insurance market – for almost half a year 113 insurance companies and 103 insurance brokers have declared before the Financial Supervision Commission their intention to operate in Bulgaria. Around 1/3 of the insurance companies are from Great Britain. Such a development confirms our forecast that the actual accession to the single financial market will influence predominantly the insurance market – due not only to opening of the market and the opportunity for a distance marketing of insurance products from the side of foreign enterprises, but also to the opportunity for expansion of Bulgarian financial institutions into other EU members.
Possible explanations of the demonstrated interest towards local market could be sought in several aspects. On one hand, probably some of the insurance companies are “following” their clients, having their business running in Bulgaria. Another possibility is that part of the companies does not have immediate real intentions to develop their business in Bulgaria, but still they inform the supervisory body “just in case”. However, we must not ignore the possibility that some of the insurance companies may really have serious investment intentions and may start actively working in Bulgaria – on site or from a distance. This is reasonable – Bulgaria with its low level of insurance penetration still provides considerable potential for development (especially considering market development in some EU countries).
It is more probable that entry into the local market would rather be realized through acquisition of a local insurance company (which allows using already built infrastructure, existing brand and market positions), rather than investing on their own. In the short run we do not expect a significant development of distance marketing – in the EU itself trance-border sales of insurance products are not sufficiently developed. Practice shows that consumers prefer to purchase insurance on the local market, and insurance companies themselves are interested in offering their products where they are well-acquainted with the risk level.
In Bulgaria we register considerable domination of non-life insurance, where almost 6 times greater premium income is realized compared to income in life insurance. This is in total juxtaposition to the situation with insurance market in the EU, where leading role is played by life insurance segment (in most countries life insurance generates over 60% of the premium income). We expect however a serious development of life insurance in the medium to long run. On one hand, penetration in this segment is more than moderate – the ratio of the premium income to GDP is barely 0.4%, while in the EU countries this ratio exceeds on average 5%. The weight of life insurance products in the financial portfolio of households is small and has stayed relatively constant for the last 2 years – around 1.1%. Although for the moment part of the growth in generated premium income is attributable rather to credit expansion (life insurance is usually a compulsory requirement for granting credit), there are favorable conditions for acceleration of demand of life insurance products as a long-term investment instrument. It is an established fact that in recent years financial assets of the population (the so called financial wealth) expended at a fast rate – according to our estimate at almost 25% annually towards the end of last year. To the moment bank deposits remained biggest component of household financial portfolio, but there is a clear tendency towards increasing demand for long-term and high-yield assets. Among major factors, which support and probably will continue to support expansion of household financial wealth (at least in the medium term) are:
Favorable macroeconomic indicators – fast economic growth, employment growth and increase in real income;
Development of financial markets – increase of capitalization and improvement of liquidity on the stock exchange, increasing competitive pressure in almost all segments of the financial industry, improving investment culture of the population and gradual acceleration of demand for more productive investment instruments, etc.;
Development of the legal framework – mostly regarding tax treatment of investments in different instruments, liberalization of the investment regime of pension companies and others.
Specific factors – considerable inflow of emigrant’s money, shadow economy reduction (undeclared labor income), etc.
We expect that the above-mentioned factors will also influence the intensity with which households channel their savings towards the life insurance sector. The expansion of credit market will continue to have considerable impact on the dynamics of premium income in this segment. Regarding non-life insurance, in the medium term growth will be supported mainly by increasing sales of automobiles, accelerating investment activity in the corporate sector and dynamic development of the real estate market.
Possible explanations of the demonstrated interest towards local market could be sought in several aspects. On one hand, probably some of the insurance companies are “following” their clients, having their business running in Bulgaria. Another possibility is that part of the companies does not have immediate real intentions to develop their business in Bulgaria, but still they inform the supervisory body “just in case”. However, we must not ignore the possibility that some of the insurance companies may really have serious investment intentions and may start actively working in Bulgaria – on site or from a distance. This is reasonable – Bulgaria with its low level of insurance penetration still provides considerable potential for development (especially considering market development in some EU countries).
It is more probable that entry into the local market would rather be realized through acquisition of a local insurance company (which allows using already built infrastructure, existing brand and market positions), rather than investing on their own. In the short run we do not expect a significant development of distance marketing – in the EU itself trance-border sales of insurance products are not sufficiently developed. Practice shows that consumers prefer to purchase insurance on the local market, and insurance companies themselves are interested in offering their products where they are well-acquainted with the risk level.
In Bulgaria we register considerable domination of non-life insurance, where almost 6 times greater premium income is realized compared to income in life insurance. This is in total juxtaposition to the situation with insurance market in the EU, where leading role is played by life insurance segment (in most countries life insurance generates over 60% of the premium income). We expect however a serious development of life insurance in the medium to long run. On one hand, penetration in this segment is more than moderate – the ratio of the premium income to GDP is barely 0.4%, while in the EU countries this ratio exceeds on average 5%. The weight of life insurance products in the financial portfolio of households is small and has stayed relatively constant for the last 2 years – around 1.1%. Although for the moment part of the growth in generated premium income is attributable rather to credit expansion (life insurance is usually a compulsory requirement for granting credit), there are favorable conditions for acceleration of demand of life insurance products as a long-term investment instrument. It is an established fact that in recent years financial assets of the population (the so called financial wealth) expended at a fast rate – according to our estimate at almost 25% annually towards the end of last year. To the moment bank deposits remained biggest component of household financial portfolio, but there is a clear tendency towards increasing demand for long-term and high-yield assets. Among major factors, which support and probably will continue to support expansion of household financial wealth (at least in the medium term) are:
Favorable macroeconomic indicators – fast economic growth, employment growth and increase in real income;
Development of financial markets – increase of capitalization and improvement of liquidity on the stock exchange, increasing competitive pressure in almost all segments of the financial industry, improving investment culture of the population and gradual acceleration of demand for more productive investment instruments, etc.;
Development of the legal framework – mostly regarding tax treatment of investments in different instruments, liberalization of the investment regime of pension companies and others.
Specific factors – considerable inflow of emigrant’s money, shadow economy reduction (undeclared labor income), etc.
We expect that the above-mentioned factors will also influence the intensity with which households channel their savings towards the life insurance sector. The expansion of credit market will continue to have considerable impact on the dynamics of premium income in this segment. Regarding non-life insurance, in the medium term growth will be supported mainly by increasing sales of automobiles, accelerating investment activity in the corporate sector and dynamic development of the real estate market.
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