While EU accession will not mean immediate "big-bang" benefits to insurers, there are some very compelling reasons to remain confident about the future of emerging markets in Central and Eastern Europe. In the eight Central and Eastern European countries that are set to join the EU in May 2004, the insurance industry can build on a solid regulatory and macroeconomic foundation for future growth.
The regulatory reforms undertaken to meet EU insurance directives have not only prepared the countries for EU membership, but have also created the kind of conditions needed to foster an efficiently functioning insurance sector. In many of these countries the insurance markets are rapidly approaching Western standards – many have opened access to foreign insurers, dismantled product and price controls, adopted capital adequacy requirements and established supervisory bodies for the insurance industry.
Zedelius confident about future of emerging markets in CEE
Werner Zedelius, Allianz board member responsible for growth markets, addresses how the approaching EU expansion in 2004 may affect Allianz's businesses in Central and Eastern Europe. Zedelius is confident that EU expansion will mean more opportunities than risks for insurers.
Werner Zedelius: "In many CEE countries the insurance markets are rapidly approaching Western standards"
Allianz is already profitable in CEE
In recent years, privatization activity in the financial sector has attracted investments by financially-strong foreign insurance groups, like Allianz. Over a decade ago, we began establishing our presence in the region, with an initial emphasis on property and casualty insurance.
Depending on the market, we set up our own operations or purchased local insurers. For some markets, we chose a combination of both in phases. We picked up a lot valuable experience along the way, on the one hand, in terms of working with the local insurance authorities and various investor groups, and on the other hand, when working with our local management and customers.
Today, Allianz is the Number 2 insurer in the CEE region, with an 11 percent market share based on premium income, and market leader among the foreign insurers. Furthermore, we are already profitable in CEE. Even after paying out substantial claims for last year's flood disaster in the Czech Republic, the net earnings for Allianz companies in CEE in 2002 was 45 million euros after tax, based on IAS.
Depending on the market, we set up our own operations or purchased local insurers. For some markets, we chose a combination of both in phases. We picked up a lot valuable experience along the way, on the one hand, in terms of working with the local insurance authorities and various investor groups, and on the other hand, when working with our local management and customers.
Today, Allianz is the Number 2 insurer in the CEE region, with an 11 percent market share based on premium income, and market leader among the foreign insurers. Furthermore, we are already profitable in CEE. Even after paying out substantial claims for last year's flood disaster in the Czech Republic, the net earnings for Allianz companies in CEE in 2002 was 45 million euros after tax, based on IAS.
Demand for insurance to grow over the long-term
The approaching EU expansion has us thinking about how it may affect our businesses in Central and Eastern Europe. While we can all see that there will be no big-bang effects, over the mid- and long-term, we believe that given economic growth, it will further stimulate demand for insurance products.
With accession, the EU's population and geographical size will increase by about 16 percent, but the total GDP will only rise by some 4 percent. However, beyond this static view, the economies of the accession countries prove to be growing more dynamically than those of their Western cousins. The GDP's of these countries have on average been growing faster than current EU countries, and that they will continue to do so in the coming years at a forecasted rate of about 4 percent.
Our Allianz economists believe this growth will be sustained. The region will continue to attract foreign direct investments, but with privatization abating, these will be lower. This decrease should be offset by higher EU subsidies mainly in the areas of agriculture, infrastructure and administration. We expect the estimated 41 billion euros to gradually flow back to the private sector and that people will eventually begin to feel the effects of greater domestic productivity, prosperity and purchasing power.
With accession, the EU's population and geographical size will increase by about 16 percent, but the total GDP will only rise by some 4 percent. However, beyond this static view, the economies of the accession countries prove to be growing more dynamically than those of their Western cousins. The GDP's of these countries have on average been growing faster than current EU countries, and that they will continue to do so in the coming years at a forecasted rate of about 4 percent.
Our Allianz economists believe this growth will be sustained. The region will continue to attract foreign direct investments, but with privatization abating, these will be lower. This decrease should be offset by higher EU subsidies mainly in the areas of agriculture, infrastructure and administration. We expect the estimated 41 billion euros to gradually flow back to the private sector and that people will eventually begin to feel the effects of greater domestic productivity, prosperity and purchasing power.
A mid- to long-term perspective necessary
For this, we know we will have to show some endurance. The leveling out of living standards within the New Europe will take at least another decade, according to our economists. We predict that in 2013, average per-capita income will have grown from 23 percent of that of today's EU countries to about 29 percent. This means income will grow by more than 25 percent, but this will be on top of European growth in real terms. Where else in the EU will we find such growth?
Will an emerging middle class mean greater demand for more sophisticated insurance and old age provision products? We think so – even if it requires a mid- to long-term perspective. Significantly lower insurance density (premiums per-capita) and penetration (premiums as a percentage of GDP) compared to that of today's EU countries indicate significant growth potential. Today, consumers of the accession countries spend an average of 120 euros for insurance products each year, compared to 1550 euros in Germany.
Will an emerging middle class mean greater demand for more sophisticated insurance and old age provision products? We think so – even if it requires a mid- to long-term perspective. Significantly lower insurance density (premiums per-capita) and penetration (premiums as a percentage of GDP) compared to that of today's EU countries indicate significant growth potential. Today, consumers of the accession countries spend an average of 120 euros for insurance products each year, compared to 1550 euros in Germany.
Pension reform: More radical thinking possible
Similar to the countries of Western Europe, an aging population combined with an increase in life expectancy could send CEE countries into a pension crisis. The difference is, these countries are not "hung up" on reform discussions and are able to apply more radical thinking than ever possible in the West.
We expect the life insurance sector also to be boosted by ongoing reform and privatization of state pension schemes. Mid-term growth forecasts are between 10 and 15 percent on average. Through tax incentives, people are already being encouraged to secure old age provision through life insurance contracts.
We expect the life insurance sector also to be boosted by ongoing reform and privatization of state pension schemes. Mid-term growth forecasts are between 10 and 15 percent on average. Through tax incentives, people are already being encouraged to secure old age provision through life insurance contracts.
More opportunities than risks for insurers
Based on these expectations, Allianz has expanded its activities to long-term life insurance and pension funds in recent years. Our asset management activities in the region are currently limited to the pension fund business, meaning long-term investments with savings character. For short-term mutual funds we do not yet see a viable market due to limitations in volume and diversity of local capital markets.
More diversity through access to international capital markets can increase security and returns in the interest of the customer. But with pension funds, current regulations in CEE countries mostly limit investments to local capital markets. In our view this does not fit into the concept of minimizing risk for the entrusted funds through wider-spread asset allocation. Therefore we urge the local governments to work hand in hand with professional providers to come to sustainable solutions.
At the same time, there is still potential for growth in the non-life sector, which today, is still our main strength in the CEE region. For example, we still expect to see continued growth in the compulsory motor insurance segment. This will also be the case with countries outside of the 2004 accession round. Recently, Russia also introduced compulsory third-party insurance for motorists. For many Russians, this will be their first encounter with the concept of insurance.
Certainly, it would be a mistake to rule out difficulties we may encounter as the New Europe unfolds, such as increasing competition and claims, and decreasing interest rates. But managing such risks has always been a part of our business. In general, it takes no stretch of the imagination to see that EU accession will mean more opportunities than risks for insurers in the new EU-member states. Allianz, as an already profitable main player in CEE, is well-positioned to capitalize on these new opportunities.
More diversity through access to international capital markets can increase security and returns in the interest of the customer. But with pension funds, current regulations in CEE countries mostly limit investments to local capital markets. In our view this does not fit into the concept of minimizing risk for the entrusted funds through wider-spread asset allocation. Therefore we urge the local governments to work hand in hand with professional providers to come to sustainable solutions.
At the same time, there is still potential for growth in the non-life sector, which today, is still our main strength in the CEE region. For example, we still expect to see continued growth in the compulsory motor insurance segment. This will also be the case with countries outside of the 2004 accession round. Recently, Russia also introduced compulsory third-party insurance for motorists. For many Russians, this will be their first encounter with the concept of insurance.
Certainly, it would be a mistake to rule out difficulties we may encounter as the New Europe unfolds, such as increasing competition and claims, and decreasing interest rates. But managing such risks has always been a part of our business. In general, it takes no stretch of the imagination to see that EU accession will mean more opportunities than risks for insurers in the new EU-member states. Allianz, as an already profitable main player in CEE, is well-positioned to capitalize on these new opportunities.
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