Insuring the east

By bne IntelliNews December 14, 2006

Nicholas Watson in Prague -

First it was Central and Eastern Europe's banking industry, now it's the region's insurance sector that's attracting the attention of Western institutions.

Shares in Bulgaria's DZI Insurance & Reinsurance have risen more than 40% over the past month as speculation mounts it will join its banking namesake DZI Bank in being put up for sale. DZI Bank was sold in September to Greece's EFG Eurobank for €158m.

Any sale of DZI Insurance would be part of a broader restructuring of the sector that is conforming to the typical pattern for industries in Europe's emerging markets.

The first stage inevitably involves a rationalisation of local outfits that involves either some closing down or others banding together to defend their turf before the expected influx of large foreign players. This process is also driven by governments cleaning up the industry in their respective countries and tightening regulations, which in turn encourages more foreign firms to invest.

For example, Poland has seen the liquidation of four insurance companies this year. At the same time, there have been mergers between local insurers NL TU na Zycie and Nordea Polska TUnZ, and HDI Samopomoc TU and HDI Asekuracja TU.

In Russia, Fitch Ratings said that the tightening of regulatory requirements stipulating the minimum capital an insurer needs has forced 14% of players to exit the market during 2006. And on Tuesday the chief of Russia’s financial watchdog Rosfinmonotoring, Viktor Zubkov, warned that criminal cases could be started soon against a number of insurance companies suspected of money laundering.

Foreign insurance firms are, of course, seeking out the enormous growth opportunities that these emerging markets offer.

Premium markets

According to Phil Wilson-Brown, a spokesman for the UK's Royal & SunAlliance, these markets are benefiting from the simple combination of low penetration of insurance among the general public coupled with a fast growing economy.

In Poland, for example, general insurance is under 2% of GDP whereas it's about 5% in the UK. At the same time, the Economist Intelligence Unit estimates Poland's GDP growth in 2006 will be 5.2%.

"If you look at the Polish market, insurance penetration is quite low there and economic growth quite high – one of the things that turns out from those two factors is that an increase in insurance penetration tends to follow," says Wilson-Brown. "People start to insure things more, as they have a greater value of things lying around."

The pace of foreign insurers entering the markets of CEE is certainly gathering pace. In the past month alone, there have been announcements by more than 10 multinational insurers about plans to expand in the region.

Royal & SunAlliance announced in November that it's expanding beyond the Baltic states and into Poland by linking up with Israel's Direct Insurance Financial Investments (DIFI) there. The joint venture will begin with DIFI's Link4, the leading direct insurance operator in Poland, but the UK insurer hopes to replicate this business model in the Czech Republic and Russia.

"The idea behind this venture is to have a successful, start-up model for Poland, which we believe would form a good model to roll out into other markets, like the Czech Republic and Russia at the back end of 2007," says Wilson-Brown.

A few days earlier, Swiss-based insurance company Zurich Financial Services unveiled plans to establish a new business unit named Central and Eastern Europe that will specifically focus on the opportunities presented in this region.

On November 24, Hungary's MKB Bank said it's contemplating establishing an insurance company with its owner BayernLB, with the two companies expected to reach a decision by the end of June. And the same week, Vienna Insurance Group said it bought more shares in Towarzystwo Ubezpieczén i Reasekuracji Cigna STU to bring its majority holding in the Polish non-life insurance company to 93% from 63%, and acquired 75% of the Polish motor insurance company TU Polski Związek Motorwy.

With Central Europe looking more crowded, insurers are moving further south and further east.

Covering the Black Sea

Bulgaria, which is due to join the EU at the beginning of next year, is seeing a lot of interest. On December 7, Germany's Ergo Versicherungsgruppe, which is part of the Munich Re Group, said it's looking at a number of markets for expansion, including Bulgaria, Romania, Russia and the Ukraine.

Ergo follows French insurer Cardif, a BNP Paribas company, which recently said it would launch general and life insurance operations in Bulgaria in 2007. And Electric Insurance of Ireland has notified the Bulgarian financial regulator it plans to sell automotive, sickness and casualty coverage there from January.

Another French institution, France's Credit Agricole Life, said on November 21 it had become the first foreign insurer to obtain an license to operate in Serbia since the government passed a new insurance law earlier this year. With insurers' income from premiums in Serbia increasing by 12% last year and predicted to grow by 10-15% a year through 2008, experts believe more foreign insurers will announce plans to expand into Serbia in the coming months.

Further east, Ukraine is increasingly seen as a target. Fortis Insurance International in August signed a preliminary deal to acquire Etalon Life, Ukraine's seventh largest life insurance company, while Generali completed in October its acquisition of Garant Auto Insurance Company.

The market that every foreign insurer is looking to expand into is, of course, Russia. Expect a slew of announcements over the coming months following last month's bilateral trade agreement between the US and Russia, which will ease US insurers' entry into the Russian market as part of the process necessary for Russia to join the WTO.

The first to take advantage of this new spirit of glasnost in the insurance sector was ACE Group, which said December 7 that it has been granted permission by the authorities to set up a life insurance underwriting operation.

"The life insurance industry in Russia is at an early stage of development and represents a real opportunity for ACE," says Evan Greenberg, president and CEO of ACE. "Russia's rising middle class aspire to a better life, which we can help them plan and attain through the life insurance products and services that we offer."

Fitch says currently only 4% of local insurance companies in Russia have foreign investors, with 92% of this capital coming from the EU.

Not everyone is welcoming these new developments. Bucking the regional trend is Belarus, whose government in September set a 30% quota on the participation of foreign investors in the capital of Belarusian insurance companies.

Rainy days

While the opportunities certainly exist, not even the insurance firms themselves pretend it will be plain sailing in these markets.

Like the retail lending firms that preceded them into the region, these insurers will struggle, though not obviously to the same extent, with the lack of experience and information with these emerging markets.

Andrew Birkett, a senior analyst for Datamonitor's general insurance team, says the way the insurance market works is that underwriters do incredibly detailed assessments on the risk they will take on. With household insurance, for example, the firm will look into the type of neighbourhood the house is situated in and how prone the area is to flooding.

"The more information the better, and the better the underwriter's business will be," Birkett says.

These insurers also have to battle people's perceptions, right or wrong, about the industry. People in many parts of the CEE region remain suspicious of insurance companies, which when owned by the state had a very bad track record of honouring their obligations.

Tell that to Dutch insurer Eureko, whose acquisition in 1999 of a 30% stake in Polish state-owned PZU has turned into an almighty headache.

Under the terms of the privatisation, Eureko was guaranteed the option to buy another 21% to get control of the insurer and carry out an IPO. The next Polish government, however, withdrew its intention to privatise the rest of PZU and successive governments have been as obstructive as possible since in dealing with Eureko.

Eureko submitted a case to the International Court of Arbitration, which found that the Polish state had violated the Polish-Dutch treaty on reciprocal protection of investments and that its discriminatory conduct was a blunt violation of the rights of Eureko under the treaty. Eureko is claiming some €1.5bn in damages from the Polish government; the government is now talking about re-nationalising the insurer.

The latest twist came in November, when Eureko announced it had withdrawn its representatives from the management boards of Polish insurers PZU Life and PZU Non-Life, accusing fellow PZU board members who had been appointed by the Treasury during the summer of "ongoing harassment and intimidation," and frustrating all efforts aimed at mutual cooperation.

Eureko has fallen foul of the country's shifting nature of politics – and not even an insurance firm can take out cover against that pervasive problem in the region.

Send comments to Nicholas Watson

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