More often than not, in the analysis that substantiates the decision to enter on emerging insurance markets, the “double digit” growth rates is one of the main arguments, being considered the direct expression of the significant potential these markets have for operators. By comparing it with mature markets in Western Europe where the possibilities to expand a business come mainly from identifying insurance needs still uncovered and developing appropriate products or from attracting a customer segment from the competitors’ portfolio, the low saturation level on the Eastern and Central European markets leaves room for a sustained growth for many years to come.
Thus, the motor insurance example can be extremely relevant. According to CEA (Comite Europeen des Assurances) statistics, the European motor insurance market reached in 2005 a volume of underwritten premiums of EUR 127 billion. This volume of premiums relates to a market with 300 million vehicles, for which third party liability insurance is mandatory. Romania, with a total of approximately 4.5 million registered vehicles (1.5% of the European total number), contributes to the underwritten premiums with only 0.7%. In fact, the gap between the two percentages reflects one of the growth potential’s dimensions. Moreover, while the European vehicle fleet corresponds, in average, to one vehicle for two persons and increases by approximately 3% per year, in Romania we have today 1 vehicle for approximately 4.7 persons, and the growth rate for the vehicle fleet is of approximately 6% per year. Consequently, over 300,000 new potential customers emerge every year.
Another relevant indicator regarding the potential, especially for CASCO insurance, is the number of annual registrations, especially registrations of new vehicles that are generally purchased in leasing or with a bank loan. At the same time, at least for the Eastern markets, this parameter may also represent a measure aimed at increasing the average value of the vehicle fleet, as we talk about high performance cars, from a new generation, implicitly more expensive than the ones they often replace. In this respect, the European average growth rate for registrations was of about 7.3% in 2005, a percentage that decreased by almost one unit in the past five years. For Romania, the number of registered vehicles increased by 23.8% in 2006 as compared to the previous year, over 62% of the cars registered in 2006 being new cars.
The evolution of the Romanian motor insurance market, compared to the overall European market, fully reflects this potential. The growth rates registered on the motor segment over the past two year indicated values in excess of 35%. Meanwhile, the European market indicated values lower than 1, or even negative values (-0.3% in 2005, as compared to 2004). So, this goes to show that, at least from this perspective, the Romanian market is very appealing, to say the least, even though, in absolute values, we are talking about much lower values than on mature markets.
But there is also a downside to it. One of the main differences between the domestic market and the western markets is the weight of this insurance line in the market’s portfolio. If motor insurance, in Europe, although the most important non-life insurance class, represents no more than 13% of the entire portfolio, or 33% of the non-life insurance, in Romania the situation is totally different: over the past five years, the motor insurance classes were never less than 50% of the total market volume or 60% of non-life insurance. Therefore, the issues related to the profitability of this class should be considered from another perspective on a market where it actually dictates the general trend.
Profit or market share?
The low profitability of motor insurance classes is nothing new. Over the past decade, European operators saw a cumulated loss of over EUR 40 billion and, although the average combined rate started to finally show positive values, beginning with 2002, the CEA analysts still think it will take several years of profitable activity to recover the previous losses in motor insurance. Meeting this estimation depends greatly on the pricing policy, therefore on the insurers’ option for profit or market share. In fact, given that claim expenses remained at a relatively constant level in the past years, the ever lower number of claims compensating the increase in the expenses per claim, the determinant factor in the equation is the insurance price. In the European Union, the average variation in the insurance price was slightly negative, the most significant reductions in prices, of up to 5 -7%, being reported on the main mature motor markets (Germany, Ireland, France, Great Britain).
For Romania, the issue of profitability in motor insurance is a somewhat sensitive one, since the competition for the market share is taking place in circumstances where motor insurance claim rate is growing steadily and substantially. In fact, the statistics for the last few years prove that the growth rate for the aggregated value of paid claims exceeded constantly the growth rate of underwritten premiums volume. In the case of CASCO insurance, the increase in the paid claims volume is mainly an effect of a higher claim frequency rate, of the increase in the average claim value, stated Ion MOISE, Head of Motor Claims Department, GENERALI Asigurari, at the National Conference for Motor Insurance. For motor third party liability insurance, these factors are supplemented by the introduction of the European Directives and by the change in the indemnification practice, added the above-mentioned specialist. Contrary to trends in Western Europe, where joint actions taken to increase traffic safety and vehicle passengers’ safety led to a net decrease in the number of accidents and victims, in Romania, the lack of modern road infrastructure corroborated with an increase in the number of vehicles in traffic generated a 5 - 8% increase in the value of these parameters. Moreover, covering and reporting all claims, regardless of their quantum, adds a substantial plus both in paid claims volume and in related administrative expenses.
The increase in the average claim value is also strongly influenced by the high repair costs, the structure of the insured vehicle fleet, where the percentage of vehicles owned by individuals is very low, as well as by the worsening of risk factors that vehicles must face.
The sum of these factors, reflected in the financial statements of the specialized insurers, lead to negative technical results at the insurance market aggregated level. As Cristian CONSTANTINESCU mentioned, in his intervention, over 90% of motor insurers indicated losses in underwriting in 2005, which forced them to attract substantial resources for re-capitalization of their companies so as to offset the deficits and reach a financial balance.
From theory to practice
Motor insurance cannot be profitable unless the prerequisites to increase efficiency are observed, indicates Cristian CONSTANTINESCU. Firstly, it concerns a revision of the tariff systems for motor insurance policies, aimed at rigorously correlating the undertaken risks. Although there are companies that already took the first steps for a more precise risk assessment, using a complex set of underwriting criteria, the prices on the motor insurance market, overall, are still too low in many cases. In this respect, the supervisory authority expressed its point of view in the statement made by Angela TONCESCU, President of ISC: Although the Commission cannot interfere in setting the premium tariffs for the motor insurance segment, where there are significant differences between relevant companies, the supervisory authority shall carefully monitor the claim rate and its impact on the financial statement of insurance companies, in order to keep them within the limits of solvability indexes.
To maintain prices at a level accessible for the consumers, other factors must also be altered, especially by controlling claim expenses and by better selecting the risks. Introducing IT systems for an efficient settling of claims, systems available on the Romanian market through the solutions provided by AUDATEX or EUROTAXGLASS’s, is already a clear must, being the only method that helps facilitate the control insurers have over costs for labor and spare parts associated with activities conducted in repair shops.
Another absolute must is the completion of a joint database that can facilitate an assessment of individual risks for motor insurance, so as to make the application of Bonus-Malus possible. The introduction of the amicable report depends greatly on applying this practice. If Bonus-Malus does not become a common practice on the entire market, insurers will not have any means to deter potential fraud attempts in cases of amicable report.
Finally, introducing the franchise as an element that helps make customers more responsible is another solution that needs to be implemented as soon as possible, even more so as this can lead to a substantial reduction in the number of solved claim files and, implicitly, the administration costs. The calculations made by the representative of GENERALI Asigurari, for their own CASCO insurance portfolio, indicate that a franchise of only EUR 150 can lead to a reduction in the number of claim files by approximately 14%.
Questions
The solutions are known, the benefits are obvious. How soon will they be adopted? The answer depends greatly on the will of the insurance companies. Will they risk taking healthy measures that customers find difficult to accept or will they rather strive to get a larger market share? A joint consensus and action is clearly needed. Otherwise, those companies that prefer to stay loyal to the old procedures might very well be in the position, after the initial joy generated by a wave of customers that prefer them instead of their competitors, where they are confronted with a high price to pay, reflected in a claim value impossible to pay. Therefore, there is one question that still needs an answer - does the motor insurance market have the power and clear vision to leave aside the immediate interests and focus on an ambitious objective, difficult to meet, but more then necessary?
Daniela GHETU
