EFFECTS OF GLOBAL CRISIS ON INSURANCE SECTOR
According to January 2009 inflation report issued on 26 January 2009, annual inflation rate remained below end-of-2008 predictions. Energy and petroleum prices rising during the first quarter of 2008 began to fall down rapidly with the advent of recession caused by global crisis. Of inflation rate of 10,06% realised at end of 2008, 6,2% is a consequence of direct effects of food and energy prices. Despite the fall in the final quarter, energy prices closed the year with an increase of 20%.
The falls in petroleum prices are predicted to be the signal of the fact that energy prices would contribute to the decline in inflation rate in the periods to come.
Inflation has been largely determined by global developments in 2008. The developing countries which adopted inflation targeting system have faced inflation rates above their targets.
The impact of the current crisis on insurance sector; non-life branches achieved a lower-than-inflation growth rate as of end of 2008 and the sector achieved a growth rate of about 6% in combined life and non-life branches. Compulsory insurances exhibited an upward performance in overall.
Lower-than-inflation growth rate has been largely caused by the tendency of people who consider insurance as an additional item of cost and readily give up making out insurance.
Changes in non-life branches in 2008 – 2009 premium distribution are as follows.
Fire Branch 1,2% é
DASK (Natural Disaster Insurance) 1% é
Health Branch 1,4 é
Engineering Branch 1,3% é
Transport (Shipping) Branch 0,3% é
Personal Accident 0,4% é
Agriculture 1,1% é
Accident Branch 3,6% é
Highway Motor Vehicle (HMV) Financial Liability 0,5% é
An analysis on total Policy quantity data unveils that merchandise/commodity insurances in transport branch fell by 37% owing to the slowdown in foreign trade.
An analysis on total policy quantity unveils that the branch feeling the impact of global crisis the most is life branch which faced a shrinkage of 42%.
By mid-2007, bank credits in Turkey exhibited a considerable upward trend and banks required life insurance for their customers as security for credits so utilised. After crisis broke out, credits and, for that matter, life insurance demands fell.
NON-LIFE PREMIUM DISTRIBUTION –Association of the Insurance and Reinsurance Companies of Turkey
A second reason for this fall could be that consumer preferences have shifted towards Personal Retirement System (Private Pension) from life insurances.
An analysis on data about the 1st Quarter of 2009 unveils that effects of crisis has begun to fade away on the part of insureds and insurers. The fall which gained momentum in the final quarter of 2009 in Loss of Profit, Transport, Third Party Liability and Theft insurance policy quantities continues in the first quarter of 2009, as well.
A comparison between the first quarters of 2008/2009 unveils that demand for credit insurances is on the rise. Increase in assembly and electronical equipment insurances continued, while, compared with data of the first quarter of 2008, construction insurance policies suffering a fall of up to 50%.
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And the company which suffered highest loss of value in the world is AIG; having a market capitalisation of 188 billion dollars in just one year ago, crisis-hit AIG now has a market capitalisation of 1.1 billion dollars. Friends ask from time to time: “We wonder, isn’t insurance sector a reliable sector? Should we give up getting ourselves insured?”
What is the real reason for such a huge loss of value on the part of AIG? The real reason is that: AIG was a company both making unemployment insurance and taking over bank credit default (non-payment) risk, while, on the other hand, insuring bond risks of bond-issuing companies. It had to shoulder a terrible load as an institution in the amidst of such a big financial crisis and, on facing a cash requirement of roughly 50 billion dollars overnight, 3 rating agencies lowered AGI’s rating by 2 levels simultaneously the very next day. And this doubled cash requirement. Thereafter, the US Federal Reserve gave OK for Lehman Brothers’ bankruptcy and one wonders why didn’t they give OK for the bankruptcy of AIG, an insurance company. AID had insured bonds of many companies and, if the government had turned blind eye to its bankruptcy, a huge chaos might have taken place in the world, follower up by a terrible domino effect. Moveover, AIG has millions of customers in certain countries. On these scores, the bankruptcy of this company might have brought about global consequences.
Only AIG? Almost all Europe- and the US-based prominent insurance giants suffered a fall in their market capitalisation. There are two important reasons for this fall. First, roughly 70% of turnover of Europe- and the US-based companies, in particular, comes from life insurances. They have asset management companies. And some of them have bank in their own structure, as is the case in Allianz. Collapses in prices of shares held in other companies have also caused loss of value in other investments and contributed to further fall in value of these companies. However, the likelihood of such a collapse in Europe and Turkey is quite low. The reason for this is that bond insurance, a natural and widespread service in the U.S.A., is not available in the Continental Europe and Turkey. Therefore, there is no reason to have fear about companies operating in Turkey in the same way as in the U.S.A.
From an overview of Turkey, last year, the sector scored a growth lower than 15 percent, a rate achieved in the last 10 years, for the first time in its history, which turned out to be lower than inflation rate, again a first. For that matter, it suffered a downsizing in real terms. Total premium volume is roughly TL11 billion; there is a premium volume of about TL12 billion. There are several threats likely to have impact on Turkish insurance sector in this crisis.
The fall in interest rates and collapse in equities market on facing recession endangered the profits in insurance sector which derives an important part of its revenue from financial tools. On the other hand, vehicle sales fell and this matters a lot as 50 percent of Turkish insurance sector’s turnover comes from automotive insurances. The falls in this segment creates a pressure in terms of turnover; and competition also drives players to lower prices downward.
Another aspect is that reinsurance sphere suffering a declined financial profitability began to push their technical prices upward. And there are significant increases in claim costs. Again, there are two reasons for such increases. First, we observe an increase in fraudulent claims. Health insurances available in many company’s structure are on the rise even during recession times. Because, people tend to go through certain surgical operations, which they once postponed for fear of dismissal, while they have time for it. After giving all this information; I would like to talk about enlarged existence of foreigners, a development which has put its stamp on Turkish insurance sector.
Big foreign companies are doing business in Turkey for about 80 years: there are companies like Allianz, Generalli, AIG, Aviva or, as once called, Commercial Union. However, foreign companies launched a strong acquisition wave in Turkey in 2006. They even paid about 500 million dollars for a company making a profit of just a few million Turkish Liras. Thereafter, all Turkish bosses began to sell their companies. HDI acquired Ýhlas Sigorta, Liberty Mutual acquired Þeker Sigorta, Ergo acquired Ýsviçre, while Fortis making inroads into the market by itself. Spanish Mafree acquired Genel Sigorta. Wiener Staedische, which is one of the top 2 business groups of Austria, acquired Ray Sigorta, Dutch Eureko acquired Garanti Sigorta and Garanti Emeklilik and, also, in 2007, Aviva and Ak Emeklilik merged. Finally, in 2008, Zürich Firancial acquired TEB Sigorta.
In 2008, Aegon acquired Ankara Sigorta and Groupama acquired Güven Sigorta as its third company. Groupama now is, at the same time, holder of 33% stake in Güneþ Sigorta and ING Bank acquired Oyak Emeklilik, while Ergo becoming a 100% German company after acquisition of Turkish shareholders’ 25% stake. On the other hand, competition in retirement/pension market intensified. Axa Sigorta, Fiba Sigorta and Ergo Emeklilik made their inroads into retirement insurance system. As of end of 2008, two other companies were out in sale. One of them was Yapý Kredi Sigorta and other was Güneþ Sigorta. However, both purchasers and sellers stopped acquisition process owing to crisis going on. I guess that these companies will be put out to sale once again in the years to come, as from 2010. The market share of foreign players reached 80 percent recently. Of course, the first question which comes to our mind is that: Is this increase in foreigners’ market share good or bad? You can make your own comment about that. But, I would like to share some information with you. First of all, we should ask, why did Turkish shareholders get out of this important sector? There are two reasons for this. Firstly, return on equity in insurance sector, being 20 percent in 2002, fell down to 5 percent at 2006. It is even currently circulating around 3.5% percent. Secondly, as a requisite of capital adequacy “sorfobilite” ???? (16:27 ) rules, capital needed to run insurance companies began to flow out. For that matter, Turkish shareholders opted for embarking on other sectors as they couldn’t make enough money in a sector offering such a low profitability. This has been followed up by real estate and energy investments, in particular.
Now let’s get bact to the question: is withdrawal of Turkish capital providers from this sector something good? In my opinion, insurance sector has a very strategic position. According to Forbest list, insurance business is the world’s fourth largest sector with a turnover of 1.6 quadrillion dollars??, ranking after petroleum, natural gas, banking and consumer products, among the top 2000 corporations. In this sense, insurance business has a turnover much bigger than that of retail trade, public services/utilities, telecoms, healthcare, chemicals, hotel and tourism management businesses. For that matter, from a strategic point of view, I think that withdrawal of Turkish capital providers from insurance sector is not a beneficial event.