The gold rush is over and foreign insurers have more than a toehold in Turkey. However, the market is highly competitive and penetration extremely low. It will require careful handling for business to reach its full potential

After the gold rush of 2006 and 2007 that saw dozens of foreign insurers enter the Turkish market, the dust is starting to settle.

At the time the market opened up, Turkey appeared to offer numerous opportunities. It was a growing economy, it had a population of 73 million, was situated where Europe meets Asia, and it was expected to join the EU imminently. Economic growth pointed to an increase in non-life business, with people likely to be demanding personal lines cover.

Within two years, the number of foreign insurers went from 8.5% of the market to more than 60%. Now, according to Milli Re, around half of the market’s total premium is with foreign companies or their joint ventures.

Since then, however, both domestic and foreign insurers have faced challenges. While awareness of insurance is growing, it is growing from a small base, and premium rates and insurance penetration have remained low.

Insurance penetration is just 1.2% when insurance spend is taken as a percentage of GDP per head. The global figure is 7.07%, for the OECD about 8%, for G7 it is 15% and the EU 27%.

Even in emerging markets – Latin America, central and eastern Europe, Southeast Asia, the Middle East, central Asia and Africa – the figure is 2.7% in GDP.

Positive factors

Turkey’s Undersecretariat of Treasury general director of insurance Dr Ahmet Genç says the figure shows that the insurance market in Turkey can expand: “It means we can double this premium production, at least as far as the emerging markets are concerned.”

Indeed, there is plenty of reason for optimism, as total premiums have more than trebled during the last seven years, rising from TRY3.7bn ($2.4bn) in 2002 to TRY12bn ($7.8bn) in 2009. Non-life premiums led this growth, with an annual 29% increase over the period, representing 86% of the market by 2006.

Accident and third-party motor liability are large lines. Motor accounted for 15%, but low profitability remains an issue for both.

The top 10 insurers accounted for 74% and 89% of non-life and life total premiums respectively.

Insurers also believe the low starting point of insurance in Turkey is a positive factor, and that insurers have done well to at least keep pace with the rapid rate of economic growth. “Although penetration has remained at 1.2%, at least it has not dropped as a percentage of rising GDP,” one observer says.

It is an optimistic view, but many of the entrants to the Turkish market insist they came in for the long haul, expecting to wait patiently and adapt to market conditions. After all, it takes years to establish a viable presence anywhere, let alone a unique market like Turkey.

An evolving market

But what makes Turkey unique? The explanation serves as a reminder why foreign entrants have not seen the growth they expected, as many characteristics are hurdles for those unfamiliar with the market.

For a start, there was already bitter price competition. This increased in ferocity as existing players tried to keep their clients following the arrival of foreign companies.

Milli Re executive vice-chairman Cahit Nomer says foreign companies did not always bring the kind of underwriting practices that the Turkish market expected, and so the trend of excessive price competition continued.

“People might ask why [foreign companies] followed the old Turkish trend, an untechnical approach to the matter. Why are they not improving things?”

The difficult nature of price competition has prompted government regulators to make a series of changes to group policies, agent commissions and earthquake insurance. In a communiqué prepared with the Association of Insurance and Reinsurance Companies of Turkey (TSRSB), they underline the need for preventing excessive price competition, which was fuelled again in 2009. They also call for the re-establishment of agent commission rates and a revision of the rules on the exposure to equity ratio of catastrophe insurers.

The structure of the insurance industry has been changed, with initiatives including the introduction of compulsory earthquake insurance and private pensions. Legislation has also introduced greater discipline and brought the industry more closely into line with international practice.

With EU membership a strong possibility, regulators are using the European Commisison’s Solvency II directive as a benchmark.

Genç says: “Regarding Solvency II, we are now almost as prepared as most EU countries. If we wished, we could implement Solvency II in 2012. Today we are at the trial stage with 10 insurance and reinsurance companies. We expect this trial to be completed by the end of this year.”

Well advanced

Another detail that has reduced the impact of the foreign influx was the fact that insurers in Turkey were already relatively sophisticated.

Eureko Sigorta chief executive and president Okan Utkueri says it was wrong to expect the dynamics of the Turkish market to change overnight.

“HR practices, IT and all the infrastructure are well advanced. Of course there will be some added value from foreign investors but, in general terms, they will not change the overall market conditions in the short term. We have realised this in the past three years.”

He adds: “Now, if the market’s profit level or return on equity remain the same, some [foreign companies] may leave. So, now we are completing the cycle. A lot of people came to Turkey and they have realised what the market conditions are like.”

Meanwhile, promotion of insurance is made more difficult because of the gap between rich and poor in Turkey.

Yildirim Consulting’s president and managing partner, Zekeriya Yildirim, says: “This is a country with only $9,000-$10,000 income per capita, and you have to come up with a price to suit the low-income population. It’s a matter of finding the right marketing approach. You have to rethink your model in all aspects.”

Sigortaci Gazetesi executive editor Ahu Berkmen confirmed that marketing styles and public perception towards insurance remain key challenges on the road to growth in the Turkish market.

“While information technology and insurance products are on a par with the EU, education and awareness of insurance are still problems,” she says, adding that, despite this, some companies have made progress.

“We have to promote insurance in a way that enables people to understand the products and their benefits. A lot of people still don’t believe in insurance,” she adds.

Growing awareness

Catastrophes have served as a wake-up call to business and personal customers alike, and stimulated the insurance market.

Turkey’s biggest catastrophe to date was the earthquake of 1999 in which more than 45,000 people died. The tragedy has had a lasting effect on the consciousness of the Turkish people, not least in the insurance market.

The biggest effect on insurers as a result of the earthquake was the $58m energy loss suffered by the Tupras company in Izmit. That was insured by Günes Sigorta, which is 30% owned by Groupama.

While insurers were at the centre of the recovery, many people argued that they were not equipped to cope with the scale of the catastrophe. On the other hand, the level of insurance penetration at the time was low, switching the focus back to the country’s relationship with insurance as a whole.

However, insurers were at least able to play their part by ensuring that homes and offices were built differently after the earthquake.

Public awareness of insurance increased again when extensive flooding hit Turkey’s north-western region of Marmara, which includes Istanbul.

The floods, the result of heavy rain, caused several deaths. Bridges collapsed and roads were closed, wreaking havoc to communities and businesses around Istanbul, the country’s largest city and its economic and financial centre.

The event was also a test for insurers’ solvency. It was a huge loss, but the industry gave a good account of itself, paying the losses speedily.

Following the flood, new practices have come in to mitigate flood damage.

Looking ahead, insurance may yet again be forced to the front of the public’s consciousness. A severe earthquake is expected to take place in Istanbul within the next 10 years. In fact, scientists say that such an event is already overdue.

But if the industry can continue to promote the benefits of its services, and build on the progress made so far, then the country will only be stronger should such a tragedy take place.

Reinsurance in Turkey

In contrast to the challenges of the primary market, reinsurers are doing well out of Turkey. Turkey’s traditional reinsurer Milli Re has gone from strength to strength even after losing its monopoly and compulsory cession arrangements in the last decade.

Standard & Poor’s even said the company had been able to benefit from the liberalisation of the Turkish market because it was able to be more selective with its business lines, avoiding exposure in unprofitable areas.

“Milli Re is very much a Turkish institution, highly respected with longstanding relationships with the direct market that will not be undermined in the short to medium term,” Standard & Poor’s says. “The fact that Milli Re is in the process of withdrawing from certain unprofitable lines, such as motor reinsurance, will actually help to focus the attention of the direct players to be more efficient in underwriting, rather than depend so heavily on proportional reinsurance.”

While the amount of reinsurance ceded by primary companies is 30%, this figure is skewed by the low level of reinsurance paid in motor and health business. In other lines, reinsurance dependence is much higher. For example, fire has 55% reinsurance, marine 50% and engineering 65%. The big two reinsurers, Munich Re and Swiss Re, are strong in some of these higher-ceding lines of business. Munich Re is big in property in Turkey, whereas Swiss Re has a major role in engineering. GR