In the Baltic capitals of Tallinn, Riga, and Vilnius people speak of the “Scandinavianisation” of their insurance market. The effect is marked: each of the three tiny former Soviet states is in the advanced stages of privatising and commercialising its insurance industry, a process that has given Scandinavian insurers a commanding position in the maturing Baltic (and potentially European Union) states of Estonia, Latvia and Lithuania.

In the global context, the Scandinavians' achievement is not substantial. At about 7.5 million, the combined population of the three Baltic countries is a match for Denmark, not China. And current premium spending in the Baltic is a very long way behind that of the Western world, averaging just $63 a head in Latvia and Estonia in 1998, and less than half that in Lithuania, home to more than half the Baltic population.

However, any opportunity is welcome from the perspective of expansion-minded western Europeans who have seen insurance penetration reach saturation in their home markets. In the words of Mogens Andersen, general manager of Royal & SunAlliance Danish subsidiary Codan, which last May beat Sampo in the bidding for Lithuania's former monopoly insurer, Lietuvos Draudimas: “It is a chance.”

Codan's acquisition of Lietuvos Draudimas (Lithuanian Insurance), which dominates the national market and is the Baltic's largest insurer, was the region's second major Scandinavianisation. It was preceded by Sampo's purchase of Eesti Kindlustus (Estonian Insurance), the non-life business of the former Estonian monopoly, and was followed by the acquisitive Finn's take-over of Balta, Latvia's former monopoly. The two Scandinavians now dominate the Baltic sector, with a market share of about 36% based on 1998 premium income, including Sampo's smaller holdings. The partly privatised Baltic market leaders had needed the expertise and experienced capital of controlling strategic investors, and in the past 12 months they got it.

A third European company has a significant Baltic position, but at the time of writing it is not certain exactly which one. Alte Leipziger Europa (ALE), the holding company for the non-German offices of the eponymous mutual insurer, has life and non-life insurers in all three countries, including the second-ranked non-life insurers in Lithuania and Estonia. In total, the network boasts slightly less than 10% of the Baltic market, including that gained through the recent acquisition of Estonia's second-ranked Leks Kindlustus by ALE subsidiary BICO (Baltic Insurance Company).

However, after boardroom battles in Oberursel, Alte Leipziger's directors have made it quite clear that they intend to focus on their home market and sell off the Europa subsidiary. Even as BICO was negotiating the purchase of Leks, ALE's future was unclear, although Munich Re, a partner in some of the mutual's Baltic joint ventures and a major reinsurer of them (and, indeed, of most Baltic insurers), has been tipped to make ALE part of the Ergo Group. Already Swiss Re, which owns 20.1% of Leks, has signalled its eagerness to unload that holding.

The rest of the Baltic market is atomised. Zurich, Ingosstrakh and Seesam, the latter a joint venture between Finnish Pohjola and AIG, each have insurers across the Baltic states, but are interested primarily in servicing the growing but extremely small home-foreign commercial sector. The mass of local companies in Lithuania (with about 30 non-life insurers) and Latvia (with about 20) includes some relatively strong players, but only relative to their local competitors.

As a reinsurance market, most ceded premium leaving the region can best be negotiated with one eye on Helsinki, Copenhagen or Munich. Reinsurers who are not yet established in the Baltics but decide to enter the region are likely to be offered only business which they probably should not accept. In addition, there are complications. Insurance is institutionalised as a form of money laundering in Latvia, and claims inflation across the region is exceeding premium growth by a frightening factor. In the past two years local firms have proved their willingness to write for market share until they collapse, a practice which may gather pace in Latvia and Lithuania in the coming years. To make matters worse, accounting standards remain novel.

As Scandinavianisation progresses, none of these negatives will matter as much. Foreign players are forcing cost ratios down, rationalising rambling networks of Soviet-era agents and introducing a broader set of policies to an increasingly insurance-aware public. Compliance with EU regulations will encourage foreign subsidiaries to become branches, and almost all the entrepreneurial local carriers will be displaced by larger rivals, as has already happened in Estonia. Within the decade the Baltics, once Soviet Russia's window on the west, will be part of it.

  • Adrian Leonard is the author of Insurance in the Baltic States, a management report published in April by Insurance Research & Publishing.

    E-mail: nfo@insurance-research.com.

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