Harald Nebelung believes that the expanded EU offers growth opportunities - but don't expect an instant revolution!

Expansion in May 2004 made the European Union the largest common market for financial services in the developed world, with about 450 million people. The ten new member states enlarged the EU's internal market by some 75 million, the equivalent of adding the combined populations of Spain, the Netherlands, Austria, and Greece all in one go.

Many tax and regulatory barriers hamper cross-border insurance sales within the EU, and enlargement hasn't changed the situation. But the addition of ten new member states has already prompted some insurers to take expansive action of their own. For example, Poland's financial services regulator KNUiFE is processing about 40 applications from foreign insurers who wish to conduct insurance in Poland on the basis of home-state supervision.

Ambitions for the new markets are high, and over time EU membership will undoubtedly help to bring renewed prosperity and fortune to millions of people. That, in turn, will drive growth in the new members' insurance markets. The penetration of insurance products will increase, and premium volumes will rise. However, the expansion itself will have no significant overnight impact on either the insurance or the reinsurance markets in the new EU ten.

No revolution

Accession will not mark a revolution for insurers in the accession countries, eight of which are post-communist, central European nations. The insurance markets of Poland, Hungary, the Czech and Slovak Republics, Slovenia, the Baltics, Cyprus and Malta were liberalised years ago. They have completed the task of bringing their insurance legislation and regulation into line with EU directives, foreign insurers and reinsurers have a dominant presence overall, and mature broker relationships have brought the world's risk transfer resources to the fingertips of insurers and corporate clients.

All ten accession countries have granted market access to foreign insurers.

According to the Comite Europeen des Assurances (CEA), all have adopted the minimum requirements of EU regulation, and have put in place solvency criteria compatible with the EU's current levels. The introduction of mandatory insurances - notably motor third party liability (MTPL) cover - was a major legislative step for the accession countries. This work was largely completed with the introduction of compulsory MTPL in Lithuania in 2002. Other countries, including neighbouring Poland, have had compulsory motor liability insurance for decades.

Of course new member states will still be required to keep up with new regulations, which may strain the fledgling compliance officers of insurers in these countries. Ten years ago EU policymakers had turned their attention to four areas of the insurance business. By 2002 their work directly targeted 32 insurance issues, and the number rose to 37 in 2003, including intermediation, competition, prudential supervision, environmental liability, pensions, motor insurance, solvency requirements, marketing, financial conglomerates, and even gender discrimination in underwriting.


The number of companies in most new EU markets is shrinking, and further consolidation and concentration of national insurance markets is likely, since many accession countries are already over-supplied with insurers.

Converium expects that in the future four or five large players will dominate in each market, with a total of up to 95% market share between them. At present the largest five non-life insurers in each of the ten accession countries have a total market share of 83.4%.

Adopting adequate standards of supervision is essential to ensuring the smooth operation of the market and a level playing field for all participants, the solvency of insurers, and consumer protection, as well as stamping out the illegitimate insurance practice that had been commonplace in some accession countries. The development of adequate supervisory regimes is advanced; most accession countries have established single financial market regulatory bodies.

Quality of supervision is important as local insurers in the accession countries open branches in neighbouring EU countries. Insurance companies in Poland, Czech Republic, Slovenia and the Baltics already have such cross-border companies operating or in the planning stages, and EU membership is likely to give such operations a boost. Supervision is also a factor for reinsurers, since now it typically includes scrutiny of local insurers' outwards reinsurance. Meanwhile the EU Reinsurance Directive is likely to come into force in 2005, and will have to be adopted in all the member states, new and old.

Foreign ownership

Foreign ownership of insurers in the accession countries is already high.

Because of this, there was no 'staking rush' when the accession countries entered the European Union. The markets are already crowded, and there is little in the way of opportunities for foreign companies that want to expand into the new EU states. Their main route of entry is through selling motor insurance, but at the moment this is a relatively soft market, especially in the cities, while the established companies have distribution tied up in rural areas. The majority of applications currently before the insurance licensing authorities in the new member countries are intended to enhance insurer applicants' ability to service multinational corporate clients without the need for local fronting arrangements, although some applicants do have more ambitious plans.

It is notable that the largest insurance companies in Poland and the Czech Republic (which together account for 64.1% of total life and non-life premium in the accession countries) - PZU and Ceska Pojistovna respectively - remain locally owned in the majority, the former by the state. In contrast, the Hungarian market (which accounts for another 14% of accession countries' premium) is almost entirely controlled by foreign insurers. In total, Converium calculates that foreign insurers are already responsible for more than 52% of premium in the transition economies among the ten accession countries (that is, the eight countries excluding the mature markets of Cyprus and Malta).

Reinsurance developments

Reinsurers from around the world had excellent access to the accession countries even before EU entry; foreign ownership is a much greater factor.

However, the statistics tell a misleading story. Data shows that foreign ownership increases the level of premium cessions to reinsurers, but foreign-owned companies tend to cede more premium internally, reducing the total available open-market premium, even though total cessions may rise. For example, two insurers in Slovakia were bought by a large Austrian insurer in 2002, which took them out of the market for reinsurance, and the largest insurer in Slovakia was bought by Allianz, and is now considering converting its reinsurance to non-proportional.

New solvency requirements will further reduce available premium. They drive consolidation, which naturally reduces demand for reinsurance. More importantly, better-capitalised local insurers are better placed to support their risk portfolio, thus reducing their reliance on reinsurance. PZU, for example, has given up its quota-share cession of motor premium.

With EU compliance a done deal, current market conditions and trends are having a much greater impact on insurance and reinsurance dynamics in the accession countries. The current hard market for reinsurance is one factor. With good returns available in more familiar markets, some reinsurance capacity has withdrawn from specific accession countries.

From the perspective of the insurers, many have no experience operating in a hard reinsurance market when investment returns are low, which has created operational challenges. To match reinsurers' increasing demands, the quality of risk data and local underwriting standards need to improve in very many cases; current data quality is another deterrent for some reinsurers. Others, however, including my own company, have embraced the region and have allocated resources to assist insurers in the accession countries with their transition.

Getting bigger

One very good reason to do so is growth potential. EU membership will have a significant impact on the insurance markets in the transition economies over the medium and long term. Inflation-adjusted premium growth rates in the accession countries exceed those of the EU 15 pre-expansion members.

In the years from 1997 to 2002, average total premium growth in the accession countries was 7.2%, compared to 6.1% in the EU's old 15.

The gap is set to widen as EU membership drives investment and trade in the new member states. Increased inter-state commerce could have an impact on credit and marine insurance, for example. Harmonisation of laws and legal aspects has affected liability insurance, and more foreign interests are building offices, impacting on construction-related insurances.

In addition, bringing insurance standards to the level of the EU norm will drive premium growth. For example, limits of insurance for MTPL have been raised to match EU minimums. However, premium levels for the underlying polices remain closer to their pre-EU levels. Rising premium rates are almost certain to follow the increased limits. Claims too are set to rise, which can only force insurers to raise premium rates.

Economic growth and stability will drive individual earnings, increasing the take-up of private property insurance, as well as fuelling increases in the insured value of property that is already protected. Social wealth will increase, and experience shows that if the economy grows, the insurance sector will grow too.

Another important area of growth will be life insurance and savings products: non-life insurance currently represents more than two thirds of premium in the accession countries, but only 40% in the EU, according to the CEA.

Total premium spending per inhabitant is EUR2,168 per year in the EU 15, but only EUR196 in the accession countries. Although the impact of EU accession on local insurance markets will not be immediate, plenty of growth and opportunity lies ahead.

- Harald Nebelung is Converium's client relationship manager for Central Europe.