Many global insurers now think twice about investing in Turkey, with those present considering their options
Turkey’s insurance market is vulnerable to a range of threats, according to a new report from AM Best, including political and economic risks, as well as limited pricing control on motor third-party liability business.
The Turkish insurance market has historically provided investment opportunities by combining strong economic growth with “east meets west” links, said the rating agency’s report, “Attraction of Turkish Insurance Market Hampered by Underwriting Losses and Economic Volatility”.
Most of the biggest international insurance groups have set up or bought their way into the Turkish market to take advantage of its potential, the rating agency noted.
“However, more recently, with elevated geopolitical tensions, currency devaluation, high inflation, changing financial regulation and an insurance market that has consistently generated poor underwriting performance for most market participants, sentiment is less optimistic,” AM Best said.
“Many global insurers now think twice about investing in Turkey, with those present considering their options,” the report warned.
Much of the commercial lines risk taken in Turkey’s insurance market is passed to reinsurers, in part due to the country’s catastrophe exposure to earthquakes. Residential property risks meanwhile are absorbed through the government-backed Turkish Catastrophe Insurance Pool.
This means that many domestic insurers are more focused on underwriting motor business, which poses a risk due to limited pricing control on motor third-party liability business (MTPL), AM Best warned.
“The underperformance of motor third-party liability portfolios has been driven principally by regulatory and legal changes in recent years,” said Will Keen-Tomlinson, financial analyst, AM Best.
“Regulatory changes such as pricing caps have further limited companies’ ability to recover losses. This has left investment income as the most viable means of profitability for companies underwriting MTPL risks,” he added.
Inflation in recent years has wiped out Turkish premium gains when converted into euros or dollars by international groups – despite 20% average growth in the country’s insurance market each year.
Furthermore, insurers have experienced inflation rises for motor repair parts and also encountered higher reinsurance rates from the firming international reinsurance market.
“When currency devaluation and inflation are taken into account, foreign shareholders can find returns falling short of their cost of capital for participating in the market,” said Keen-Tomlinson. “At least one large foreign player has pulled out of the market recently, and others are likely to be considering their options.”