With an economy on the up, a rapidly growing insurance sector, and anticipated legislative developments, Ben Harvey and Rimvydas Jogela believe the Lithuanian insurance market will become increasingly attractive to foreign investors in the coming years.

Lithuania, Estonia and Latvia, located on the eastern shore of the Baltic Sea, collectively make up the Baltic region of Europe. With a population of just over 3.7 million, Lithuania is the largest of the three countries. Its capital, Vilnius, is at the geographical heart of Europe, being crossed by lines connecting Paris and Berlin with Moscow, and Helsinki with Athens.

Since regaining its independence in 1990, Lithuania has arguably been the slowest of the Baltic countries to introduce market reforms. However the current centre-right government coalition, supported by the newly elected President Valdus Adamkus, a former senior official in the US Environmental Protection Agency, has seen the speed of transition pick up. Many large companies have been earmarked for privatisation and steps are being taken to restructure the tax legislation, tackle the fiscal deficit and increase foreign trade and direct investment.

Between 1990 and 1993 Lithuania's real gross domestic product shrank by 63%. Since 1994 the economy has recovered. GDP growth in 1997 was 5.7%, and inflation has fallen steadily and is now at 6.7% (year on year) with a 1998 forecast of 6%. Trade and services are the most important sectors of the economy accounting together for nearly 50% of GDP. The average monthly salary per head during 1997 was $230.

In April 1994, the national currency, the Litas, was pegged to the US dollar at a rate of 4 to 1. This peg is expected to remain in place until 1999 when it is likely to be replaced by a peg to a basket of currencies or possibly to the new euro.

The insurance sector

The sector has grown rapidly in recent years. Both life and non-life premiums increased by almost 40% in 1997 compared to 1996. Statistics show that in 1996, the average level of premiums paid per head was $10 and that by 1997 this had risen to $17. Despite this, the insurance sector in Lithuania remains under-developed.

With a law on compulsory third party liability motor insurance likely to be passed during this year, the level of non-life insurance premiums is expected to grow even more rapidly. The adoption of this law is likely to be crucial to the attraction of significant foreign investment into the market in the coming years.

At the end of 1997 there were 37 registered insurance companies in Lithuania, although only 20 of these could be considered to be active. Due to the high minimum share capital requirements introduced in 1996, most of the smaller companies are expected to merge with or be acquired by the larger players.

The 10 largest insurance companies in Lithuania by gross premium income during 1997 are listed in table 1.

The table illustrates the extent to which the market is dominated by the state-owned Lithuanian Insurance. By most estimates, Lithuanian Insurance has about 90% of the life insurance market, as well as around 55% of the non-life insurance market. There is also a geographical concentration in the capital, Vilnius, where 60% of insurance companies established in Lithuania are located.

Most of the smaller insurance companies reinsure with the major European reinsurance companies, such as Munich Re, Cologne Re, Swiss Re and Lloyd's. In 1997 premiums paid to foreign reinsurance companies totalled about 20% of all premiums collected, although a few insurance companies reinsured up to 90% of their risk. The most common types of reinsurance used are proportional and general. The extensive use of reinsurance by local insurance companies can in part be explained by their weak financial position.

Legal framework

In general, Lithuanian law provides a considerable degree of security for foreign investors. Bilateral agreements are in place with many European countries including the United Kingdom, Scandinavia, France and Spain, providing a reliable structure for investment, earnings and legal protection.

Insurance companies are regulated by a relatively recent update to the Law on Insurance, passed in mid 1996. The law is implemented and safeguarded by the Insurance Supervision Department. In order to be active in the insurance market, a company is required to obtain a licence from the Supervision Department.

The Law on Insurance provides for strict segregation of companies by type of insurance products, requiring that life, non-life and credit insurance must be provided by separate companies. The law also sets out the minimum share capital requirement for companies in the different product sectors as follows:

* life insurance companies $1 million;

* non-life insurance companies $0.5 million;

* credit insurance companies $1.75 million.

It is worth noting that foreign insurance companies which are not registered in Lithuania are allowed to sign contracts directly with legal entities or individuals only if a Lithuanian insurance company does not provide a particular insurance product, and their financial position is too weak to offer such a product.

Financial statements have to be prepared and audited independently within three months of the financial year end, although international accounting standards are not yet obligatory.

Current legislation provides tax incentives for legal entities and individuals who acquire voluntary insurance policies. At present the most popular non-life insurance products are property, vehicle and drivers third party liability, general third party liability and personal accident. New types of insurance are gradually being introduced, some of the more recent being customs guarantee insurance, export credit insurance, medical insurance and pension insurance.

Opportunities for foreign investors

Foreign direct investment in Lithuania had reached a cumulative total of $1 billion by the end of 1997, 27% coming from the United States, 7.4% from the United Kingdom and 11.3% from Germany. However, the insurance sector has not yet been a significant target for the foreign investor. A majority of the insurance companies in Lithuania are funded by local investors, including the government of Lithuania which has 70% of the shares of Lithuanian Insurance. Currently five companies have foreign investors, mainly from Germany and Estonia.

The signals for foreign investment in all sectors of the economy are positive. The insurance sector is one which as yet remains relatively untapped, but which shows significant potential for growth.

Ben Harvey and Rimvydas Jogela are managers in the Price Waterhouse Vilnius office, providing audit and business advisory services to five of the top 10 insurance companies in Lithuania.