Though not in the European Union until 2003, Poland is no longer considered an emerging market. A member of NATO, Poland's economy is now highly integrated into the European business cycle and its GDP per capita currently stands at approximately $3,500, having an impressive growth rate in 1999 of 4.1%. In fact, it is widely believed that the officially projected 5.2% growth rate in 2000 will be achieved, or even exceeded.
A decade has passed since the former socialist country moved towards the free market economy. The insurance companies previously operated by the state have been transferred to private ownership and new privately owned insurance companies have been established. This has driven the growing trend for globalisation and internationalisation within the financial sector.
With Poland being the largest country in Central and Eastern Europe (CEE) with a population of 40 million, its insurance market has expanded rapidly since liberalisation and de-regulation in the early 1990s. This, combined with economic reform, is increasing competition and attracting ever-larger amounts of foreign capital. Foreign investment in the Polish insurance sector doubled from 1997-1998. New products and distribution channels are appearing and the recent pension reform is radically altering the competitive landscape.
From 23 insurance companies in 1991 (5 life, 18 non-life), Poland now boasts over 30 general insurers and almost 30 life and pension insurers. Most insurers have foreign shareholders and the Polish insurance supervisory system is similar to the Western European model. Non-life insurance premiums are currently dominated by motor insurance, which accounts for almost 70%, and of the balance property insurance accounts for 16%. From 1992 to 1999, the gross insurance premium written within the non-life sector increased from 1.540 billion PLN to 11.500 billion PLN. In the corresponding period, the life sector increased from 542 million PLN to 7.000 billion PLN. Despite these impressive growth rates, there is a distinct lack of risk awareness and insurance knowledge among insurance buyers and product penetration among Poles remains extremely low.
While motor insurance currently dominates the non-life sector, there is a noticeable growth in liability products, personal injury-related motor cover and public and products liability (especially professional indemnity). In addition, automobile manufacturers are fast becoming the new breed of competition for traditional insurers.
Opportunities within the Polish insurance and reinsurance industry have been due to two inter-related and far-reaching structural reforms. Firstly, the four “big” reforms initiated in 1999 (social security, health, education and public administration) and secondly, alignment with the EU regulatory environment. This alignment has impacted four major areas: market access, the supervisory system, market structures and product harmonisation.
The government has introduced various legislative measures, beginning with the Act of Property on Personal Insurance in the mid-1980s. Rather restrictive, this allowed for the establishment of insurance companies in the form of co-operatives or joint-stock companies. Amendments were made in May 1998 which opened the market to foreign investment. A new insurance system was introduced by the Insurance Activity Act in July 1990, which was based on regulations of the European Union. Further amendments in 1995 included the introduction of the State Office of Insurance Supervision and addressed the financial management of insurers, the investment of insurance funds and the role of the insurance intermediary.
The liberalisation of the Polish insurance sector resulted in a wave of new players entering the market. This represented a clear threat to existing players and ended previous state-owned PZU's virtual monopoly on life and non-life insurance. The other key player at this time was WARTA SA, which focused on policies in foreign currency and reinsurance.
On 5 November 1999, the Polish Treasury announced the sale of a 30% stake in PZU (the largest Polish insurer) to a consortium formed by pan-European insurer Eureko and BIG Bank Gdanski for more than 3 billion PLN. The acquisition secured 60% of the Polish insurance market and nearly 25% of the pension fund market. PZU wrote gross premiums of 6.012 billion PLN last year and its life subsidiary had 15.8 million policies in 1998. On the pension side, PTE PZU has attracted over 1.7 million new customers since the launch of the new funds in April 1999. The company also enjoys a strong position in the corporate sector, servicing a number of Poland's largest companies. Although the PZU Group holds the leading market position, aggressive foreign and local insurers will guarantee that competition is stiff.
The impact of liberalisation and EU alignment can been seen from the fact that in 1999 over 30% of Poland's insurance companies were owned by foreign insurers. Although freedom of cross-border insurance is expected further to intensify competition, this is still rather an insignificant event in the EU. The most likely scenario is that there will emerge a single European market for commercial risks, dominated by large European insurers, and personal lines will remain with local business.
Life and pensions
Reform in the pension and life industry are a result of the move towards the 3-pillar system, inspired by the World Bank, and the first private pension plan went live on 1 April 1999. There are currently 21 second pillar funds licensed (which includes compulsory contributions for those under 30) and the market is dominated by four big players. The so called ‘4th' pillar holds most potential for foreign players offering group and individual saving products and there will doubtless be an increase in demand for life cover.
The Polish life market is still young and a typical life insurance product comprises term insurance, whole life insurance policy and endowment policies. There is a slow, but steady, growth in universal life insurance, and new products entering the market include insurance policies with flexible premiums and unit-linked products. The drive for innovation is influenced by requirements for new insurance products not currently available and foreign insurance companies entering the market. Foreign companies, however, need to adjust their own life insurance products to fit the Polish market.
Direct sales agents are still the dominant distribution channel for non-commercial policies and alternative forms of distribution have yet to take off. Distribution remains heavily reliant on agents and brokers and is consequently labour intensive. Alternative channels are emerging (e.g. direct mailing, telemarketing, internet, etc), but remain more talked about than a reality.
There is increasing interest among foreign reinsurers in both Poland and the CEE as a whole. Demonopolisation has encouraged competition as the number of insurance companies has grown. Both large and small reinsurance companies can compete for the client, and international players face competition on a global and local level, for example, Polish Re. Established in 1996, Polish Re (5% owned by foreign shareholders) has the advantage of being able to offer local knowledge, lower cost and flexibility that larger, global players cannot.
Regarding larger scale risks, there is no significant earthquake exposure and exposures to windstorm both within Poland and across the CEE as a whole, are relatively low. The main catastrophe exposure is flooding. July 1997 saw extensive flooding in Poland, which had a severe economic impact. However, the cost to insurers and reinsurers was reduced due to the high proportion of uninsured buildings and contents.
Flood was a covered risk for both residential and business exposures under the communist state-owned insurance schemes. This procedure continues and flood is automatically included in extended coverage perils which can be bought in a property insurance policy. Premium rates remain low as competition is high due to a wide range of local and foreign-owned insurers now offering this full coverage. In addition, many also offer extended coverage perils or an all risks alternative. As a consequence of the 1997 floods, there was investigation into creating a natural catastrophe insurance fund. However, the necessary legislation has not been passed at present due to insufficient government support for such schemes.
The Polish economy is now highly integrated into the European business cycle. When the main economies in the eurozone expand, Poland follows with an upswing. As such, it should not be seen just as a next-round EU entrant, but also as part of the group of emerging market economies whose outlook is influenced by developments in a more advanced and stable body.
The system of control requires further strengthening of supervisory authorities and enforcement of rules in line with EU standards. There is increasing pressure on poorly capitalised companies and the need for capital as well as risk transfer/financing. The reforms of the social security system have offered insurance companies new opportunities that have been rapidly grasped. Within the insurance industry there is increasing professionalism and division of labour in terms of risk assessment, underwriting and claims handling. New distribution channels are developing and traditional group products are transforming. Existing insurance cover is being extended and new products being introduced, with the growth of health insurance being something to watch for.
The downside of the demonopolisation, however, is that the reinsurance is set to become increasingly competitive as the market shares of international players grow. While the demand for reinsurance within CEE is greater than the world average, the area is not exclusively an emerging market and foreign investors will dominate the insurance market. With strong parent companies, there will be limited need for reinsurance and highly exposed, unprofitable business will be increasingly ceded to the reinsurers. As a consequence, reinsurers may be well advised to concentrate on servicing global covers and providing alternative risk transfer schemes.