The potential for growth in Poland is drawing foreign insurers, but they are probably too late to benefit from pension reform, says Trevor Petch.
Poland may not be due to join the European Union until the middle of thenext decade, but its insurance market is already part of Europe. Of the 27 life insurers currently registered (not all are operational), 21 are controlled by foreign insurance groups, with minority stakes, held directly or indirectly, in at least three more, and at least three major US life insurers reported to be applying for licences. Market growth, especially in individual life, is dominated by Commercial Union Polska, AIG subsidiary AMPLICO Life and Nationale-Nederlanden.In non-life, the small, locally-capitalised insurers which led the competition to the former state monopolies in the early years have had difficulties raising the capital to fund either growth or net losses accrued in previous years. Of the 31 companies registered, close to 20 are now effectively foreign controlled, while two have lost their licences and have portfolios for sale, and at least two more are actively seeking foreign investors.
A new stage in development of the market will begin at the end of 1999,through the sale of 30% of former state monopolist PZU to the Eureko consortium, and the end of the recruitment phase for the compulsory element of the newly-reformed pension system. Again, the market will be dominated by Commercial Union and Nationale-Nederlanden, together with PZU, with foreign companies such as AIG, Norwich Union and Zurich also at the top end of the middle-ranking pension providers.
Poland has already seen its first and second, and even third, waves of investors. Initially there were the pioneers such as CU and AIG, then thecompanies, many of them German, which bought up existing Polish operations, and other multinationals which began to invest once the future seemed more certain. Recent months have seen a further inrush of new start-ups by companies such as Generali and Skandia, which might have been expected to enter far earlier.
Why the attraction? Not only is Poland a primary candidate for the next stage of EU expansion, supposedly as soon as 2003; it is also the largest country in central Europe, with a population a fraction less than that of Spain. Between 1992 and 1997, growth in life premium was 143% compared with 49% for the EU as a whole. Nominal growth in 1998 was 25% for traditional life business and 58% for unit-linked (33% overall), with a further 30% in the first half of 1999. In non-life, driven mainly, it is true, by motor third party liability rates, real growth for 1992-97 was 65%, compared with an EU average of 11% - although in some markets such as the UK growth was negative. In 1998, when both Germany and Switzerland exhibited negative non-life nominal growth, Poland grew by 24%, and by a further 10% in the first half of 1999.
At the same time, as a proportion of GDP, non-life penetration is below 2%,and for life just above 0.75%, while premium per capita (in 1997) was $69 in non-life and $27 for life. If Poles spent as much on insurance as thePortuguese, Poland would be the seventh biggest non-life market in Europe and in life, it would rank eighth. Sustainable, long term growth is, therefore, Poland's attraction, and moreand more multinational insurers are recognising that it is a market from which they cannot afford to be left out. Whether entering now is too little, too late, may still be an open question for some segments of the life and non-life business, but in pensions, it looks like a foregone conclusion.
Pension reform involves the majority of the non-agricultural workforce under 45 having 7.3% of social security contributions diverted to a privately managed individual pension fund. Eight or nine million workers at any one time will be paying perhaps $300 per year into the funds for up to 45 years, 70% of them to Commercial Union, PZU and Nationale-Nederlanden.
CGU declared a new business profit of $34m for its 25% market share as of 30 September, implying a value of about $450 million for the Polish pension market as a whole, after adjusting for full receipts for a whole year. That is, of course, absurd, reflecting an extremely high discount rate (cancelling the long-term advantages of the business) and an apocalyptically high lapse rate.
More to the point, just as over two-thirds of pension applicants gravitated to the four firms which account for 96% of life premium, including the three foreign ones which dominate individual life, so the same dynamic canbe expected by those well off enough to buy a voluntary, supplementary pension. This is the market which the latest wave of entrants are seeking to exploit. They have probably missed the boat, unless they can discover instant distribution.
Trevor Petch is an insurance analyst with Robert Fleming Securities Ltd, London.