In Search of Pan-European Insurance

1
In Search of Pan-European Insurance where is it?

• ao. Univ.-Prof. Dr. Michael TheilInstitute of
  Risk Management and Insurance
• Vienna University of Economics and Business
  Administration

2
Aims and scope

• EU legislation, single currency which changes
  wereexpected / intended?
• How did insurance markets in EU-12 (Euro-zone),
  EU-15 and EU-25 develop?
• In particular which changes in market
  indicators, market concentration, cross-border
  sales, distribution channels and investments do
  we see?

Overview Main Indicators Companies
Distribution Investments
3
yellow EU-15
no
no
no
blue new countries(2004)
4
Single Market for Insurance

• Aims
• Enable EU-wide operations
• Promote competition
• Improve supply to meet consumer demands
• Measures
• Single license
• Cross-border sales
• Enhanced investment opportunities (single
  currency)

Overview Main Indicators Companies
Distribution Investments
5
Premiums - where in this world?
Overview Main Indicators Companies
Distribution Investments
6
Main Indicators

• Density
• Represents average insurance spending per capita
  (premiums / population) expressed in
• Penetration
• Represents the relative importance of the
  insurance industry in the domestic economy
  (premiums / GDP) expressed in
• Note
• Both refer only to private insurance therefore,
  we observe considerable differences between
  countries with and without extensive social
  security systems

Overview Main Indicators Companies
Distribution Investments
7
Density (), Penetration () Total (2002)
very faroutlier LU
countries below the diagonal
LT, LV, EE, SK, PL, HU, GR
8
Density, Penetration (2002 ,) Total

• very different levels of market development
  within the EU, even between established
  EU-countries
• Many of the recently admitted countries are in
  the small markets group but also GR and PT
• exceptional numbers for LU small country
  (450,000), but with long-lasting ties with NL
  and BE plus a favorable place for insurers
• below-diagonal-countries insurance premium
  higher in of GDP than absolute numbers would
  suggest relatively poor countries, but with
  potential to grow

Overview Main Indicators Companies
Distribution Investments
9
Density, Penetration (1992-2002) Total Change
Overview Main Indicators Companies
Distribution Investments
10
Density, Penetration (1992-2002) Total Change

• while EU-25 is still behind the US and JP
  regarding thecurrent status, growth rates tell a
  different story
• many of the new EU-countries exhibit much higher
  growth than established EU-countries
• the actual date of accession to the EU plays a
  minor role Before, they are under observation
  for many years transformation from the communist
  economy implies that risks are shifted from the
  state to private insurers plus many additional
  individual needs for coverage
• some markets in established EU-countries appear
  saturated However, there is much pressure on
  state pension systems plus developing needs for
  coverage
• Since premiums are prices for insurance,
  competition limits growth

Overview Main Indicators Companies
Distribution Investments
11
Density (), Penetration () Life (2002)
very faroutlier LU
LT, LV, EE, SK, PL, HU, GR
12
Density, Penetration (2002 ,) Life

• Small markets as before Baltic states even
  more behind
• DE and AT are even behind ES and PT in terms of
  penetration
• Reference markets USA and JP form a quite compact
  group with northern and western EU states
• Explanation for outlier LU as before GB comes
  from opting-out under PM Margaret Thatcher
• Change 1992-2002
• growth in all markets (except JP), i.e. the
  insurance industry within the national economy
  gains in importance
• especially high growth rates (gt200) in BE, PT,
  MT, IT, SI

Overview Main Indicators Companies
Distribution Investments
13
Density (), Penetration () Non-Life (2002)
LV, EE, SK, PL, HU
14
Density, Penetration (2002 ,) Non-Life

• Small markets as before
• USA far ahead of EU
• Within EU, GB and NL rank highest, mainly because
  of their pension system and real estate markets
• Change 1992-2002
• many markets falling in part a result of
  increasing competition (notorious motor
  insurance)
• especially high growth rates (but far lower than
  in life) in PT, SI, SK, GR, CY, MT, CZ

Overview Main Indicators Companies
Distribution Investments
15
Insurance Markets Summary

• In sum, the national markets within the EU play
  an importantrole in global insurance business
• In terms of density and penetration, the national
  markets appear very heterogeneous
• Overall, new states and southern states are
  (often far) behind the rest
• Considerable growth is seen mainly in new states
• After a period (by the mid-90s) with high-rising
  life insurance premiums and rapidly declining
  non-life premiums, we now observe an opposite
  pattern

Overview Main Indicators Companies
Distribution Investments
16
Companies and employees 1992-2002 ()
downward trend in most of EU-15
17
Premiums, companies and employees 1992-2002 ()
Overview Main Indicators Companies
Distribution Investments
18
Companies and Employees Trends

• Concentration (old EU countries) versus expansion
  (newEU countries)
• Varying development in new EU countries points at
  differences in employee structure (e.g.
  independent brokers and agents instead of
  employed sales force) and in functions (e.g.
  fronting instead of full scale insurer)
• When controlling for premium, new EU states are
  behind (except PL, CY)
• Despite downward trend, insurance companies
  remain very important employers
• Further concentration is expected

Overview Main Indicators Companies
Distribution Investments
19
Concentration first five, first ten (2002)
Non-Life
Overview Main Indicators Companies
Distribution Investments
20
Concentration first five, first ten (2002) Life
Overview Main Indicators Companies
Distribution Investments
21
Market Concentration

• Measured in premium for first 5 and first 10
  insurers
• Generally, the insurance industry is considered
  to be highly concentrated
• Concentration is slightly higher for life than
  for non-lifeinsurance (except AT, DK, GB, HU,
  IT, SK)
• Reason critical size in life insurance
• New EU-countries show higher concentration than
  old ones(60 vs. 80 for non-life 78 vs.
  95 for life)
• 1992-2002 concentration increased in most old
  EU-countries and decreased in most new
  EU-countries
• That is, differences in concentration have been
  even more extreme

Overview Main Indicators Companies
Distribution Investments
22
Largest groups
for comparison largest non-life/life in AT
Overview Main Indicators Companies
Distribution Investments
23
Largest groups

• 5 already far behind Winterthur 21,034
• Proportion life vs. non-life premium 21 (except
  Allianz 12)
• by far most of their premium is written in Europe
• more than 315,000 employees (rising)

Overview Main Indicators Companies
Distribution Investments
24
EU-branches vs. local companies

• Cross-border sales are one of the pillars of the
  single market
• alas, we cant show it
• numerous data problems
• some countries report number of EU-branches
• others report number of companies
• others do not report either of those
• inconsistent definitions domestic / foreign
• some instructive examples
• AT 13 (still rising plus many local companies
  are in fact foreign)
• GB 10, ES 11, IE 28
• non-EU-branches (licensed individually)
  declining constantly

Overview Main Indicators Companies
Distribution Investments
25
Distribution channels

• Early nineties very different structures, e.g.
• countries with broker tradition e.g. GB, BE
• countries with employed sales force, e.g. DE, AT
• General assumption EU-wide legislation favors
  brokers outsourcing of sales force
• Data fragmentary plus inconsistent definitions
  of categories
• Current status very heterogeneous example

Overview Main Indicators Companies
Distribution Investments
26
Distribution channels (2002) ()

-
/-
/-

27
Distribution channels trends

• No clear trend developments vary considerably
• employees often decrease (exception GB)
• tied and multiple agents often decrease
  (exception AT)
• brokers increase (exceptions BE, IT)
• banks increase (exception GB)
• other channels (e.g. worksite / affinity)
  increase, but volume is very small
• local cultures to sell insurance appear strong

Overview Main Indicators Companies
Distribution Investments
28
Investments

• Early nineties
• many currencies
• congruency rules plus mostly local business
  investments in local currency
• Then ECU, stability program (European Monetary
  System), (99, 02)
• Expectations for investment by insurance
  companies
• deeper financial markets (congruency now means )
• reduced costs for transactions
• much broadened possibilities for insurance
  companies
• But still varying limits per investment category

Overview Main Indicators Companies
Distribution Investments
29
Investments (2002) ()
-
-
-/
/-
/-


30
Investments trends

• Development very dynamic, but no consistent trend
• shares, fixed income securities and (only in some
  countries) loans are most important categories
• DE dramatic consequences of over-enthusiastic
  investments in shares
• shares decrease, fixed income securities and
  loans increase
• overall, investment strategies became more
  varied, making use of the new possibilities, but
  companies often appear to lack knowledge

Overview Main Indicators Companies
Distribution Investments
31
What Is Not (Yet) Achieved?

• Differences is contract law
• Major obstacle for EU-wide operations, in
  particular with a single product portfolio
• Not to come in the near future
• Differences in company reporting and taxation
• Major differences in detail, for instance
  valuation methods different tax schemes
  definition of domestic / foreign-controlled
  companies definition of number of employees and
  many, many more
• Some efforts for standardization underway
  however, differences are likely to remain
• Differences in insurance demand

32
Consequences

• Single market process still unfinished
• Political message versus economic realities
• Competition / security / consumer demands are
  often contradicting targets
• Nevertheless
• Former national markets did change considerably
• Premiums in some branches (motor) fell
  significantly
• Insurance companies became more efficient,
  flexible and innovative

33

• Thank you and open for QA!

34
Some Words About Data Quality I

• Major sources
• OECD Insurance Statistics Yearbook
  (www.oecd.org) compiles data by supervisory
  authorities
• Comité Européen des Assurances (CEA) European
  Insurance in Figures (www.cea.assur.org)
  compiles data by insurer associations
• Various additional data by national associations
  and supervisory authorities

35
Some Words About Data Quality II

• Problems
• Data inconsistency (more or less obvious) errors
• OECD does not report new EU countries
• CEA does not report USA and Japan
• Solutions
• Constantly revise data sets for plausibility
• Calculate common measures, accounting for
  currency and inflation
• Therefore
• what you see here is not provided on a
  supranational level