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Country report: Turkey - Want turbo-charged growth? Head to Turkey.(Reinsurance Via Thomson Dialog NewsEdge) Turkey, without a doubt, presses all the right buttons for international (re)insurers looking for the next hot market ready to be catapulted out of its 'developing' status and into the big league. The Turkish economy has improved substantially over the past 15 years, with real GDP growth at an average 7.1% between 2002 and 2006. A sharp rise in disposable income and a favourable demographic trend indicate that the Turkish market has significant potential. Yet Turkey is relatively uninsured for both life and non-life sector, and penetration is still very low on a per-capita basis compared to Western European countries. Foreign investment in Turkish direct non-life insurers has accelerated in recent years which David Laxton, director of insurance at Standard & Poor's, compares to Russia, where there is also a lot of foreign interest. Investments are often based on an assumption that the markets have an untapped resource that is best accessed by setting up shop and waiting for the premiums to eventually come through. While growth in the insurance markets has been impressive, low per capita spend and penetration suggest significant upside. The Turkish economy is ranked 17th in the world, yet the Turkish insurance market ranks only 35th. According to the recently published Benfield report, Turkey Insurance Market Review, non-life business accounts for approximately 85% of the market and this has been the primary driver of premium growth, with a 29% per annum growth over the past five years. Low profitability has been an entrenched feature of the market fuelled largely by losses in accident and motor third party liability, the first and third largest business lines. Turkey has an open foreign investment policy. Historically, the state has been heavily involved but the current intention is to privatise most state-owned enterprises. There are no state insurers, although the government has major holdings in a number of banks, which in turn have shareholdings in insurers. The current programme of privatisation is perceived as a main driver of commercial insurance demand. At present, 22 of the 47 insurance and pension companies active in Turkey have foreign shareholders, whose share in total paid-in capital is approaching 25%. Companies with international partners have a total market share of 60%. A dynamic market Nicola Giargia, head of Benfield's Turkey and Greece market teams, characterises the Turkish non-life market as extremely dynamic, with the rapid growth in premium comparable only to some of the fastest growing countries in Eastern Europe. The downside as he sees it is the low profitability of the main classes in personal lines and commercial lines, particularly motor. He also describes the return on equity levels as horrific: "The major trading and manufacturing groups, which are broadly similar in structure to the keiretsu conglomerates in Japan, have already divested or are in the process of divesting their non-life businesses, while retaining their banking arm because of low profits in insurance. "Insurance used to be a 'cash cow' for the local conglomerates but they no longer view that to be the case. Foreign buyers like Groupama and Eureko are taking majority stakeholds in Turkish insurers because looking long term the foreigner investors consider Turkey to have huge potential irrespective of the profit situation in the immediate term." Angela Coad, industry analysis & research (IAR), Benfield, says that the main foreign strategic stakes, which started in 1998 by Axa and Allianz, have accelerated over the past two to three years. Many, but not all are majority shareholding acquisitions. "While insurance premiums have been growing dynamically, low profitability has been a feature fuelled by losses in motor TPL and accident lines of business. Low profits can be largely attributed to competitive pricing. However, there are results reported where losses have been brought under control but commissions and expenses are too high. The upshot going forward is that foreign stakeholders like Axa are likely to insist on better performance, better loss ratios in coming years. Return on equity is the mantra that they are looking at," she highlights. Hasan Sener, analyst at Oyak Securities, confirms the poor underwriting performance in the Turkish market represented by Anadolu Sigorta, the leading non-life insurer with a 12.9% share owned by the local Isbank, which has no foreign stakeholder as yet. He states: "Despite high premium production, Anadolu Sigorta suffers from the fierce competition in the market. The loss ratio of the company is one of the highest in the sector at 81% in 2006, affecting the technical profitability negatively." Mr Giargia draws attention to the tightening of the underwriting environment through legislation, recently by making it compulsory to hire qualified actuaries. Increasing scrutiny by the authorities of the capital adequacy requirements of insurers is a related development. He also highlights the demand for dynamic financial services including software packages and finally the prospect of the 'battle of the future' when banks start to become major channels of distribution for insurance products once the government caps interest rates from next year onwards. A shift in decision making A fundamental change brought about by foreign ownership of Turkish non-life players, according to Mr Giargia, is the shift in the decision-making process and structure of reinsurance away from the local market to the international market using leverage with the continental reinsurers. "Essentially, the foreign owners are consolidating their exposure on a regional basis, diluting costs and applying more sophisticated reinsurance models, getter better terms and cheaper prices than was previously the case. In line with global trends, outbound reinsurance from Turkey in general terms is moving from proportional treaties," he explains. Mr Giargia's view is supported by Fusun Ersoz, assistant general manager, reinsurance and retrocession, Milli Reasurans TAS. "The impact of foreign direct investment has already become quite evident, as some companies that have been able to strengthen their capital bases tended to switch to non-proportional covers. Aviva and Axa Oyak have already been utilising non-proportional programmes; they were followed by Basak, immediately following its acquisition by Groupama. It is anticipated that this trend would be followed by other market players and that individual reinsurance programmes of some companies might be completely cancelled to be included under the global programme of the respective group", says Ms Ersoz. Milli Re has a dominant position in the Turkish reinsurance market with a market share of around 30%, as a result of the strong client relationships built during the operation of the compulsory reinsurance system and the demand for proportional reinsurance from local insurance companies. S&P's David Laxton believes that the end of the compulsory reinsurance cession requirement to the state reinsurer Milli Re from the end of 2006 has actually benefited the company, which has gone on to build its position, growing strongly in 2007. "Milli Re is very much a Turkish institution highly respected with long standing relationships with the direct market that will not be undermined in the short to medium term," he says. "The fact that Milli Re is in the process of withdrawing from certain unprofitable lines, such as motor reinsurance will actually help to focus the attention of the direct players to be more efficient in underwriting, rather than depend so heavily on proportional reinsurance." Mr Laxton does not assume that the foreign acquisitions in the direct market will threaten Milli Re's position: "Reinsurance relationships carry weight and the change is slower than you would imagine although eventually you may see greater retention levels and a move from proportional to non-proportional placements." According to Ms Ersoz, the Milli Re withdrawal from motor direct insurance underwriting will not have much of an impact on the sector in Turkey: "The majority of the motor insurance has been retained for net by the direct insurance companies, which have been protected by excess of loss treaties quoted and written by Milli Re. "Only a limited number insurance companies had quota share treaties on revenue basis placed with very few international reinsurers and some had conventional quota share treaties with Milli Re. Despite the fact that this line of business has been written mainly for their net account, insurance companies have been continuing to focus on market share rather than technical profitability. For this reason, the Milli Re withdrawal from motor reinsurance is not anticipated to have a significant impact on motor direct insurance underwriting." The devastating earthquakes in 1999 killed 17,000 people and many commercial and residential buildings were lost in the country's most prosperous region, Marmara. Some experts claim that this has significantly increased the risk of a large seismic strike near Istanbul, Turkey's largest city. The Turkish Catastrophe Insurance Pool (TCIP) has effectively replaced a significant portion of government obligations. As of March 2007, there were approximately 2.6 million TCIP policies in force, representing a household penetration rate of 20%. Highly exposed A high proportion of catastrophe risk is reinsured to Milli Re, leaving it somewhat exposed, and Mr Laxton believes the company has done everything it can do to protect its position including extensive application of catastrophe modelling. Nevertheless, in common with other reinsurers operating in the Turkish market, Milli Re is exposed to risks relating to uncertainty surrounding the accuracy of the models available to size its potential exposure to earthquakes. Milli Re's concentrated portfolio exacerbates this risk relative to its more diversified peers. If there is another large earthquake, Milli Re would inevitably take a large hit; there is always an element of unpredictability in any kind of modelling scenarios. Milli Re is unlikely to withdraw from catastrophe since the company is expected to, and has to be seen to play, a long-term supporting role to the market. What Milli Re is doing is to balance out Turkish exposure through increasing the proportion of inbound reinsurance. Ms Ersoz states that Milli Re plans to maintain its current market share in the Turkish market and, therefore, earthquake exposure growth for Milli Re will be in parallel with the generic market growth, which in turn will be influential in the size of reinsurance programmes. One of the key concerns of Milli Re is to transform itself from a local reinsurance player into a major player in Asia, Africa and the Middle East. The company already has extensive experience and expertise in managing African business in the FAIR pool since 1974. Milli Re has actively engaged in accepting business from emerging markets starting from 2006, both on direct basis and through international brokers, in order to achieve a diversification in its portfolio. Milli Re's main target is to increase the premium volume of foreign business up to 25% in the company's overall portfolio within five years and strengthen its reputation in the international markets. Taking into consideration the geographical distance and the specific characteristics of the region and aiming to have a substantial presence in related markets, such as Taiwan, South Korea, China, Malaysia, Singapore, Indonesia, Thailand, the company decided to set up a branch office in Singapore in 2007. The main focus will be short-tail proportional and excess of loss business. Facultative capacity will be offered with small lines for supporting treaty business. TOTAL PREMIUM AND GROWTH IN TURKEY AND SELECTED COUNTRY COMPARISON Country 2005 2006 CAGR 2001-2006 Turkey $5.71bn $6.62bn 27% Poland $9.44bn $11.95bn 17% China $60.13bn $70.81bn 23% Russia $17.52bn $21.5bn 18% Source: Swiss Re Sigma World, Benfield LAR. TURKEY NON-LIFE COMPANIES OWNERSHIP STRUCTURE AND MARKET SHARE Company Foreign investor Foreign investor Market share stake 2006 Anadolu Sigorta None - 12.9% Axa Oyak Axa/Oyak 50%/50% 11.4% Koc Allianz Allianz 37% 9.5% Aksigorta None - - Yapi Kredi Unicredit 50% 7.1% Gunes Groupama 36% 6.4% Isvicre Ergo/Munich Re 75% 6.1% Basak Groupama 100% 5.4% Garanti Eureko 80% 4.4% Source: Benfield Turkey Insurance Market Review. Copyright 2007 Timothy Benn Publishing Ltd, Source: The Financial Times Limited |