RIGA - A strong insurance industry is something that most Westerners take for granted. A well working insurance sector where competition is high, premiums affordable, coverage is adequate, and companies are stable, is a large part of what helps individuals and companies manage risk as they grow and prosper. And in the Baltic states, this is hard to come by.
Rapid growth, low penetration
Although growth is quite rapid, the Baltic states recorded the lowest insurance penetration in the European Union in 2004.
Nina Kukuskina of the American based global insurance broker and risk management firm Aon, said the main factor driving the Baltics' insurance surge is the growing number of homes and automobiles on credit. The current high-lending rate also correlates with higher insurance policies, due to banks requiring insurance for cars and real estate bought on credit. According to Kukuskina, this sector makes up 70 percent of Latvia's current insurance growth.
Managing rapid development, and the resulting inflation, is a major challenge for the Baltic insurance industry. Kukuskina pointed out that inflation in the construction industry complicates the costs of reinstating assets after an event.
For example, a building insured for fire damage in 2003, when construction prices were 250 lats (386 euros) per square meter, which needs be reconstructed in 2006 for 600 lats (864 euros) per square meter, leaves the building under-insured due to inflation. Thus, companies have to keep up on their policies and consider the high rate of inflation when insuring their businesses.
In a recent report, Price Waterhouse Coopers said that European insurers were facing a "perfect storm" of new and more exacting regulations from the European Commission.
The Price Waterhouse Coopers study predicted that increasing margin pressures were likely to be the strongest impetus for further mergers and acquisitions in the industry, also predicting domestic deals with strong synergy potential.
However, in Estonia there are no firms that operate without outside capital, and in Latvia there are only four firms that operate exclusively with local capital.
Kukuskina attributes this to the business culture in Latvia at the moment. In describing the current attitudes of local insurance companies, she brought up an old anecdote, "Three Latvians are sitting at a table and the first one says to the second one, 'What should we have to eat?' And the second Latvian answers, 'The third Latvian.'"
In a situation with economic growth at almost double digit levels, it is hard for any locally owned businessman to see the benefits of synergy. This will likely change as the business community becomes more sophisticated, and the competition in Latvia from the outside becomes fiercer.
In 2005, insurance company subsidiaries from larger EU member states were predicted to become stronger in the future, according to the Lithuanian Insurance Supervisory Commission's 2005 annual report. The report also predicted that the Lithuanian market would integrate more and more into the EU single market for insurance. The same could be said for the Baltic market as a whole.
Human resource issues, especially, affect the growth of the insurance industry in Europe, according to the Price Waterhouse Cooper report, and the same is true for the Baltic states.
According to Kukuskina, other than a few courses offered in the economics faculty, there is no advanced study and certification in place at Latvian universities for insurance professionals. She herself has an ACII certification from the U.K.'s Chartered Insurance Institute, and mentioned that training new staff takes up a considerable amount of time at Aon's Riga office, due to the lack of trained insurance professionals in Latvia.
In Lithuania, one of the major non-life insurance companies, DUAB INGO Baltic, went bankrupt in 2005.The bankruptcy sent ripples through the public, and caused negative consequences for both policyholders and insurers.
According to the 2005 government report, the case "confirmed once again that it is vital for insurance companies to adhere to the fundamental principles of the insurance business 's responsibility towards the customer, business prudence and particularly well-founded risk assumption." This was both a learning experience for the Lithuanian insurance sector, and a sign of the lack of qualified and experienced professionals.
Nowhere to go but up
But the future looks bright for the Baltic insurance industry. With low penetration levels and lending on the rise, the current credit-driven growth is likely to continue. However, sustained growth of the industry, and the fringe benefits it provides the economy, are still beyond the horizon.
According to Kukuskina, individuals and companies in the Baltic states still carry a psychological barrier against taking out insurance of their own free will. And it will take some time before every, "Noble person sees living without insurance as unacceptable."
Similar to the psychological barrier against credit that existed before the Baltics joined the EU, negative attitudes toward insurance will also have to fall before Western levels of insurance penetration come about. It's just a matter of time.