CHANGING TACK: The market’s collapse after its best year in 2007 forced companies to rethink strategies and directions, says Julius Kondratas.
KLAIPEDA - Market experts unanimously agree that the insurance market is the best litmus test showing an economy’s status quo and its trends. Thus, after a steep fall in recent years, the insurance market has started scrambling, prompting vigorous guesses about the market and the entire economy’s recovery.
In this year’s first three quarters, insurers have signed insurance policies for a bit over 1 billion litas (285 millions euros) and have paid out nearly 700 million litas in different forms of insurance. It is a 2.7 and 12.9 percent drop, respectively, compared to the same period of 2009. However, despite the post-crisis plummet, the Insurance Supervision Commission (ISC) is convinced that the insurance market is starting to recover. According to its deputy head, Ramunas Baravykas, though the insurance market has shrunk, the trend is not accelerating any more and is showing signs of bottoming out. “As we predicted, by the middle of the year, the market’s downturn started slowly subsiding, and we started seeing certain recovery signs in the second half of the year. The total insurance policy packet this year is only 2.7 percent less than last year. Therefore, we hold on to our previous forecast – the market shrinkage will hover at 2 percent. While evaluating the market’s trends, in a favorable scenario, we foresee a modest 8-10 percent growth next year,” Baravykas asserted to the Lithuanian media recently.
According to ISC, in September, in the market segment of life insurance, insurance payment totals went up by 2.5 percent and amounted to 122 millions litas, compared to August, while growth in the non-life insurance market inched up by 0.8 percent and made up a bit more than 80 million litas. Baravykas concludes that this indicates that, lately, people have become more property-, health- and family well-being-conscious. “More and more inhabitants assume responsibilities for themselves and their families, and start getting insurance policies,” the ISC deputy head pointed out. The positive trends signal that the downturn in insurance may be ending.
The climax of the crisis, in 2009, was disastrous for Lithuanian insurers – the market saw a 24 percent insurance contribution slump, down to 4.5 billion litas from 6 billion litas in 2008. The non-life insurance market, ISC’s chairman Mindaugas Salcius claims, has experienced the sharpest fall to think of - while growing 13 percent in 2008, it nosedived 30 percent last year. The declining trend prevailed in 2010 as well, but the fall was less steep, signaling the market has likely reached its record lows and is about to bottom out. “With the downfall of the insurance market, the insurance signing flow has been disrupted. For some time, those insurance agreements that had been signed before generated certain revenues, thus, cushioning the aftermath of the downfall and easing the statistics. However, the effect is over now, therefore, with further shrinkage of the non-life insurance market, we see a more negative reflection in the financial results. Briefly speaking, insurer revenues have come back to the level of 2006,” Baravykas maintained.
While the non-life insurance market was the most crisis-stricken, the life insurance segment remained barely touched - even in the peak of the downturn, in 2009, it generated profit of 26.4 million litas for 2 consecutive years, 2009 and 2010. “This segment of the market has remained particularly resilient and stable throughout the economic ordeal, and its results are constantly going up,” Baravykas says. According to ISC, during the three quarters of 2010, nine of 13 operating insurance companies reported profits, while the other 4 admitted to losses.
Lietuvos Draudimas, the largest non-life insurance company in Lithuania, reports that it handles 33.1 percent of the Lithuanian insurance market by the end of 2010. “We have gone this far by offering an array of extra services to our loyal clients, something that other insurers do not do, [such as] rendering free assistance on the road. Besides, if a client chooses a civil responsibility insurance and Kasko insurance [insurance claim form for damages or destruction of vehicles] as one packet, the insurance contribution will be less and the client will receive a better package or free of charge service while on the road. For a couple of years, Lietuvos Draudimas offers not only this, but also assists its clients while they repair their damaged real estate or while they obtain a domestic electric appliance. It means that after a calamitous event, our insurance company will either indemnify the damage or will offer its client to take care of the damaged property,” Julius Kondratas, a Lietuvos Draudimas board member and director of Insurance Risk and Damage Department, revealed to The Baltic Times. If a client prefers a repair instead of a payout, Lietuvos Draudimas takes full charge of the arrangements of the repair and ultimately pays for the whole job. Likewise, it does this with damaged electronic appliances.
The company’s profit peaked in 2007, which Kondratas described as the year of “colossal growth and fantastic consumption and prosperity.” Thus, in 2008, the company’s turnover totalled 513 million litas, but plunged to 351 million litas in the money-strapped year of 2009. By the end of 2010, with the three quarters tallied up, the company reports a 252 million litas turnover, which is a worse result on a year-to-year basis. “When I look back at 2007 and 2008, it seems that it was very easy to achieve those great results. The insurance market itself rode on the wave. However, in the second half of 2008, all changed – the market started shrinking. It [insurance market], differently from bank sector, was hardest hit one year after the start of the crisis. This is due to the insurance market’s one year lag with its financial data. Thus, in 2009, insurers reaped what they sowed in the previous year, and this year we are seeing the results of 2009. In order not to see only alarming, red-marker scratched lines in this year’s financial papers, all insurers had to rethink their strategies and reprogram their strategic directions,” Kondratas emphasized.
The main task that the company had to take on, he claims, was managing fixed service costs. “We had to see ten steps ahead while assuming certain unpopular decisions - getting rid of some benefits to our workers, cut down training and marketing budgets, temporarily halting the company’s expansion projects and laying off the workers that had been hired when having in mind company expansion. While implementing the decisions, open and effective company communication that let our staff perceive properly what was going on and what awaited us ahead was of the utmost importance,” Kondratas maintained.
Though the insurance market shrank nearly 30 percent in 2009, its trend was downwards this year as well, seeing a 6.2 percent drop in the non-life assurance sector. According to Kondratas, Lithuanian insurance companies, seeking to maintain the output level of 2009, stimulate insurance sales by decreasing their service costs. “Thus, instead of trying to slash their inner costs, they dump prices, making them inadequately small - so small that they do not cover insurance risk,” Kondratas pointed out. However, he claims, Lietuvos Draudimas did not give in to the trend. Instead of focusing on price dumping, it heeds its clients and offers better service.
The company board member remains upbeat about the company’s performance next year. “I believe that finally we will see a market recovery next year. However, most likely, it will be a slow process, as with reports about meager recovery indications flowing, business insurance does not yield any significant recovery signs. Our company still reports a 5 percent fall in classic business insurance in 10 months this year,” Kondratas said. He relates the continuous fall with several factors, including an aging Lithuanian vehicle fleet and slowly growing enterprise turnovers. “With the national car fleet getting older, less and less vehicles are insured with Kasko insurance. Besides, the insured item’s value decreases. Second, with enterprises recovering slowly, their turnovers grow very weakly, causing disruptions in cargo or business insurance contributions. Third, as I mentioned before, there is severe competition among Lithuanian insurers which, regrettably, resulted in constantly decreasing, loss-making insurance contribution margins,” Kondratas explained.
He is convinced that the main problem of business insurance lies in the segment’s exhausted profitability. “This segment is obviously loss-producing, as a large damage frequency and size have increased considerably. In addition, due to high competition in the market and lesser small damage frequency, insurance companies tend to collect fewer contributions in the segment. Obviously, insurers have exhausted all their options in the market, and soon business logic will not let insurers act that aggressively in the market,” Kondratas concluded.
However, Brigita Blavasciuniene, administration director of insurance company Seesam Lietuva contradicts this, maintaining that the insurance market is not saturated in Lithuania and still offers an array of options. “Quite the opposite – there exists a big insurance potential, according to different indications, including insurance contribution size per capita, proportion of insured and possessed property,” Blavasciuniene asserted to The Baltic Times. The insurance company is one of the smaller market players which, according to ISC, takes up 3.4 percent of the non-life insurance market. Due to its comparable minuteness and limited liabilities in the market, the company has plowed its way through the downturn successfully, seeing only a mere drop in its turnover, from 33.8 million litas in 2008 to 32.7 million litas in 2009.
“Car insurance remains the most popular kind of insurance. However, demand for real estate insurance was on the rise also,” the administration director suggested. “Our company predicts a 6 percent growth in the non-life insurance market in 2011,” Blavasciuniene said.
Kestutis Bagdonavicius, chairman of ERGO Insurance Group Board in the Baltics, says that after two years of the crisis, the insurance market shows feeble signs of recovery. “Signed insurance policies in October grew by 6 percent, up to 129 million litas. Having in mind that insurance contributions directly depend on a country’s economic growth, with GDP recovery, the market is obviously rising in Lithuania in recent months, signaling recovery on a broader scale,” Bagdonavicius maintained to The Baltic Times. According to him, real estate property insurance has shown the most resilience during the downturn. “This could be explained with a deteriorating criminogenic situation in the country – the need to protect property rose constantly. Besides, unprecedented damages due to last spring’s floods and ravaging storms in the summer have boosted the insurance market. Real estate property insurance recovery means that the population and business acquires more property which, consequently, signals a consumption market recovery,” Bagdonavicius pointed out.
According to Autotyrimai, in ten months of 2010, 7,605 new cars have been sold, a 3 percent increase from 2009. “These rising numbers are reflected in car insurance as well, surging nearly 30 percent in the driver’s mandatory civil responsibility insurance segment in October, compared to the same month in 2009,” the ERGO representative suggested.
ERGO reported a record 13.7 percent growth in the life insurance segment through January and October of 2010 and a 17.2 percent growth in warranty insurance in the same period. “By estimating the indications in the insurance market, as well as in others, we can infer that Lithuania is coming back to its growth course. However, its recovery dynamics will lie upon not only macroeconomic factors, but upon the government’s policies as well,” Bagdonavicius asserted.