Many players are currently looking for strategic investors abroad to give them a new influx of capital and the know-how to weather problems in the future.
"Most of the insurance companies are recording lower profits," said Paavo Pold, an analyst with Talinvest Suprema Securities. Though talks have been going on for a while, the recent economic problems have made the issue more urgent.
"Everybody's talking to everybody right now," he said.
Insurance companies Eesti Kindlustus, AB Kindlustuse Grupp, and Polaris all announced in the last few weeks that they would be looking for foreign investors while many of the other companies already have one.
"We want to find a partner regarding non-life insurance," said Mart Maji, the chief financial officer of Eesti Kindlustus. He also predicted that the number of companies doing business in Estonia would decrease in the next year.
"I think that there will be some kind of consolidation at the beginning of next year," he said.
Part of the reason for the squeeze today is that there are too many companies for such a small market. After independence, insurance companies sprang up like mushrooms in an Estonian forest.
"Lots of small insurance companies started in 1992 with a room in an apartment," said Pold. "A lot of them have grown quite big by now."
According to the Estonian Insurance Supervisor Authority's most recent figures, 15 companies are competing in the Estonian insurance market, either in life or non-life insurance or both. First half premiums for 1998 totaled about 630 million kroons ($45 million).
Life and non-life insurance companies must, under Estonian law, be completely separate entities. As a result, a company such as Leks, one of the biggest in Estonia, has a life and non-life division that report separate profits, losses and have different rules about how their money can be invested. Eesti Varakindlustus is the largest company with 26 percent of the market.
The roots of the boom in the insurance sector can be traced back to 1996, when almost everyone was leasing or buying new cars, but this came to a halt with the economic decline beginning in 1997.
"The whole insurance boom is related to the lending and leasing boom," said Pold. Banks were practically giving away car loans at interest rates close to single digits. Since auto insurance accounts for 50 percent of the premiums collected by Estonian insurance companies, they also benefited.
In other countries, auto insurance is a much smaller percentage compared with real estate and life insurance.
"It's more balanced," said Anneli Simm, an analyst with Hansa Investments. But convincing people to invest in life insurance is very difficult in Estonia. During Soviet times, it was quite common to insure your children. The hyper inflation of the early '90s wiped out all the savings that people had accrued through these policies and convincing them that insurance is a safe investment is challenging.
"People prefer to put their money in white goods," said Peter Treialt, with Hansa Investments.
The competition between different insurers has benefited consumers but not companies. Car insurance rates dropped to such a low level in Estonia that few companies are able to make a profit.
"Right now, Estonia probably has the lowest tariff levels in Europe," said Pold.
At the same time, many companies didn't have the experience to properly assess risks and premiums.
"In Estonia, many times, numbers were taken from the air," said Treialt.
Estonian law requires that all companies doing business in Estonia invest all of their reserves in Estonia.
Critics say that the domestic market is too small and risky a place to invest all of their reserves.
The economic problems that Estonia is experiencing will have an effect on what type of coverage people decide to get. Life insurance is usually one of the first expenses to go when money is tight.
"If you don't have any money, the first thing that you will drop is life insurance," said Maji. Claims usually go up during times of economic crisis as well which means that companies will probably be taking in less money while paying out more.