Since 1989, the Austrian insurance company Vienna Insurance Group (VIG) has rapidly expanded its business in the countries of the former “Eastern Block” and the Baltic States, in Latvia as well. Early in June the Competition Council of Latvia allowed to commence the acquisition, of Seesam Insurance Latvia branch (The closing is still in progress).
In 2016, VIG acquired BTA Baltic Insurance Company AAS (BTA). VIG insurance business in Latvia also involves Latvia branch of the risk insurer Compensa Vienna Insurance Group and Latvia branch of the life insurer Compensa Life Vienna Insurance Group.
In the mid-June, Franz Fuchs, Board Member of VIG, who is responsible for the Baltic region, Poland, Moldova and Ukraine as well as Motor and life/health business on group level, visited Latvia. During a conversation with TVnet, he told about operations of VIG in the region and future plans.
What is VIG dealing with?
We supervise and manage exclusively insurance companies; we are not engaged in other lines of business. Our goal is clear – to be the leading provider of insurance services in the countries of Central and Eastern Europe, and in Austria.
What are your main insurance products?
We offer all insurance product lines and we are market leaders in the majority of countries we are working in. Globally, we have 60% of non-life insurance products, where 50-60% are comprised of motor vehicle insurance, and the rest – property and health insurance. The total insurance premium income of VIG Group equalling almost 9.3 billion euros is comprised of approximately 55% of non-life insurance and the rest income – of life insurance.
In the context of the future of insurance sector, of course, there are the traditional categories – life insurance and non-life insurance, which includes motor vehicle insurance, property and health insurance. But isn't the time coming, when people and businesses acquire new types of properties, assets and values, which also should be insured against loss? For example, data? A company may hold almost its entire business in a so-called cloud and lose it all in the case of any accident...
First, we have to remember, that this region – Central and Eastern Europe – has population of 180 million, and we have not yet fulfilled huge potential on the market of traditional insurance products. Motor Third Party Liability insurance is mandatory in most of the countries, whereas KASKO, i.e., motor own damage insurance, is not mandatory. In its turn, hardly 20-30% of population has private property insurance, plus it is usually minimal. We see the largest potential in the coming 10-15 years in extending the market acquisition, i.e., penetration. The pace will differ in different countries, but the potential market is huge.
So, when it comes to the new types of risks, to cyber insurance, it is irrelevant, whether private property insurance is unavailable yet. For example, in Austria, the Czech Republic and Slovakia, we already offer insurance of cyber risks. The first major risk occurred in Ukraine, where a cyber-attack on banks and other companies and authorities was detected. The problem is that cyber risks significantly differ from common risk situations. All of them are local in some way. A certain building is destructed in a fire, a whole region may suffer from flooding, but the cyber-attack on Ukraine may affect the U.S. market and American companies. Then there are no borders. It is a borderless risk in the amount we cannot even estimate at the moment. And it does not concern only large companies, where such risk manifests itself; a small company as well, for example, in Ukraine, may be linked to the large Amazon company in the USA and may cause a huge loss of data there. Nowadays, the world is completely networked, and what happens in China may affect the USA, and events in the USA may transfer to India.
So, currently, you try to strengthen your position in the field of insurance of traditional risks?
Yes, as I already said, there are 180 million people living in the region, and we have insured only nine million cars among them. We know, that there are many more million cars. The challenge is to extend market shares of the existing products and acquire the non-insured persons, who don't have property insurance, private accident insurance or any other type of third party liability insurance. Also the potential of health insurance is enormous. Such insurance will be requested, where one won't have to pay from his/her own funds to a healthcare institution, instead a confirmation, acknowledging that a person is insured will suffice and treatment costs will be covered. It may occur in the cases, where such costs are large, 20,000 euros for a complicated spinal surgery, or even for procedures that cannot be received in a particular country and require going abroad. We want to offer insurance, which will cover service costs, also abroad, for example, cancer therapies etc.
VIG entered this market through acquiring companies. You acquired BTA a few years ago, also another company...
I personally participated in the acquisition of life insurance company Seesam Life in 2008, which is now called Compensa. Since 2008, I participated in the overtaking of BTA. The transaction was completed, and we have experience on this market. The economic growth and legal environment is relatively clean. Of course, there is competition, but we, as a market leader, have to deal with it.
Did the economic crisis, which started around year 2008, affected the acquisition of Seesam Life? People hardly subsisted, not to mention buying any insurance...
Yes, there were difficulties and the crisis could not be foreseen. But insurance business is built on the long-term basis. If we look 20 or 25 years ahead, a five-year decline is not very significant. The goal was to acquire the market leader, number one. And by acquiring Seesam and BTA it was achieved. But we are still too small, although we are growing at above the average market pace. In the Baltic States, we have income equal to approximately 400 million euros, and here, in Latvia, we are market leaders with BTA and Compensa, and all this is achieved based on 20% growth rate. We invest at the right time and grow faster than the market in general.
What happened? Have people realised, that insurance is necessary in various areas of their life?
There are two factors. Motor insurance has always brought certain losses in Latvia, because insurance premiums were too low, and competition was huge. The new sectoral conditions require insurers to hold sufficient capital to cover the risks they assume. Risks have long-term nature in the sector of MTPL (LV - OCTA) insurance, especially when covering personal injuries and their consequences. Consequently, if clients of such insurance are attracted, the insurer must have capital that can cover such insurance, which means, that prices, namely, insurance premiums, have to be reasonable. Latvia was not the only country to witness such kind of rather drastic price changes.
The second factor is increase of gross domestic product, which drives investments in various properties, and people understand, that these properties have to be protected. So, the demand for property insurance, health insurance and also life insurance is growing. People have money to save in various ways; therefore, we see, that life insurance has increased by 30%. This number significantly exceeds the general pace of market growth.
We were lucky because we invested in our own sales networks - BTA has a large network of sellers, and Compensa has such a network as well.
Does the Latvian insurance market differ in any way from other markets of business of VIG?
The Latvian market is much more digitised, also other Baltic states. There are other markets, where, for example, there is no electronic land register publicly available. But here, if you give me your name and address, I will find out all the necessary information – when you bought your flat and all other required data. Maybe Scandinavia has a similar situation, but we don't operate there. Even Austria and the Czech Republic don't have such a system, available for the insurer Here, in Latvia, things are really advanced! Also here, at our Riga office, we can't see many papers, because they are unnecessary as machines work for us! Not even for record keeping, because when we have to sign an employment agreement, we do it electronically. We operate in 25 countries, and nowhere else things are as digitised as in Latvia.
In Latvia, VIG acquired two insurance companies - Seesam and BTA. How do you assess these transactions?
We acquired BTA two years ago, and we worked on it for a longer period of time through negotiations with the family that owned the company. By doing so, we obtained market volume and a very profitable company, as well as good management. Large investment was not required for information technology or restructuring after the acquisition procedure. The company had already done its homework. Thus, we obtained a company with a good market position and brand, which managed its business in all three Baltic States with a diverse insurance portfolio.
Do you have any further plans for acquisition of other insurance companies in the Baltic States, namely, to look for the next BTA or Seesam?
The competition legislation may be an obstacle for us in non-life insurance, because we have already reached 25% or 30% market share, for example, in motor insurance. Therefore, we wouldn't be able to acquire anything too large in the area of non-life insurance. It would be good to acquire something in the sector of life insurance, because we don't have the leading position on the market yet. However, this business is closely related to banks, and we are not interested in the banking business. We are interested, but only in companies not related to banks.
But haven't banks established relations with insurance companies, the products of which they offer to their clients?
In principle, yes, but in the Baltic region banks have their own insurance companies. For example, the Swedish SEB bank has such a company. In this situation, it is difficult for us to expand our operation, because banks have good access to potential life insurance clients, for example, middle-aged people with high income and a family; they have to take care of. We lack such access also on the non-life insurance market, and this is why we have an extensive sales network. Compared to other insurance companies, we have the largest insurance “sales” (retail) network in Latvia.
And how about sales across product groups, so-called cross sales? Respectively, life insurance is offered to persons who have insured their car.
For now, we don't do this, but we want to start cross sales. Currently, the market experiences rapid growth, above 20% on non-life and life insurance markets. We are not forced to do it. But the time will come, when we will have to get more from each client – offer some life insurance products etc. to holders of non-life insurance policies. It is among our future plans. Moreover, we have to remember, that attracting a new client is more expensive and time-consuming than sales of a new product.
So, there will be more sales across product groups and efforts to strengthen the position on the life insurance market in the future. And what will happen with the new risk insurance, cyber risks, we spoke about previously?
Cyber insurance is a fashion thing, but also is related to very high risk. Reinsurers and direct insurers have to set insurance conditions. We don't have such experience. If there is a flood of the Rhine River in Germany, we can determine the flooding risk area, let's say five kilometres to the right and left of the river. In this case we have a limit, so the risk can be calculated. Whereas in electronic environment we don't know the limits. How to determine them? We don't know, whether data virus can travel to the USA and cause harm. How this harm is distributed? Which person has to receive insurance indemnity – the first one, who suffers such harm? Maybe all insurance claims have to be summed up, saying – the indemnity will not exceed 100 million dollars? We can see, where flood water flows, what damage it causes; sometimes we also can track a computer virus, but the damage caused by the virus sometimes occurs much later, when everything that has been stolen is detected.
In regard with common insurable events, risks are transparent, and to prevent them timely we can offer the so-called risk engineers, who will provide consultations and advice to the businesses looking forward to acquire insurance at us,. This could work out when, for example, a sawmill is insured.
A different matter is when new entrepreneurs want to insure an incomplete software, which is developed in Latvia, but is stored as a set of data and source code in a cloud computing network as Amazon. Then it is difficult even to the entrepreneur itself to define, what it is and how it could be linked to risks. For example, if one would want to attack some bank in the Great Britain, it is enough to find a small company, which is electronically linked to the bank.
So, this imaginary company with two or three working founders receives an e-mail from China, wherefrom a service provider had been outsourced, but the e-mail contains malware, which penetrates Amazon cloud and destroys the homepage and archive of the newspaper The New York Times...
Yes, and in the worst case scenario, the total amount of insurance claims can constitute five billion dollars, which is beyond the reach even for some reinsurers. Reinsurers are still studying, how to set insurance coverage limits. It is a new business, which will take time to develop new products. For now, we simply determine the indemnity limit. Maybe in the case of a small company we cover 20 million, whereas the remaining amount is allocated to other insurance claims or is not covered at all.
In the old insurance model, the so-called business interruption, which is frequently the most significant risk, is a risk that is still difficult to calculate. Okay, equipment worth a few dozen thousand breaks down, but the real loss is interruption of manufacturing and sales of manufactured products. Moreover, in the modern industry there is equipment, which is customised upon request, so it is unavailable in stores and warehouses. Such being the case, the delivery time and loss arising from such a downtime has to be calculated. Basically, the higher technology is used in the business, the more difficult it takes to insure it.
We have to remember, that even a small thing can cause enormous problems in the technology era. The company Bosch manufactured a small program for calculation of fuel consumption, which was pulled in the major scandal concerning forgery of fuel indicators for Volkswagen cars, and Bosch had to pay a fine of three million dollars. What happened? It was not even a cyber-attack, just an error in the software development process. Modern hospital equipment is exposed to similar risks – a wrong surgery can be made due to erroneous electronic diagnosis. The more technology is involved, the more challenging it is for the insurance sector.