In Search of Pan-European Insurance – where is it?

1. In Search of Pan-European Insurance – where is it? ao. Univ.-Prof. Dr. Michael TheilInstitute of Risk Management and Insurance Vienna University of Economics and Business Administration

2. Aims and scope • EU legislation, single currency – which changes wereexpected / intended? • How did insurance markets in EU-12 (Euro-zone), EU-15 and EU-25 develop? • In particular: which changes in market indicators, market concentration, cross-border sales, distribution channels and investments do we see? Overview | Main Indicators | Companies | Distribution | Investments

3. yellow: EU-15 no € no € no € blue: new countries(2004)

4. Single Market for Insurance • Aims: • Enable EU-wide operations • Promote competition • Improve supply to meet consumer demands • Measures: • Single license • Cross-border sales • Enhanced investment opportunities (single currency) Overview | Main Indicators | Companies | Distribution | Investments

5. Premiums - where in this world? Overview | Main Indicators | Companies | Distribution | Investments

6. Main Indicators • Density • Represents average insurance spending per capita (premiums / population); expressed in € • Penetration • Represents the relative importance of the insurance industry in the domestic economy (premiums / GDP); expressed in % • Note • Both refer only to private insurance; therefore, we observe considerable differences between countries with and without extensive social security systems Overview | Main Indicators | Companies | Distribution | Investments

7. Density (€), Penetration (%) Total (2002) very faroutlier: LU countries below the diagonal LT, LV, EE, SK, PL, HU, GR

8. Density, Penetration (2002; €,%) Total • very different levels of market development within the EU, even between “established” EU-countries • Many of the recently admitted countries are in the “small” markets group; but: also GR and PT • exceptional numbers for LU: small country (~450,000), but with long-lasting ties with NL and BE plus a favorable place for insurers • “below-diagonal-countries”: insurance premium higher in % of GDP than absolute numbers would suggest; relatively “poor” countries, but with potential to grow Overview | Main Indicators | Companies | Distribution | Investments

9. Density, Penetration (1992-2002) Total; Change Overview | Main Indicators | Companies | Distribution | Investments

10. Density, Penetration (1992-2002) Total; Change • while EU-25 is still behind the US and JP regarding thecurrent status, growth rates tell a different story • many of the new EU-countries exhibit much higher growth than established EU-countries • the actual date of accession to the EU plays a minor role: Before, they are under observation for many years; transformation from the communist economy implies that risks are shifted from the state to private insurers plus many additional individual needs for coverage • some markets in established EU-countries appear saturated; However, there is much pressure on state pension systems plus developing needs for coverage • Since premiums are prices for insurance, competition limits growth Overview | Main Indicators | Companies | Distribution | Investments

11. Density (€), Penetration (%) Life (2002) very faroutlier: LU LT, LV, EE, SK, PL, HU, GR

12. Density, Penetration (2002; €,%) Life • “Small markets” as before; Baltic states even more behind • DE and AT are even behind ES and PT in terms of penetration • Reference markets USA and JP form a quite compact group with northern and western EU states • Explanation for outlier LU as before; GB comes from opting-out under PM Margaret Thatcher • Change 1992-2002: • growth in all markets (except JP), i.e. the insurance industry within the national economy gains in importance • especially high growth rates (>200%) in BE, PT, MT, IT, SI Overview | Main Indicators | Companies | Distribution | Investments

13. Density (€), Penetration (%) Non-Life (2002) LV, EE, SK, PL, HU

14. Density, Penetration (2002; €,%) Non-Life • “Small markets” as before • USA far ahead of EU • Within EU, GB and NL rank highest, mainly because of their pension system and real estate markets • Change 1992-2002: • many markets falling; in part a result of increasing competition (notorious: motor insurance) • especially high growth rates (but far lower than in life) in PT, SI, SK, GR, CY, MT, CZ Overview | Main Indicators | Companies | Distribution | Investments

15. Insurance Markets: Summary • In sum, the national markets within the EU play an importantrole in global insurance business • In terms of density and penetration, the national markets appear very heterogeneous • Overall, new states and southern states are (often far) behind the rest • Considerable growth is seen mainly in new states • After a period (by the mid-90s) with high-rising life insurance premiums and rapidly declining non-life premiums, we now observe an opposite pattern Overview | Main Indicators | Companies | Distribution | Investments

16. Companies and employees 1992-2002 (%) downward trend in most of EU-15

17. Premiums, companies and employees 1992-2002 (%) Overview | Main Indicators | Companies | Distribution | Investments

18. Companies and Employees: Trends • Concentration (old EU countries) versus expansion (newEU countries) • Varying development in new EU countries points at differences in employee structure (e.g. independent brokers and agents instead of employed sales force) and in functions (e.g. fronting instead of full scale insurer) • When controlling for premium, new EU states are behind (except PL, CY) • Despite downward trend, insurance companies remain very important employers • Further concentration is expected Overview | Main Indicators | Companies | Distribution | Investments

19. Concentration: first five, first ten (2002); Non-Life Overview | Main Indicators | Companies | Distribution | Investments

20. Concentration: first five, first ten (2002); Life Overview | Main Indicators | Companies | Distribution | Investments

21. Market Concentration • Measured in premium for first 5 and first 10 insurers • Generally, the insurance industry is considered to be highly concentrated • Concentration is slightly higher for life than for non-lifeinsurance (except AT, DK, GB, HU, IT, SK) • Reason: critical size in life insurance • New EU-countries show higher concentration than old ones(~60% vs. ~80% for non-life; ~78% vs. ~95% for life) • 1992-2002 concentration increased in most old EU-countries and decreased in most new EU-countries • That is, differences in concentration have been even more extreme Overview | Main Indicators | Companies | Distribution | Investments

22. Largest groups for comparison: largest non-life/life in AT Overview | Main Indicators | Companies | Distribution | Investments

23. Largest groups • #5 already far behind: Winterthur € 21,034 • Proportion life vs. non-life premium 2:1 (except Allianz 1:2) • by far most of their premium is written in Europe • more than 315,000 employees (rising) Overview | Main Indicators | Companies | Distribution | Investments

24. EU-branches vs. local companies • Cross-border sales are one of the pillars of the single market • … alas, we can’t show it … • numerous data problems • some countries report number of EU-branches • others report number of companies • others do not report either of those • inconsistent definitions domestic / foreign • some instructive examples • AT: 13% (still rising; plus many local companies are in fact foreign) • GB: 10%, ES: 11%, IE: 28% • non-EU-branches (licensed individually): declining constantly Overview | Main Indicators | Companies | Distribution | Investments

25. Distribution channels • Early nineties: very different structures, e.g. • countries with “broker tradition”: e.g. GB, BE • countries with employed sales force, e.g. DE, AT • General assumption: EU-wide legislation favors brokers; outsourcing of sales force • Data: fragmentary plus inconsistent definitions of categories • Current status: very heterogeneous – example Overview | Main Indicators | Companies | Distribution | Investments

26. Distribution channels (2002) (%) - +/- +/- + +

27. Distribution channels: trends • No clear trend – developments vary considerably • employees often decrease (exception: GB) • tied and multiple agents often decrease (exception: AT) • brokers increase (exceptions: BE, IT) • banks increase (exception: GB) • other channels (e.g. worksite / affinity) increase, but volume is very small • local “cultures” to sell insurance appear strong Overview | Main Indicators | Companies | Distribution | Investments

28. Investments • Early nineties: • many currencies • congruency rules plus mostly local business – investments in local currency • Then: ECU, stability program (European Monetary System), € (’99, ’02) • Expectations for investment by insurance companies • deeper financial markets (congruency now means €) • reduced costs for transactions • much broadened possibilities for insurance companies • But: still varying limits per investment category Overview | Main Indicators | Companies | Distribution | Investments

29. Investments (2002) (%) - - -/+ +/- +/- + +

30. Investments: trends • Development very dynamic, but no consistent trend • shares, fixed income securities and (only in some countries) loans are most important categories • DE: dramatic consequences of over-enthusiastic investments in shares • shares decrease, fixed income securities and loans increase • overall, investment strategies became more varied, making use of the new possibilities, but companies often appear to lack knowledge Overview | Main Indicators | Companies | Distribution | Investments

31. What Is Not (Yet) Achieved? • Differences is contract law: • Major obstacle for EU-wide operations, in particular with a single product portfolio • Not to come in the near future • Differences in company reporting and taxation: • Major differences in detail, for instance: valuation methods; different tax schemes; definition of domestic / foreign-controlled companies; definition of number of employees and many, many more • Some efforts for standardization underway; however, differences are likely to remain • Differences in insurance demand

32. Consequences • Single market process still unfinished • Political message versus economic realities • Competition / security / consumer demands are often contradicting targets • Nevertheless • Former national markets did change considerably • Premiums in some branches (motor) fell significantly • Insurance companies became more efficient, flexible and innovative

33. Thank you and open for Q&A!

34. Some Words About Data Quality I • Major sources • OECD: Insurance Statistics Yearbook (www.oecd.org); compiles data by supervisory authorities • Comité Européen des Assurances (CEA): European Insurance in Figures (www.cea.assur.org); compiles data by insurer associations • Various additional data by national associations and supervisory authorities

35. Some Words About Data Quality II • Problems • Data inconsistency; (more or less obvious) errors • OECD does not report new EU countries • CEA does not report USA and Japan • Solutions • Constantly revise data sets for plausibility • Calculate common measures, accounting for currency and inflation • Therefore … • … what you see here is not provided on a supranational level